The external analysis allows businesses to make changes in the product, services, and strategies in order to meet the needs and wants of customers. It doesn’t matter whether you’re a financial analyst, marketer, or business owner, the external analysis would help your business to grow and proliferate. Therefore, it’s significant to comprehend the component and benefits of the review.
Today, we’ll discuss what is external analysis; its various elements and benefits along with examples.
Table of Contents
What is External Analysis?
External analysis is when you analyze the changes in the industry, market, or external environment that would impact the operations of the company. Businesses and companies conduct an environmental analysis in order to keep up with the changes in the industry.
Elements of External Analysis
Some of the main elements of conducting an external analysis are as follows;
Industry
When we talk about external analysis, one of the main elements is the market or the product industry in which the company is doing its business. The industry or the market depends on the following factors;
- Finding alternative industries in your niche
- Existing growth level of the industry
- Size of the industry currently
- Opportunities and risks involved within the industry
After analyzing these factors, companies make required changes or take certain actions in order to make sure that it keeps on growing.
Example
A jewelry shop is offering handcrafted earrings, bracelets, necklaces, and rings by using the business-to-customer model. The shop owner conducts the external analysis and finds out the competitor’s companies are amplifying their marketing by selling their products at lower wholesale prices to the other companies.
The reason for their business or industry expansion is because they’re targeting both types of markets; B2B and B2C. It would make the company earn extra profit by increasing the industry market.
Supply Chain
The supply chain system is a very important element of external analysis and it deals with the following factors;
- The transportation and carriage of the finished products to the retail stores
- Various production and manufacturing processes convert raw materials into finished goods
- Raw material source
The operations of supply chain external factors happen away from the company’s headquarter. It’s significant for the company to evaluate the performance of various processes and find ways to improve efficiency while following the rules and regulations.
Example
A company is analyzing its production processes in terms of labor laws that are protecting the rights of employees. It finds out that the existing practices are exposing employees to the dangerous equipment and they work within its five feet. However, the law advises them to work and stand 10 feet away from such equipment. The company changed its regulations for workers so that they work while maintaining safety protocols.
Competitors
It’s significant to analyze competitors while conducting the external analysis. Some of the areas that you should consider are as follows;
- The impact of complementary product/service on your business
- How competitor’s product would influence the sale of the same product of other businesses
- Setting reasonable prices for the products that would promote sales and increase the company’s profitability and get ahead of the competition
- Studying the potential barriers that would stop the new entry like brand loyalty, product saturation, and government laws
- Industry competitors in the market and analyzing their company size, target audience, price range, and product
When you analyze all of these factors of the competitor, then it would help you to improve your marketing strategy, measure the product quality, pursue alternative industries, and set the best price.
Example
A gift shop is conducting an external competitor analysis, and it finds out the prices variation among competitors. The company sets its price lower than the competitors to attract the attention of customers.
Market Demographics
The market demographic allows you to check whether your product/service meets the needs and requirements of customers. Some of the factors are;
- Their interests and hobbies
- Residence and location
- Economic and income level
- Age
You should keep in mind the market demographic factors while developing the marketing strategy. You should offer them such product/service that they like and add some value to their lives.
Example
The target audience of the soft drink company is young people in their 20s. After conducting the market demographic analysis, the company finds out that the adults in their 30s/40s are also consuming its drinks. Anyways, the company changes its marketing campaign and targets a new audience.
Economic Trends
The analysis of economic trends comprises of the following factors like recession, trading laws, inflation, interest rate, and regulations. When you study economic trends, then it helps you to find out that how such factors would impact the profitability of the company.
Example
Companies conduct economic trend external analysis to find out the possibility of economic recession in the upcoming months. It would help them to foresee the decrease in the sale and be ready for it.
PEST Analysis
Pest analysis is a very good tool to conduct external analysis. However, it allows business management to study political, economical, social, and technological factors and how they could use these factors to their advantage. It comprises of following factors;
- Political: trade barriers, regulations, and government laws
- Economical: interest rate, exchange rate, and inflation
- Social: demographic like age, gender, education, income level, etc.
- Technological: research and development, latest technology, new tools, etc.
Pest analysis offers companies a quick and deep insight into the external factors that they usually forget.
Example
IT Company conducts pest analysis in order to determine the impact of external factors on its business. Some of the main external influences are as follows;
- Political: it’s trade barriers and government regulation issues outside of North American countries
- Economical: the currency exchange rate in Canada, the USA, and Mexico is very different
- Social: the interest of customers in the Eastern region is more towards the business side
- Technological: it would be highly beneficial if the company could change the programming language of its application to Python, C++, and Java.
Benefits of External Analysis
Some of the main benefits of the external analysis are as follows;
Promoting Business Growth
The external analysis makes companies be more active in their operations. For instance, if a clothing retail company finds out about the new emerging trend in the market, then the analysis allows them to increase its business model and exploit the opportunity. It would increase the company’s sales.
Adapting Changes
The external analysis informs businesses and companies to make adjustments in their products/services and business operations. For instance, a food catering company makes changes in its food items, store setting, and other seating arrangements in order to comply with the regulations of FDA and safety officer visits.
Creating Opportunities
When a company conducts external analysis, then it allows management to recognize potential opportunities that would help the company to differentiate its offers from the competitors.
For instance, a staffing company finds out after conducting an external analysis that it is offering the same services as competitors like IT, business administration, marketing, and promotion. In order to achieve differentiation and gain a competitive edge, the company realizes that it should include healthcare facilities and trade profession in its portfolio of staffing.
