7 Environmental Scanning and Approaches

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1.  Learning Outcomes

 

After studying this module, you shall be able to

  1. Understand the concept of environmental scanning
  2. Know different factors to be considered for environmental scanning
  3. Understand the need for environmental scanning
  4. Study various approaches to environmental scanning
  5. Learn about the sources of information for environmental scanning
  6. Analyse the methods and techniques for environmental scanning
  7. Understand SWOT Analysis
  8. Learn about PESTLE Analysis

 

2. Meaning    of    Environmental    Scanning          and    Factors    to    be   considered     for

 

Environmental Scanning

 

Environmental Scanning relates to examining and understanding the environment in which a business unit exists, in order to facilitate strategic decision making. It refers to studying both internal as well as external environment and analysing its impact on the business opportunities. It also includes making prior judgements about the risks and uncertainties that the business may have to encounter in near future.

 

Hunger pointed out that Environmental scanning is the monitoring, evaluating and disseminating of information from the external and internal environments to key people within the corporation. It is a tool that a corporation uses to avoid strategic surprise and to ensure long – term health.

 

Azhar Kazmi, quoted in his book – “Business Policy and Strategic Management” that – “The process by which organizations monitor their relevant environment to identify opportunities and threats defecting their business is known as environmental scanning.”

 

The businesses function in an environment which is ever changing as the environment is known to be dynamic; therefore the scanning of the environment has to be a fast and regular process.

 

The environmental scanning cannot be a onetime action in a business; in fact it is constantly watching the external environment and micro-scoping of internal environment.

 

Environmental Scanning provides a broader perspective to the management and planning department to formulate plans and strategies. In other words, it is the process which helps organisations to observe the environment in which they function in order to identify the opportunities and threats impacting their business.

 

Factors to be consider for environmental scanning –

 

1.             Events are relevant and specific incidents which take place in the different environmental factors.

 

2.             Trends are the general courses of action along which the events take place.

 

3.             Issues are the current matters that may arise as a result of the events and trends.

 

4.             Expectations are the demands and requirements of the concerned groups in view of the trends and issues.

 

Example: Gas leakage accident at Bhopal in Dec. 1984

 

The environmental scanning process enables an organisation to analyse the influence which various situations and changes in the environment exert on its strategic management process. Since the environment facing any organization is complex and its scanning is absolutely essential, strategists (who, as individuals or in groups – internal or external; are concerned with and play a role in strategic management) have to deal cautiously with the process of environmental scanning.

 

Objectives –

  • To make efforts to deal with the important issues impacting the business and avoid wasting time and effort on irrelevant factors.
  • To enable this it is important to devise an approach, or a combination of approaches to environmental scanning.

 

3. Need for Environmental Scanning

 

Environmental Scanning is essential because of following reasons –

 

  1. Prime Influence – Environment impacts the effectiveness of business strategies majorly. The strategic planning can be undertaken without taking environment into account as any change in the environmental factors affects the business decisions. In addition, the successful implementation of strategies is also dependent on the environment.
  2. A tool to anticipate Changes – Environmental scanning is an effective tool for predicting the changes that may happen in the environmental factors in near future. It not only makes an organisation aware of its business surroundings but also prepares it to face the challenges in future.
  3. Time for adjustment – Environment scanning gives time to an organisation to adjust according to the changing environment. As businesses may have to come across sudden changes in the environment, environmental scanning helps the organisation in adapting to the changes by predicting them before hand.
  4. Early Warning system – The scanning process, if done properly, may predict the adverse changes in the business environment and help the organisation in developing a defence mechanism to counter the adverse changes.

 

Approaches to Environmental Scanning

 

As suggested by Kubr, three approaches can be to organise the information for the process of environmental scanning

 

  1. Systematic Approach – Gathering information for environmental scanning which have a direct impact on organizations activities, Govt. policy statements relating to the business and industry, keeping a track of alterations and taking the same into account. The information so collected necessarily needs to be updated to the strategic management team for strategic decision-making and also for making changes in the operational activities.
  2.  Ad Hoc Approach – In this approach, organisations periodically conduct special projects and evaluate existing strategies and also to formulate new strategies. Sometimes special surveys and studies are also undertaken in order to address the environmental issues.
  3. Processed – form Approach – Some organisations may use secondary data which is processed by Govt. or private agencies; this is often referred to as processed form approach.Since environmental scanning is absolutely necessary for strategy formulation of any organization, whatever approaches is adapted, DATA Collection and Processing systematically is ultimate for Strategic Management Process.
  4. Sources of Information for Environmental Scanning Strategists use different information sources depending on their needs for environmental scanning. The sources of information could be formal or informal, written as well as verbal and external or internal.

 

1.  External Sources –

 

a)  Documentary or secondary sources of information like publications. These could be newspaper, magazines, journals, books, trade and industry association newsletter, Govt. Publications, annual reports of competitions etc., information from

 

b)   Media sources like audio, visual, audio-visual media (radio, television, internet)

 

c)  External Agencies like customers, marketing intermediaries, suppliers, trade associations, Govt. agencies and so on.

 

2. Internal Sources –

 

a) Company files and documents, MIS, databases, company employees.

 

b) Formal analysis and studies undertaken by organisations with the help of employees, market research agencies, consultants and educational institutions etc.

 

Some of the important sources of information used in Indian context can be –

 

1. International Publications

 

a)  Data published by Intergovernmental and international agencies like UN, UNCTAD, UNESCO, WTO, IMF, OECD, etc.

 

b) International private data agencies like Fitch, Moody’s, Standard & Poor, etc.

 

11.         World Wide Web, Online databases and systems

 

a)             Search engines.

 

b)            Online databases of govt and private data agencies.

 

111. Government Publications

 

a) Government information sources such as Census of India report; five-year plan reports etc. provide important inputs for planning purpose.

b)   Periodic reports like economic surveys, annual surveys etc. provide current data.

c) Occasional reports brought out by statutory agencies such as guidelines to industries, export-import policies etc. which are relevant for business and industry.

d) Reference books and encyclopaedias.

 

1V.    Institutional Publications

 

a)             Information on economic indices published by Centre of Monitoring India Economy (CMIE).

 

b)            Publications of market research agencies like NCAER etc.

 

c)             Publications of trade and industry federations such as CII, FICCI, ASSOCHAM, NASSCOM, ATMA etc.

 

d)            Annual company reports having data relating to balance sheet and profit and loss account.

 

V.           Periodicals and Newspapers

 

V1.  Industrial Espionage agencies

 

Private agencies provide information and reports on competitors, which may be essential for strategic planning.

 

5. Methods and Techniques Used for Environmental Scanning

 

There are wide range of methods and techniques available for environmental scanning. Strategists may choose one which suit their needs in terms of the –

 

 

•  Quantity

•  Quality

•  Availability

•  Time lines

•  Application/ Relevance

•  Expenditure on getting environmental information

 

Many authors have given various methods and techniques which can be used for environmental scanning. Le Bell and Krasner have outlined 9 groups of techniques:

 

1.      Unstructured expert opinion

2.      Structured expert opinion

3.      Single – variable extrapolation

4.      Theoretical – limit envelopes

5.      Dynamic modes

6.      Mapping

7.      Multivariable interaction analysis

8.      Structured in expert speculation

9.      Unstructured in expert speculation

 

But the most popular of these are –

 

1)  Structured/ Unstructured expert opinion – The opinions of experts in field of business, in related industry, working in similar type of markets can be used for the purpose of environmental scanning. These people have expertise knowledge about the business as they are well aware of the current trends and may also be valuable in predicting future trends of the business e.g. a person who a wants to set up a restaurant may seek opinion of expert in the same business in order to know the prospects of the business. The opinions can be gathered through a structured survey and also through informal talk with the experts. These opinions may help in giving a clear picture of the business environment and also the future trends.

 

2) Extrapolation – The statistical technique of extrapolation helps to calculate the future trends from the data of current trends; for instance, a company may use the data of sales of past 10 years to predict the future sale trends.

 

3) Estimate – This technique considers the best and worst scenarios the business may have to witness as a result of the changes in its environment. These cases are further used to predict more possibilities and probabilities of opportunities and threats which may occur in near future.

 

4) Mapping – Mapping is a tool that tracks the environmental factors to identify that which factors are changing and how much change is there is each of them. Mapping also tries to uncover the rate and trends of change taking place in each factor, as all the factors do not change simultaneously. While, some factors change frequently others remain constant for some time. Thus, mapping defines the direction of changes taking place in environmental factors and also the level of change.

 

5) Modelling – In modelling various statistical tools like regression analysis or probability tables etc. are used for future prediction.

 

6)  Chaos Theory – Chaos theory by Edward Lorenz and Michael Feigenbaum, uses mathematical models, known as chaotic models, to interpret the process of non – linear and dynamic system.The phenomenon of Chaos is observed in a wide variety of processes – biological, sociological, economic, and meteorological. The applications of Chaos theory in management may range from predicting market behaviour, financial forecasting and anticipating competitive strategies.

 

7)  QUEST Technique – Quick environmental scanning techniques is a process which analyses various scenarios after scanning the environment and then come out with different strategic options available. The process involves four steps which are –

 

1.     Internal  strategists  will  observe  and  identify  the  major  events  and  trends  in  the

2.   Speculate on a wide range of important ISSUES that might affect the future of their organization.

3.     Preparing a report summarizing the major issues and their implications and 3-5 scenarios incorporating the major themes of their discussion.

4. Report and scenarios are reviewed by a group of strategists who identify feasible strategic options to deal with the evolving environment.

 

After the environmental scanning process is complete, the strategists start to appraise the environment – called environmental appraisal. It is structured by the preparation of the environmental threats and opportunities profile (ETOP), which involves breaking up the environment in various segments or sectors and predicting the influence of each segment on the business.

 

6. SWOT Analysis

 

SWOT, is an instrumental framework in value based management and strategy formulation to give in-depth information about strengths, weaknesses, opportunities and threats for a particular company / organization. SWOT analysis or environmental analysis is a process which enables an organisation to examine its related environment to find out the existing opportunities and threats that may affect its business. It is a process of studying the environment before taking decisions and formulating strategies.

 

 

Possible strengths are –

  • Name recognition
  • Proprietary technology
  • Cost advantages
  • Skilled employees
  • Loyal customers etc.

 

And weakness is a company’s lack of ability or a situation that acts as a disadvantage for it in comparison to its counterparts. Weakness is an inherent limitation or shortcoming of an organisation, which can lead it to strategic disadvantage; however, weaknesses are areas which are capable of improvement. Possible weaknesses are –

  • Poor market image
  • Limited finance
  • Lack of efficient human resources
  • Obsolete facilities
  • Internal operating problems
  • Poor marketing skills etc.

An opportunity is a favourable condition in the organization’s environment which enables it to strengthen its position.

 

A threat is an unfavourable condition in the business environment that may adversely affect the business and cause damage to the organization. Threats are anything from the environment that can adversely affect its performance or achievement of its goals. Threats can be external or internal, external threats could be inflation, new legislation, or a new competitor in your market while internal threats could include a skill or staff shortage within your organisation.

 

The relationships in a SWOT analysis are generally’ represented by a 2×2 matrix, wherein the ‘Strength’ and ‘Opportunities’ are both positive considerations while ‘Weakness’ and ‘Threats’ are both negative considerations.

 

The matrix identifies the strength, weaknesses, threats and opportunities of a business firm. This formation can be used by the company in many ways in evolving its options for the future. In general, the company should attempt to –

 

§      Build its strength

§       Reverse its weakness

§       Maximize its response to opportunities

§       Overcome to its threats

 

The final results of an analysis could be listed in the matrix in given below –

 

The SWOT Matrix –

 

ROLE AND IMPORTANCE OF SWOT ANALYSIS

 

A.  Identify strengths – The internal environment analysis identifies the strengths of an organisation. The internal environment includes the resources of the organisation – physical, financial and human resources for instance – when a company has superior technology in comparison to its counterparts, it becomes strength for the company.

B. Identify weaknesses – SWOT analysis also identifies the areas where a company needs improvement and which puts it at a disadvantage in comparison to its competitors. The analysis helps a company to spot such weaknesses and take corrective actions, for instance – having lesser financial resources can be a weakness and in order to work on this issue the company may have to explore for avenues to raise additional funds.

C. Identify opportunities – The external environment may have to offer many new opportunities for businesses and SWOT analysis helps a company in recognising them.

D. Identify threats – With many opportunities, the external environment also leads a company to various threats from competitors, govt. policies, etc. Early identification of such threats helps a company to counter them in future. For instance, the govt. may change the taxation policies which may further affect the costing for the firms; therefore, business firm must take necessary steps to reduce the effect of such changes.

E. Effective planning – Environmental analysis also helps a firm in planning its future actions and facilitates quick decision-making. The planning exercise must take into account the internal and external environment and the SWOT analysis enables a firm to make well defined plans.

F. Facilitates Organising Resources – Environmental analysis helps an organisation to predict the future demand of their products which enables it to organise its resources accordingly. The organisation can plan the requirement of resources to handle the activities of the market.

G. Face Competition – The environmental analysis helps a firm to identify the strengths and weaknesses of its competitors, which further enables it to counter the strengths of the competitors and also exploit the competitors’ weaknesses in its favour.

H. Flexibility in Operations – As the environment keeps changing, the environmental analysis enables a firm to adjust its operations accordingly.

7.  PESTLE Analysis Environmental Scanning is an important component when the business is in Competition.

 

The PESTLE Matrix –

 

 

PESTLE analysis involves identifying the political, economic, socio-cultural, technological, legal and environmental influences of an organization or policy in the past, and how they might do so in future. The advantage of this tool is that it encourages management into proactive and structured thinking in its decision making.

  • Like the SWOT analysis, the PESTLE analysis is also simple, quick, and uses four key perspectives. PESTLE analysis, has its origins in the PEST analysis, which involves identifying the political, economic, socio-cultural and technological influences on an organization.
  • The PESTLE analysis is used to provide a context for the organisation’s / individual’s role in relation to the external environment (mainly macro and mega environment).
  • Depending on which elements are included it can also be referred to as STEP, STEEP, PESTEL, PESTLE or LEPEST.
  • Recently it was even further extended to STEEPLE and STEEPLED, including education and demographics.
  • PESTLE is useful before SWOT – not generally the other way round as it helps to identify SWOT factors.

 

8. Pitfalls in Environmental Scanning

 

Few pitfalls faced while using environmental scanning can be –

  • Increased focus of planners on relevant environment of the business organisation may sometimes lead to avoidance of the events taking place in the general business environment that may affect the business.
  • Environmental scanning may lead to increased information inflow for the organisation creating an information overload which may further delay timely actions, thus leading to paralysis by analysis.
  • The purpose of environmental scanning is to uncover influences that matter for the future of the organisational strategic decision-making. This purpose should not be lost and environmental scanning should not be used for purposes other than this.
  • Environmental scanning function should not be integrated too closely with operational and functional activities of the organisation.
  • Environmental should not be too far from realities of the organisation, making it impersonal, staff function.

After the scanning process is complete, the strategists have to give structure to the huge information available. They have to filter the information in such a manner that a clear picture of opportunities and threats operating in different sectors emerges and can be utilised by the organisational benefits.

 

9. Summary

  • Environmental scanning refers to studying both internal as well as external environment and analysing its impact on the business opportunities.
  • Environmental Scanning provides a broader perspective to the management and planning department to formulate plans and strategies.
  • The environmental scanning process enables an organisation to analyse the influence which various situations and changes in the environment exert on its strategic management process.
  • Environmental Scanning is essential because environment has a major affect on the effectiveness of business strategies, helps to anticipate the changes, gives time to the company to get adjust to the changed environment and gives advance warning or danger signals of the adverse changes in environment.
  • Environmental Scanning can be done by following different approaches viz. systematic approach, ad-hoc approach and processed-form approach.
  • Environmental scanning requires information to be analysed and the sources of information may be formal or informal, written as well as verbal and external or internal.
  • A wide range of methods and techniques can be adopted for environmental scanning. Strategists may choose one caters to their requirements on factors like quantity, quality, availability, time lines, relevance and cost of environmental information.
  • SWOT analysis is a systematic approach to find the strengths, weaknesses opportunities and threats relating to an organisation and its environment.
  • In the SWOT analysis, ‘SW’ stands for strengths and weaknesses while ‘OT’ stands for opportunities and threats. Strengths and weaknesses are internal to an organisation whereas the external environment creates opportunities and threats for the business. SWOT analysis helps an organisation to find out its positive and negative points.
  • PESTLE analysis involves identifying the political, economic, socio-cultural, technological, legal and environmental influences of an organization or policy in the past, and how they might do so in future.
  • PESTLE analysis encourages management into proactive and structured thinking in its decision making.

 

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