A firm that does not watch its surroundings is steering with its eyes shut. Environmental scanning is the habit of looking around, systematically, for changes that matter.
Strengths, weaknesses, opportunities and threats (SWOT) and PESTEL are the two frameworks the Institute of Chartered Accountants of Nigeria (ICAN) syllabus names for turning what is seen into a plan: PESTEL for the wider external environment, and SWOT for matching the firm’s own strengths and weaknesses to the opportunities and threats outside.
This topic covers environmental scanning, SWOT analysis and the steps, benefits and pitfalls of PESTEL. The PESTEL factors themselves are in The business and its stakeholders.
In 30 seconds
Environmental scanning systematically collects and interprets information about the environment to spot opportunities and threats. It can be ad hoc, regular or continuous. SWOT sorts what is found into strengths and weaknesses, which are internal, and opportunities and threats, which are external. The aim is to use strengths to seize opportunities and to limit the damage from weaknesses and threats.
Both SWOT and PESTEL are cheap and quick, but they can rest on weak data and assumptions and cannot keep pace with fast change.
Environmental scanning
Environmental scanning is the process of systematically surveying and interpreting data in order to spot external opportunities and threats that could affect future decisions. It is part of strategic planning and is closely tied to SWOT. The firm gathers information about its environment, forecasts how changes will affect it, and then shapes a strategy that makes the most of opportunities and limits threats.
Types of scanning
| Type | Meaning | Used when |
|---|---|---|
| Ad hoc | Unplanned and short term | In an emergency or crisis |
| Regular | Done at set intervals, such as each quarter or year | For routine strategic review |
| Continuous | Always running and wide in range | Preferred by most firms today, because it lets them act quickly |
Why it matters
- It lets a firm exploit openings before its rivals do.
- It gives early warning of problems, so they can be tackled in good time.
- It shows when the environment is shifting, so the firm can meet customers’ changing wants.
- It supplies qualitative information that helps strategists choose suitable strategies.
- It helps decision-makers weigh resources against risks.
- It supports broad-based study by executives and keeps strategies up to date.
What to look for
| Item | Meaning |
|---|---|
| Events | Specific occurrences in the internal or external environment that the firm can observe and track |
| Trends | Groups of related events moving in a direction, which may be positive or negative |
| Issues | Concerns that arise from events and trends. Emerging issues are hard to spot and often begin with a shift in values |
| Expectations | Demands that interested groups make because of their concern about issues |
After the external scan comes an internal scan: review the vision, mission and strategic plan, examine strengths and weaknesses, consider where the firm is and where it wants to be in five or ten years, and interview or survey its leaders. Data can be gathered by reading publications, running focus groups, interviewing leaders inside and outside the firm, and using surveys.
Sources of information
| Internal sources | External sources |
|---|---|
| Records, files, reports and management information systems | Customers: feedback and buying behaviour |
| Employees’ knowledge of processes, customers and the industry | Suppliers: supply chain issues and technology |
| Organisational standards and guidelines | Competitors: strategy, market share and innovation |
| Trade directories, journals, news media, government publications and market research reports | |
| Online databases, industry associations, consultants, universities and specialised agencies |
SWOT analysis
SWOT analysis sorts the findings of a scan into four boxes. The firm’s own strengths and weaknesses are matched with the opportunities and threats in its environment, so that it can plan to use its strengths on the opportunities and to reduce the harm from weaknesses and threats.
| Element | Meaning | Examples |
|---|---|---|
| Strengths (internal) | What makes the firm better than its rivals | Superior product, efficient processes, cost advantage, an information technology (IT) system that can handle growth, skilled staff |
| Weaknesses (internal) | Areas where the firm must improve to stay competitive | High debt, lack of capital, a weak supply chain, untrained staff, outdated products |
| Opportunities (external) | Outside factors that can give an advantage | A change in import law that helps an exporter, growth in a niche market, poor rival products |
| Threats (external) | Outside factors that could cause harm | A drought for a farming firm, new legislation, rising interest rates, a rival with a more advanced product |
Carrying out a SWOT analysis
- Write a profile of the business: what it does and who its customers are, with a separate profile for each segment of a large firm.
- List the perceived strengths, weaknesses, opportunities and threats.
- Bring the management team together to fill in and test each list, and brainstorm ways to build on strengths and seize opportunities.
- Turn the findings into strategies and actions. The analysis is only the start of change.
The quality of the data is the most important factor. A SWOT can be done for the whole firm or for one area such as production, marketing or sales.
| Benefits | Pitfalls |
|---|---|
| Shows the key issues affecting the business | It is easy to oversimplify and use too little data |
| Helps spot and deal with weaknesses | Too much data can cause ‘paralysis by analysis’ |
| Helps minimise risks and deter threats | The data may rest on assumptions that later prove wrong |
| Helps capitalise on opportunities and strengths | Good internal data can be slow to get and politically difficult to obtain |
| Helps set goals and identify strategies | It has little structure, so key points can be missed |
| Low cost and quick | Change is so fast that future developments are hard to foresee |
PESTEL: steps, benefits and pitfalls
PESTEL examines the external factors a firm cannot control: political, economic, social, technological, environmental and legal. The syllabus gives four steps for carrying it out.
- Set the objective and scope. Decide what question you are answering, and which regions, industries or products you cover.
- Research each factor: government policy and stability, economic trends, social patterns, technological change, environmental rules and climate, and relevant laws.
- Interpret and organise the data. Summarise each factor, pick out the key trends and likely impacts, and set them out clearly.
- Use the results. Predict future trends, adjust strategy and resources, and tell the team.
| Benefits of PESTEL | Pitfalls of PESTEL |
|---|---|
| Foresight. It prepares the firm for market trends so that it can reduce threats and use openings | Oversimplification. Results rest on assumptions, and the context of the data may be ignored |
| Strategy. It deepens understanding of the market and improves planning | Hard to measure change. Markets shift fast and not every trend can be measured at one moment |
| Simplicity. It is easy to set up and yields plenty of information | Too much data. Define the variables before starting |
Worked example: a SWOT for a Lagos bakery
Scenario. Bako Bakery has a popular recipe and loyal local customers, but its oven is old and it relies on one flour supplier. A new mall is opening nearby, flour prices are rising and a large chain has announced a branch in the area. Complete a SWOT and suggest a strategy.
| Strengths | Weaknesses |
|---|---|
| A popular recipe. Loyal local customers | An old oven that limits output. Dependence on one supplier |
| Opportunities | Threats |
|---|---|
| A new mall that will bring more customers | Rising flour prices. A large chain moving in |
- Use strengths on opportunities. Open a stall in the mall, trading on the recipe and the loyal following.
- Fix weaknesses that block opportunities. Replace the oven so that output can meet the extra demand.
- Limit the threats. Find a second supplier and agree prices in advance, and build loyalty with offers that the chain cannot easily copy.
SWOT and scanning in more detail
Turning a SWOT into strategy
A SWOT list is only a start. Its value comes from combining the four boxes.
| Combination | Question | Typical strategy |
|---|---|---|
| Strengths with opportunities | How can our strengths take advantage of openings? | Grow and invest where we are strong and the market is opening |
| Weaknesses with opportunities | Which weaknesses stop us using openings? | Fix the weaknesses, or partner to get the missing skill |
| Strengths with threats | How can our strengths reduce threats? | Use our brand, cost advantage or skills to resist |
| Weaknesses with threats | Where are we most vulnerable? | Reduce exposure, defend, or withdraw |
Internal and external: the line that matters
The test for whether something is a strength or an opportunity is whether it sits inside the firm or outside it. The firm’s own skills, assets, costs, brand and systems are strengths or weaknesses. Market growth, competitor moves, regulation and technology are opportunities or threats.
The same fact can sometimes fall in either place, depending on the firm: a new tax on imports is an opportunity for a local producer and a threat to an importer.
Steps in an environmental scan
- Decide what you need to know and why, tying it to strategic decisions.
- Identify the sources of information, internal and external.
- Collect data on events, trends, issues and expectations.
- Analyse and interpret it, separating signal from noise.
- Identify opportunities and threats and forecast their effect.
- Report to decision-makers and decide actions.
- Repeat, so the scan is continuous.
A worked example with scoring
A small bank weights each SWOT item from 1 to 5 for impact. Strengths: strong local brand (5), loyal customers (4). Weaknesses: old IT systems (5), few branches (2). Opportunities: growing mobile payments (5), more small businesses (3). Threats: new fintech rivals (4), tougher capital rules (3).
The highest-scoring weakness, old IT systems, blocks the biggest opportunity, mobile payments, so the first priority is a systems upgrade or a partnership with a technology provider, supported by the brand and customer loyalty.
PESTEL and SWOT compared
PESTEL examines the wider external environment in six categories and produces a list of opportunities and threats. SWOT combines the external findings with an honest look inside the firm. PESTEL is usually done first, and its results feed the opportunities and threats boxes of the SWOT.
Exam focus: types, importance and sources of environmental scanning
Environmental scanning systematically surveys and interprets data to identify external opportunities and threats that could affect future decisions. It is closely linked to SWOT and belongs in strategic planning.
Three ways of scanning
- Ad-hoc scanning. Unplanned and short-term, mainly in an emergency or crisis.
- Regular scanning. Done at set intervals, such as every quarter or year.
- Continuous scanning. Ongoing and broad. Most businesses now prefer it because it allows quick action.
Importance of environmental scanning
- It lets the organisation seize opportunities earlier than competitors.
- It gives early warning of impending problems so solutions can be found in time.
- It shows when the environment is changing to meet customers’ wishes.
- It gives strategists qualitative information about the environment.
- It helps decision-makers by showing the resources and risks involved.
- It supports broad-based study by executives and finds up-to-date strategies.
Factors to consider before scanning
Events are specific occurrences in the internal or external environment. Trends are groups of related events moving in one direction, and can be positive or negative. Issues are concerns that arise from events and trends. Expectations are demands made by interested groups because of those issues. After scanning externally, carry out an internal scan: review the vision, mission and strategic plan and examine strengths and weaknesses.
Sources of information
- Internal: organisational records, employee expertise, and organisational standards and guidelines.
- External: suppliers; trade directories, journals and magazines; news media; government publications; market research reports; online databases and search engines; industry associations; consultants and educational institutions; and specialised agencies.
Common mistakes in the exam
- Putting external factors under strengths and weaknesses. Those two are internal. Opportunities and threats are external.
- Listing the four SWOT headings with no link to a strategy.
- Calling environmental scanning and SWOT the same. Scanning gathers the information. SWOT organises it.
- Forgetting the internal scan that follows the external scan.
- Giving the benefits of PESTEL or SWOT without the pitfalls when the question asks for both.
Quick revision
- Scanning: systematic collection and interpretation of environmental data. Types: ad hoc, regular, continuous.
- Look for events, trends, issues and expectations. Use internal and external sources.
- SWOT: strengths and weaknesses inside, opportunities and threats outside. Match them to form strategy.
- SWOT and PESTEL are quick and cheap, but depend on data quality and cannot keep up with fast change.
- PESTEL steps: objective and scope, research, interpret and organise, use the results.
Practice questions
These are original questions written in the style of the ICAN exam. Try each one before you open the answer.
Section A style: multiple choice
Question 1. Which type of environmental scanning is ongoing and wide in range?
- Ad hoc scanning
- Regular scanning
- Continuous scanning
- Emergency scanning
Show the answer
C. Ad hoc scanning is short term and used in a crisis. Regular scanning is done at set intervals.
Question 2. Which of the following is an internal factor in a SWOT analysis?
- A change in import law
- A rival’s new product
- Lack of capital
- Rising interest rates
Show the answer
C. Lack of capital is a weakness, and weaknesses are internal. The others are external.
Question 3. A drought that could destroy a farming company’s crop is, in SWOT terms, a:
- Strength
- Weakness
- Opportunity
- Threat
Show the answer
D. It is an external factor that could cause harm.
Question 4. A pitfall of SWOT analysis is that:
- It is very costly
- Its data may rest on assumptions that later prove unfounded
- It ignores internal factors
- It needs no data
Show the answer
B. Poor or assumed data gives misleading results.
Question 5. In environmental scanning, ‘trends’ are:
- Demands made by interested groups
- Groups of related events that move in a direction
- Single occurrences
- Concerns that have not yet arisen
Show the answer
B. Single occurrences are events, demands are expectations and concerns are issues.
Question 6. The first step in a PESTEL analysis is to:
- Set the objective and scope
- Act on the findings
- Interview staff
- Draw conclusions
Show the answer
A. Research, interpretation and use of the results follow.
Question 7. The same fact can be an opportunity for one firm and a threat for another. A new import tax on a product is:
- Always a threat
- An opportunity for a local producer and a threat for an importer
- Always a strength
- Neither
Show the answer
B. It depends on the firm’s position.
Question 8. Combining strengths with opportunities leads to which kind of strategy?
- Fix weaknesses
- Use strengths to take advantage of openings
- Retreat
- Cut staff
Show the answer
B. The aim is to grow where the firm is strong and the market is opening.
Question 9. PESTEL results usually feed which part of a SWOT?
- Strengths and weaknesses
- Opportunities and threats
- Only strengths
- Only weaknesses
Show the answer
B. PESTEL analyses external factors.
Question 10. The last step in environmental scanning is to:
- Collect data
- Report and act, and repeat the scan
- Choose sources
- Define the purpose
Show the answer
B. Scanning is meant to be continuous.
Section B style: written questions
Question 11 (10 marks). Explain environmental scanning and state four reasons why it is important to a business.
Show the marking guide
Explanation (4 marks). The systematic collection and interpretation of information about the internal and external environment, to identify opportunities and threats and to support strategic decisions. Mention the three types: ad hoc, regular and continuous.
Importance (6 marks). Any four, with explanation: acting before rivals, early warning, meeting customers’ changing wants, qualitative input to strategy, balancing resources and risks, keeping strategies up to date.
Question 12 (20 marks).
(a) Distinguish between environmental scanning and SWOT analysis. (4 marks)
(b) Explain the four elements of SWOT and give an example of each. (8 marks)
(c) Explain three benefits and three pitfalls of using PESTEL analysis. (8 marks)
Show the marking guide
(a) 4 marks. Scanning gathers and interprets information about the environment (2). SWOT organises what has been found, matching internal strengths and weaknesses to external opportunities and threats (2).
(b) 8 marks, 2 each. Strengths and weaknesses are internal. Opportunities and threats are external. Award 1 mark for the meaning and 1 for an example.
(c) 8 marks. Three benefits, 1 mark each for naming and explaining: foresight, support for strategy, simplicity (4 marks with explanation). Three pitfalls: oversimplification, difficulty in measuring change, too much data (4 marks with explanation).
A further written question
Question 13 (10 marks). Explain the steps a business should follow in an environmental scan.
Model answers
Show the model answer to Question 11
Environmental scanning is the systematic collection and interpretation of information about the internal and external environment to spot opportunities and threats that may affect future decisions. It is linked to strategic planning and to SWOT. Scanning may be ad hoc, regular or continuous.
Four reasons for its importance:
- it lets a firm seize openings before rivals
- it gives early warning of problems so they can be tackled in time
- it shows when customers’ wants are changing
- it supplies information that helps strategists choose suitable strategies
It also helps managers weigh resources against risks and keeps strategies up to date.
Show the model answer to Question 12
(a) Scanning and SWOT. Environmental scanning is the process of gathering and interpreting information about the environment to identify opportunities and threats. SWOT is a tool that organises what has been found, matching the firm’s internal strengths and weaknesses against external opportunities and threats to form strategy.
(b) The four elements. Strengths are internal features that make the firm better than rivals, for example a superior product or efficient processes. Weaknesses are internal areas needing improvement, for example high debt or untrained staff. Opportunities are external factors that can give advantage, for example a change in import law that helps an exporter.
Threats are external factors that could cause harm, for example new legislation or a rival’s more advanced product.
(c) PESTEL benefits and pitfalls. Benefits:
- it gives foresight of market trends so threats can be reduced and openings used
- it deepens understanding of the market and improves strategy
- it is simple to run and yields plenty of information
Pitfalls: it can oversimplify, resting on assumptions; changes are hard to measure because markets move quickly; and too much data can overwhelm unless the variables are defined beforehand.
Show the model answer to Question 13
An environmental scan follows these steps. First, define the purpose: decide what the firm needs to know and for which decisions. Second, identify sources, internal, such as records and staff, and external, such as customers, competitors, suppliers, government publications and market reports. Third, collect data on events, trends, issues and expectations, by reading publications, surveys, interviews and focus groups. Fourth, analyse and interpret the information.
Fifth, identify opportunities and threats and forecast their effects. Sixth, report to decision-makers and agree actions. Seventh, repeat, ideally continuously, because the environment keeps changing. An internal scan of strengths and weaknesses should follow the external scan.
Pathfinder on SWOT analysis and environmental scanning
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
From the earlier Business, Management and Finance paper. Asks for the meaning of the business environment and environmental scanning, the importance of scanning and the two methods of analysing environmental factors, which are PESTEL and SWOT.
Revise first: Exam focus: types, importance and sources of environmental scanning
From the earlier Business, Management and Finance paper. Asks you to analyse the business environment as a basis for competitive strategy. Revise SWOT and PESTEL.
Revise first: Exam focus: types, importance and sources of environmental scanning
From the earlier Business, Management and Finance paper. Asks about business analyses and models used to decide which products and markets to keep or grow.
Revise first: Worked example: a SWOT for a Lagos bakery
Multiple-choice questions can test the elements of SWOT and the types of environmental scanning. Check Section A of every diet you practise for items on these points.
Revise first: SWOT analysis
Source: ICAN Pathfinder, Business Environment. Diets covered: May Diet, 2021 to May Diet, 2026. November Diet, 2024 is not yet mapped.
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