You can mark the external Active in Disk Management, extract the ISO files to it using ImgBurn or PowerISO, then boot it using BIOS boot order or one-time BIOS Boot Menu key.
This allows you to use the Custom>Drive Tools to repartition and format before install, since you are booting the installer as required.
Some USB drives require bootsecting, which can be achieved by writing the ISO to it using UltraISO trial version's Bootable tab.
You can also from Windows 7 run Setup as Admin from the external drive but you won't have the Drive Tools available as when booted.