2 Environment Analysis
Mandeep kaur
Learning Outcome:
After completing this module the students will be able to:
Understand the concept of Environmental Scanning
Understand the stages, approaches and tools of Environmental Scanning Critically evaluate the process of Environmental Scanning
1. INTRODUCTION
Environmental analysis is a strategic process that helps to identify all external and internal elements/factors that may have an effect on an organization’s performance. The purpose of environmental analysis is to find out existing and prospective strengths and threats, weaknesses and opportunities of a business. Such a process helps an organization to formulate appropriate strategies to tackle such issues in the future.
Managers usually perform environmental analyses to help them understand the internal and external environmental factors and the interplay between them. This, in turn increases the probability of appropriateness of the organizational strategies. In order to perform an environmental analysis efficiently and effectively, a manager must thoroughly understand the structuring of the various forces in an organizational environment.
For purposes of environmental analysis, the environment of an organization is generally divided into 3 distinct levels:
General Environment Operating Environment Internal Environment
To improve an organization’s performance, the managers must be well aware of these levels and the dynamics between them. Further, the policies should be designed and implemented as a response to them. The components of these environmental have been briefly discussed below.
General Environment: The general environmental largely consists of the macro (external) environment of a business. The various sub-environments in these category include the following:
o Economic o Social
o Political o Legal
o Technological o Natural
o International
Operating Environment: The operating Environment includes the task/micro components of a business. These are:
o Customers
o Creditors
o Suppliers
o Labour
o Publics
o Financers
o Intermediaries
Internal Environment: The level of an organization’s environment that has an immediate and specific implication for it is called the internal environment. It includes the following areas:
o Mission
o Objectives
o Internal power relationships
o Human resource capabilities
o Marketing Capabilities
o Physical assets
o Research and Development
o Brand equity
o Brand image
2. STAGES OF ENVIRONMENTAL ANALYSIS
The process of environmental analysis may be divided into the following stages:
o Scanning: Scanning is the process of analyzing the factors that may have an
implication on the business. This process involves identification of precursors or indicators of prospective environmental changes. This stage is therefore aimed at ‘signaling’ the organization to potentially significant impingement, before it has fully occurred and crystallized. The overall focus here is to detect the warning signals for a business.
o Monitoring: This step involves in-depth monitoring and analysis of specific environmental trends that have been identified in the first step. The purpose here is to assemble data to discern trends and emerging patterns in the environment. The outputs of monitoring include specific description of environmental factors; identification of specific environmental patterns and trends for further monitoring and assessment.
o Forecasting: “Forecasting is concerned with development of plausible directions, scope, speed, and intensity of environmental changes, to lay the evolutionary path of anticipatory change”. i
o Assessment: the focus here is to assess the impact of the identified factors on the business. Herein, “the frame of reference moves from understanding the environment-focus of scanning, monitoring, forecasting – to identifying what that understanding of environment means for the organization.ii
3. APPROACHES TO ENVIRNOMENTAL ANALYSIS
Broadly, there are two approaches to environmental analysis:
o Outside-in Approach: Also known as the ‘macro’ approach, this takes into consideration a long term perspective of the business. It involves identifying changes in the macro environment, and making necessary changes in the organization’s internal environment in the light of these.
o Inside-out Approach: Also known as the ‘micro’ approach, this involves an analysis of the changes in the internal environment of the business. Re-building strengths and removal of weaknesses are the objectives of this approach.
Various methodological approaches to environment analysis are as follows:
3.1 SWOT Analysis: SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. The strengths and weaknesses represent the internal characterization of the business; whereas the opportunities and threats arise from the external environments’ interplays. The degree to which the internal environment of the firm matches with the external environment is termed as strategic fit. SWOT analysis enables organizations to identify both internal and external influences. SWOT’s primary objective is to help organizations develop a full awareness of all the factors that may affect strategic planning and decision making. Subsequently, the TOWS matrix framework (presented below) can be applied to determine various strategic alternatives for an organization.
Table 1: Components of SWOT Analysis
Source: Wheelen, T. L., & Hunger, J. D. (2011). Concepts in strategic management and business policy. Pearson Education India.
3.2 PESTLE ANALYSIS: PESTLE is an acronym for the Political, Economic, Social, Technological, Legal and Environmental factors that affect the business environment. These factors have been explained below:
Political Factors: The political factors include the present political situation of a country. It may also include international political conditions that may have a bearing on the business. Some important political factors include the following:
o Fiscal Policies
o Monetary Policies
o EXIM Policies
o Tax Laws
o Proximity to elections etc
Economic factors: These factors include all the determinants of the economy and its state, and direction. Various such factors are:
o The rate of inflation
o Bank Rate
o Lending Rate
o Credit accessibility
o Unemployment rates
o The foreign exchange rate etc
Social factors: This set of factors includes the social, behavioral or attitudinal characteristics of a business’s current or prospective clients. These are:
o Socio-economic status
o The gender and connected demographics
o Lifestyle
o The domestic structures
o Level of Education
o Income Level
Technological factors: The advancements in technology are greatly influencing businesses. Performing environmental analysis on these factors shall help business in staying up to date with the changes. Various technological factors that may be important for a firm are:
o Rate of technological obsolescence
o Rate of technological advances
o Innovative technological platforms
o Research and Developmental advancements
Legal factors: The legal factors include the legislative forces which may have a direct or indirect bearing on the business. Various important legal factors are:
o Employment regulations
o Competitive regulations
o Patent infringements
o Health and safety regulations
o Product regulations etc
Environmental factors: Every business unit used environmental resources. It therefore owes an environmental responsibility. Assessment of environmental factors is equally important for the success of an organization. Various such factors that need attention are:
o Geographical location
o The climate and weather
o Waste disposal law
o Energy consumption regulation
Pros of PESTLE Analysis
o Simple and easy to use framework.
o Involves cross-functional skills and expertise.
o Helps to reduce the impact and effects of potential threats.
o Aids strategic thinking and decision making.
o Helps in identification and exploitation of environmental opportunities.
Cons of PESTLE Analysis
o Oversimplification of information
o Needs to be monitored on timely basis.
o Chances of ‘paralysis by analysis’
o Time consuming and costly
o Users’ access to quality external information is often restricted because of the cost and time needed to collate it.
Often, managers choose to learn about political, economic, social and technological factors only. In that case, they conduct the PEST analysis. PEST is also an environmental analysis. It is a shorter version of PESTLE analysis. STEP, STEEP, STEEPLE, STEEPLED, STEPJE and LEPEST: All of these are acronyms for the same set of factors. Some of them gauge additional factors like ethical and demographical factors.
3.3 Michael Porter’s Five Force Model: According to this model, the state of completion in an industry depends on five basic competitive forces. An assessment of these forces is important for a firm to appropriately position itself in the market. Figure 4 presents the five force model of Michael Porter. The five basic competitive forces are:
- o Rivalry among Existing Firms: Firms in an industry are “mutually dependent”, competitive moves of one firm have a bearing on the others. The intensity of rivalry may however be subject to several factors. These include the following:
- o Threat of New Entrants: In a growing industry, the threat of new entrants is high. Potential competition tends to be higher in such an industry due to its profitability. Barriers to entry in such cases are also low. Higher are the entry barriers, lesser is the threat of new entrants. These barriers have been explained below:
o Threat of Substitutes: A substitute is a product that can be used in place of the existing one. While substitutes offer a definite threat, the extent of it depends on the extent to which the price and performance of the substitute can match the industry’s product, the willingness of customers to switch, their loyalty and switching costs.
Lesser price, better performance, lack of customers’ trust and low switching costs individually and collectively result in higher threat of substitutes.
o Bargaining Power of Suppliers: Such power of the suppliers is high in the following cases:
o When there are only a limited number of large suppliers. o When the resources supplied by them are scarce.
o When the switching costs are high. o When the customers are loyal.
o When the supplier can integrate vertically. o When the customer is small and unimportant
o When there are few or no available substitutes.
o Bargaining Power of Buyers: Powerful customers are able to exert pressure to drive down prices, or increase the required quality for the same price, and therefore reduce profits in an industry. A great example in the UK currently is the dominant grocery supermarkets which exert great power over supplier firms. The bargaining power of the customers is high in the following cases:
- o When the customers are small in number
- o When the size of the order is very larger
- o When several alternative suppliers are available
- o When the customers can integrate backwards
- o When the customers are well informed
- o When the switching costs are very low
Figure 3: Michael Porter’s Five Force Model
Source: Porter, M. E. (2008). Competitive strategy: Techniques for analyzing industries and competitors. Simon and Schuster.
4. TECHNIQUES FOR ENVIRONMENTAL ANALYSIS
The techniques for environmental analysis are the tools for gathering the information for appraising the environment. William Glueck mentions four techniques for environmental analysis. These are:
Verbal and Written Information: Written information included the documented information that is published or unpublished. There may be various sources of written information depending upon the context of information required. Common sources are the websites, reports, records, books etc. In cases when the documented information may have changed, contacting the concerned persons may provide the latest information. Verbal information is, therefore, also important. Sources of verbal information include electronic media, conferences, seminars, workshops etc.
Search and Scanning: Even if the information exists, it may not be readily available, the processes of searching and scanning, then, come in picture. They help in identifying sources of information to collect the required information in a timely manner.
Spying: Spying, albeit unethical is not uncommon in business. This has been used to collect secret information in order to get a competitive advantage.
Forecasting: Forecasting is a formal procedure that involves estimation of the intensity, nature, and timing of the external forces that may affect the performance of a firm, disrupt its plans, or force a change in its strategies.
5. ADVANTAGES AND LIMITATIONS OF ENVIRONMENTAL ANALYSIS
5.1 Advantages
o The very idea of environmental analysis makes one aware of the environment-organization linkage
o It helps an organization to identify the present and future threats and opportunities
o It helps a firm to understand the transformation of the industry environment
o It helps in adequate strategy formulation and implementation
o It helps in making suitable modifications in the strategies
o It keeps the managers more informed and alert.
o It provides a necessary and useful factors of the influential factors for a business
5.2 Limitations
Environmental analysis has several limitations. These include the following:
- o Unexpected and Unanticipated Events: Such elements cannot be
foretold. Many times, the business has to face unexpected happenings. The benefit of environmental analysis fails in this case.
- o Uncritical Faith: Sometime data may be incorrect. So, decisions on basis of this analysis may be risky for business.
- o Paralysis by Analysis: Analysis paralysis or paralysis by analysis is an anti-pattern, the state of over-analyzing (or over-thinking) a situation so that a decision or action is never taken, in effect paralyzing the outcome.
SUMMARY
Environmental analysis is a vital process of strategic management. It allows the identification and assessment of the internal and external factors for a business that may have an effect on it. The analysis entails assessing the level of threat or opportunity associated with such factors. This, in turn helps in the formulation and implementation of appropriate strategic initiatives and plans. The process of environmental analysis begins from scanning the factors in a firm’s environment, continues with monitoring and forecasting of the changes, and ends with the assessment of the impact of them on a firm.
Thus, environmental analysis helps a firm in assuming a pro-active stance in understanding and forecasting the changes in and around its environment, thereby increasing the probability of success of the organizational strategies.
Books
- Ahmed, M. & Alam, A. (2014). Business Environment: Text and Cases. Taxman.
- Francis Cherunilam. (2014). Business Environment: Text and Cases. Himalya Publishing House.
- Porter, M. E. (2008). Competitive strategy: Techniques for analyzing industries and competitors. Simon and Schuster.
- Wheelen, T. L., & Hunger, J. D. (2011). Concepts in strategic management and business policy. Pearson Education India.
Articles
- Orfano, F. (2011). Components of a pestle analysis. Retrieved January, 2016.
- Srdjevic, Z., Bajcetic, R., & Srdjevic, B. (2012). Identifying the criteria set for multicriteria decision making based on SWOT/PESTLE analysis: a case study of reconstructing a water intake structure. Water resources management, 26(12), 3379-3393
Online Sources