The two environments of an organization are the internal and external environment. The internal environment refers to employees' interactions with other employees and with management, the interaction of management with managers and board members, and the structure of the organization. External analysis includes an analysis of the competition, as well as other external factors such as the industry, the national environment, and the socioeconomic environment. An external analysis will often result in changes within an organization.
Managers frequently participate in the process of conducting an external analysis as part of an organization's strategic plan. The manager will participate in the external analysis by sharing knowledge about his or her area, and then the manager will consider factors known as Porter's Five Forces. These forces include the suppliers the manager works with; the buyers the manager works with; the competition, including figuring out potential economic, social, or technological threats from the competition; and predicting whether competition will emerge in the future.
One benefit of conducting an external analysis is that it is an efficient way to respond to the constantly changing, competitive environment in which an organization exists. It is necessary to constantly evaluate the competition so an organization can revise its internal competencies and strategies in response. For example, an external analysis could indicate the price or availability of supplies is changing, prompting a company to revise its strategy in response.