What are some benefits of conducting an external analysis?
External analysis falls in the Opportunity and Threats (OT) part of the SWOT analysis. Strengths and Weaknesses are internal to the business while Opportunities and Threats are external to it. It is important for businesses to perform an external analysis because the information gathered would show if there exist opportunities for growth and expansion which they could exploit and reap the benefits. However, the same information may also show looming threats to the business, enabling the firm to make necessary adjustments to prevent or reduce negative impacts to the business.
The (SWOT) analysis leads us to an evaluation of the specific external factors that are likely to present opportunities and/or threats by conducting a PESTEL analysis. PESTEL refers to Political, Economic, Social, Technological, Environmental and Legal factors which are external and are likely to affect the business in one way or another. For instance, developments in technology may improve the efficiency of a business’ operations, leading to increased profits, or eliminate the business altogether leading to the firm’s collapse.
External analysis helps the business to forecast and predict changes in the market. It also helps the business to exploit opportunities and guard against threats.
An external analysis provides detailed information about opportunities and threats to a business and is a part of the SWOT analysis. Business managers need to understand the external factors and their likely impacts on their own business. Some of the external factors that may impact a business include, customer behavior; competitor's strengths, weaknesses and strategies; market factors (entry barriers, projections, trends, etc.) and environmental factors (such as technological and political changes, etc.). An external analysis provides the managers and decision-makers with the information about consumer preferences and purchasing power and thus, an opportunity to make more profits. Analysis of competitor's strengths and weakness will enable the firm to decide on its own strategies in order to become more competitive. Technological changes help in cutting costs, while political changes may pose either a threat or provide an opportunity for further expansion. Other benefits of external analysis include, increased knowledge and learning.
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