The Ultimate Checklist for Environmental Analysis: 6 Factors That Really Count
- Introducing the Components of the Ultimate Checklist for Environmental Analysis
- Step #1: Political factors
- Step #2: Economic factors
- Step #3: Social factors
- Step #4: Technological factors
- Step #5: Legal factors
- Step #6: Environmental factors
- Final Thoughts on the Ultimate Checklist for Environmental Analysis
Did you ever wonder what an environmental analysis is? Or do you know that, but struggle with the process and steps necessary to perform one?
Well, then this is the place to be! In this article, I will tell you what an environmental analysis is and how to perform it.
This is your ultimate checklist for an environmental analysis! And the best thing is that there are only 6 factors that really count!
In fact, this checklist contains the most straight-forward and proven ways to analyze a company’s environment. Specifically, you will learn which factors to be aware of that determine the performance of the company.
So if you want to know which external factors are crucial to a company’s business performance, you’ll love this checklist!
Let’s get started…
Introducing the Components of the Ultimate Checklist for Environmental Analysis
What is an environmental analysis? That’s probably what you have asked yourself recently and why you landed here.
Great question and here is my answer: an environmental analysis is the process you follow to analyze all external factors of a company that influence its performance. For example, a company’s business and financial performance can be determined by many different factors. These could be of political, economic, or legal nature.
Either way, depending on the company’s activities, changes in its environment can potentially have significant impacts on the business performance. Especially if you are considering investing into a company, you should always be aware of these factors.
The list of factors you should know and analyze is quite simple. In fact, there are only 6 factors that really count:
- Political factors
- Economic factors
- Social factors
- Technological factors
- Legal factors
- Environmental factors
Often times, an environmental analysis is also referred to as PESTLE analysis.
Yet, an environmental analysis is usually one of the last steps when analyzing a company. You can find the complete guide to analyze a company in 5 simple steps here.
Let’s assume you want to analyze the environment of BMW. Since BMW is headquartered in Germany, of course you want to know more about Germany in the first place. Specifically, you want to know if BMW’s business activities might, for example, be influenced by changes in tax laws or other regulation. However, BMW is also active in many more countries across the world.
In fact, BMWs are not only sold globally, but also manufactured in different plants across the globe. That’s why the company is not only exposed to its German environment but also to the remaining countries in which BMW is operating in.
Thus, if you want to do a complete environmental analysis it should be twofold: first, you should analyze the environment (by that I mean country) the company is headquartered. Second, you should analyze the environments of the countries’ the company is operating in. I admit, for global corporations this might be a lot of work. That’s why I would primarily focus on the company’s home country as well as its major other markets. In the case of BMW this would be Germany, UK, USA, and China.
Nevertheless, now that you know what an environmental analysis is, I will tell you what to do with it. Let’s dive into the ultimate checklist for PESTLE analysis…
Step #1: Political factors
Political factors are those related to a country’s current political situation. This is twofold: a country’s domestic politics but also its foreign affairs should be closely observed.
You should be aware of the overall political stability within the country. Think about the political forces, their attitudes and potential effects on the economy or the company you’re are looking at. Further, you should know how the company related to other countries. Foreign relations might heavily affect other factors such as economic or technological. Just think about a country that might not get along very well with other states and thus, stops trade with them.
It’s quite easy to always ask yourself a few questions. For example, “how might an upcoming election impact the company I want to invest in?”. Or “Is the political relationship with the country’s major trading partners endangered?”
Some political factors for your ultimate checklist for environmental analysis you should always look at:
Current political situation and political landscape
Taxes and laws
Step #2: Economic factors
Economic factors are quite straight-forward to analyze and observe. They determine the country’s economy and its current state. Additionally, they tell you something about the economy’s forecast and future development.
Most of these factors are often in the news. This might be unemployment rate, inflation rate, GDP, and so on. Thus, if you are regularly following the news you should be aware of these topics.
However, for some countries you want to analyze this information might not be as prominent as for your home country.
However, there is an easy solution for that: check out the World Bank’s database! The World Bank is a global financial institution with rather humanitarian goals. For example, it wants to reduce poverty across the globe.
In fact, the World Bank has an awesome database with a huge amount of data. Let’s assume you want to know more about Canada. First, you can check out the overview page on canada. There you can see some of most important data such as GDP, population, school enrollment, etc.
Second, you can look at the specific country profile. This is super helpful and very organized! It provides you with a huge table with even more detailed data. For example, on population, environment, people, economy, etc.
To keep them in mind, here are some economic factors from your ultimate checklist for environmental analysis:
Inflation and interest rates
Historical and forecasted GDP
Foreign exchange rates
Step #3: Social factors
Every country has a unique culture and value structure. Social factors might help you to dig into these cultural differences. Be aware that not only economic factors but also social ones influence people’s consumption patterns, preferences, or attitude towards certain products.
There is quite an easy way to get a good feeling about cultural and social differences. You just have to familiarize yourself with the cultural framework of Geert Hoofstede. He defined the famous 6-D model of national culture. It is comprised of six dimensions on which every country can be ranked.
The best thing is that you can simply compare different countries along these dimensions. For example, let’s look at the cultural dimensions of the United States, the United Kingdom and Japan.
The largest cultural differences are regarding uncertainty avoidance and long term orientation. It becomes quite clear that Japan is the most uncertainty avoiding and long term oriented country of the three. Contrarily, the UK is rather not uncertainty avoidant and happy to change direction throughout the day or along their plans. Further, the US is the most short term oriented nation.
Again, some social factors from of the ultimate checklist for environmental analysis are:
Cultural dimensions and their implications
Social lifestyles and distribution of wealth
Step #4: Technological factors
“Nothing is as constant as change”. Maybe you have ever heard of that statement. I think it fits perfectly to the technological factors of PESTLE analysis. Technology is advancing continuously. Not only regarding tangible, manufacturing technologies but also regarding intangible, rather data driven technologies.
Thus, companies have to stay up to date. They have to make sure they do not miss an important trend influencing their industry in the future. That’s also what you should do. Get familiar with the most important trends and tech movements globally, and in the respective country. Make sure you understand which advancement or trends might impact the company you are looking at most significantly.
A great source to get more familiar with the T in the PESTLE analysis is the Global Innovation Index. It covers almost every country in the world. Basically, it provides you with a good overview on how the country generally ranks regarding innovation and knowledge transfer. You can download a one-pager per country. It covers, for example, human capital & research, infrastructure, or business sophistication. More interestingly regarding technological factors are those two dimensions: knowledge & technology outputs and creative outputs.
Some technological factors from your ultimate checklist for environmental analysis are:
Number of patents
Rate of technological change
Innovativeness of different industries
Step #5: Legal factors
Legislative changes can massively influence an industry. These changes can be manifold. There can be new or changing regulations. Further, new laws could be take effect, or new regulatory bodies might be set up.
However, you have to be careful. Not only changes or renewals in regulations directly affecting companies are important. Also, those affecting consumption in the first place, might heavily impact companies. For example, if there is a limit on the amount of sugar included in soft drinks, beverage producers are those companies impacted most.
Overall, you should include the following legal factors on your ultimate checklist for environmental analysis:
Any form of regulations, e.g. product, employment, health and safety, etc.
New laws or regulatory bodies
Step #6: Environmental factors
The environment influences everyone and everything. Of course, we have move, get to work, go shopping, meet friends. Same with companies. They have to get raw materials (which have to grow and be sourced somewhere), manufacture, test, and sell. All steps are heavily influenced by our environment. This is not only the nature, weather, or climate conditions. But also the infrastructure, location, or areal surrounding.
Therefore, you should know how the company and country you are looking is placed. There are quite some easy questions you could ask yourself. For example, “Where is the company located?” “Where does it get its resources from?” “Is the country exposed to extreme climate and weather conditions?” “How might this affect the company I am analyzing?”
Generally, be aware keep those factors on your ultimate checklist for environmental analysis:
Geographical location and neighboring states
Climate and weather conditions
Infrastructure and areal surrounding
Final Thoughts on the Ultimate Checklist for Environmental Analysis
There is one last thing to finish our ultimate checklist for environmental analysis: Watch the news! Know what’s up to date and critical. You can simply do that by following your favorite channels on social media. The good thing is that there is probably one for anything you can imagine: each country, politics, environment, legislation, tech, etc.
But now I want to turn over to you:
For which company are you going to da a PESTLE analysis first?
Which of the tips and additional sources did you like most? Which ones didn’t you know before reading this article?
Either way, let me know by leaving a comment below right now.
Thanks for reading this article. Please, let us know if you have feedback, corrections, or any further question (either down below in the comments or via contact). We are happy to discuss and further support you along your way to becoming a “yield reviewer”
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