An environmental analysis identifies external and internal parameters to understand broad issues related to the context and industry where the organization operates. Decisions can be made against the backdrop of this broader context.

An examination of the external environment includes a consideration of opportunities and threats. Opportunities are characteristics of the environment that can help the organization succeed. Threats are characteristics of the external environment that can prevent the organization from being successful.

A common framework for understanding industry-based threats is the now classic work by Michael E. Porter, called “five-force analysis.” These include three forces from horizontal competition (i.e., the threat of substitute products or services, the threat of established rivals, and the threat of new entrants), and two forces from vertical competition (i.e., the bargaining power of suppliers and the bargaining power of customers).

An examination of external trends is critical for businesses of all sizes. But it is particularly challenging for multinational organizations because they are concerned with both domestic and international trends. An examination of the internal environment includes a consideration of strengths and weaknesses. Strengths are internal characteristics that the organization can use to its advantage.

Weaknesses are internal characteristics that are likely to hinder the success of the organization. These could include the misalignment of objectives or a talent pool with skills that have become obsolete given changes in the industry and in technology.

The process of creating a strategic plan begins with an environmental analysis, also called SWOT analysis, which considers internal as well as external trends. Internal trends can be classified as either strengths or weaknesses, and external trends can be classified as either opportunities or threats. A SWOT analysis offers critical information for all organizations.