{"id":26,"date":"2018-10-25T05:08:52","date_gmt":"2018-10-25T05:08:52","guid":{"rendered":"http:\/\/mgmtp12.epgpbooks.inflibnet.ac.in\/?post_type=chapter&p=26"},"modified":"2018-10-25T05:29:24","modified_gmt":"2018-10-25T05:29:24","slug":"environment-analysis","status":"publish","type":"chapter","link":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp12\/chapter\/environment-analysis\/","title":{"rendered":"Environment Analysis"},"content":{"raw":"
\r\n\r\nLearning Outcome: <\/strong>\r\n

After completing this module the students will be able to:<\/p>\r\n

Understand the concept of Environmental Scanning<\/p>\r\n

Understand the stages, approaches and tools of Environmental Scanning Critically evaluate the process of Environmental Scanning<\/p>\r\n \r\n\r\n1.\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>INTRODUCTION<\/strong>\r\n\r\n \r\n

Environmental analysis is a strategic process that helps to identify all external and internal elements\/factors that may have an effect on an organization\u2019s performance. The purpose of environmental analysis is to find out existing and prospective strengths and threats, weaknesses\u00a0and opportunities of a business. Such a process helps an organization to formulate appropriate strategies to tackle such issues in the future.<\/span><\/p>\r\n\r\n<\/div>\r\n

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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.<\/p>\r\n \r\n

For purposes of environmental analysis, the environment of an organization is generally divided into 3 distinct levels:<\/p>\r\n \r\n

General Environment Operating Environment Internal Environment<\/p>\r\n \r\n

To improve an organization\u2019s 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.<\/p>\r\n \r\n

General Environment: <\/strong>The general environmental largely consists of the macro (external) environment of a business. The various sub-environments in these category include the following:<\/p>\r\n \r\n\r\no Economic o Social\r\n\r\no Political o Legal\r\n\r\no Technological o Natural\r\n\r\no\u00a0 International\r\n\r\n \r\n\r\nOperating Environment: <\/strong>The operating Environment includes the task\/micro components of a business. These are:\r\n\r\n<\/div>\r\n \r\n

\r\n\r\n\u00a0 \u00a0 o\u00a0\u00a0 Customers\r\n\r\no\u00a0\u00a0 Creditors\r\n\r\no\u00a0\u00a0 Suppliers\r\n\r\no\u00a0\u00a0 Labour\r\n\r\no\u00a0\u00a0 Publics\r\n\r\no\u00a0\u00a0 Financers\r\n\r\no\u00a0\u00a0 Intermediaries\r\n\r\n \r\n

Internal Environment: <\/strong>The level of an organization\u2019s environment that has an immediate and specific implication for it is called the internal environment. It includes the following areas:<\/p>\r\n \r\n\r\no\u00a0\u00a0 Mission\r\n\r\no\u00a0\u00a0 Objectives\r\n\r\no\u00a0\u00a0 Internal power relationships\r\n\r\no\u00a0\u00a0 Human resource capabilities\r\n\r\no\u00a0\u00a0 Marketing Capabilities\r\n\r\no\u00a0\u00a0 Physical assets\r\n\r\no\u00a0\u00a0 Research and Development\r\n\r\no\u00a0\u00a0 Brand equity\r\n\r\no\u00a0\u00a0 Brand image\r\n\r\n \r\n\r\n \r\n\r\n2.\u00a0<\/strong>STAGES OF ENVIRONMENTAL ANALYSIS<\/strong>\r\n\r\n \r\n\r\nThe process of environmental analysis may be divided into the following stages:\r\n\r\n \r\n\r\no\u00a0\u00a0 Scanning: <\/strong>Scanning is the process of analyzing the factors that may have an\r\n\r\n \r\n

implication on the business. This process involves identification of precursors or indicators of prospective environmental changes. This stage is therefore aimed at \u2018signaling\u2019 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.<\/p>\r\n \r\n

o\u00a0\u00a0 Monitoring: <\/strong>This step involves in-depth monitoring and analysis of specific environmental trends that have been identified in the first step. The purpose here\u00a0is 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.<\/span><\/p>\r\n\r\n<\/div>\r\n

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o\u00a0\u00a0 Forecasting: <\/strong>\u201cForecasting is concerned with development of plausible directions, scope, speed, and intensity of environmental changes, to lay the evolutionary path of anticipatory change\u201d. i<\/p>\r\n \r\n

o\u00a0\u00a0 Assessment: <\/strong>the focus here is to assess the impact of the identified factors on the business. Herein, \u201cthe 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<\/p>\r\n \r\n\r\n3.\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>APPROACHES TO ENVIRNOMENTAL ANALYSIS<\/strong>\r\n\r\n \r\n\r\nBroadly, there are two approaches to environmental analysis:\r\n\r\n \r\n

o\u00a0\u00a0 Outside-in Approach: <\/strong>Also known as the \u2018macro\u2019 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\u00a0 organization\u2019s internal environment in the light of these.<\/p>\r\n \r\n

o\u00a0\u00a0 Inside-out Approach: <\/strong>Also known as the \u2018micro\u2019 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.<\/p>\r\n \r\n\r\nVarious methodological approaches to environment analysis are as follows:\r\n\r\n \r\n

3.1 SWOT Analysis: <\/strong>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\u2019 interplays. The degree to which the internal environment of the firm matches with the external environment is termed as strategic fit. <\/a>SWOT analysis enables organizations to identify both internal and external influences. SWOT's primary objective is to help organizations develop a\u00a0full 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.<\/span><\/p>\r\n\r\n<\/div>\r\n \r\n\r\nTable 1: Components of SWOT Analysis<\/strong>\r\n\r\n\"\"\r\n\r\n \r\n\r\n\"\"\r\n\r\n\"\"\r\n

\r\n\r\nSource: Wheelen, T. L., & Hunger, J. D. (2011). Concepts in strategic management and business policy. Pearson Education India.<\/em>\r\n\r\n \r\n

3.2 PESTLE ANALYSIS: <\/strong>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:<\/p>\r\n

Political Factors: <\/strong>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:<\/p>\r\n \r\n\r\no\u00a0\u00a0\u00a0 Fiscal Policies\r\n\r\no\u00a0\u00a0\u00a0 Monetary Policies\r\n\r\no\u00a0\u00a0\u00a0 EXIM Policies\r\n\r\no\u00a0\u00a0\u00a0 Tax Laws\r\n\r\no\u00a0\u00a0\u00a0 Proximity to elections etc\r\n\r\n \r\n

Economic factors: <\/strong>These factors include all the determinants of the economy and its state, and direction. Various such factors are:<\/p>\r\n \r\n\r\no\u00a0\u00a0\u00a0 The rate of inflation\r\n\r\no\u00a0\u00a0\u00a0 Bank Rate\r\n\r\no\u00a0\u00a0\u00a0 Lending Rate\r\n\r\n\u00a0o\u00a0\u00a0\u00a0 Credit accessibility<\/span>\r\n\r\no\u00a0\u00a0\u00a0 Unemployment rates<\/span>\r\n\r\no\u00a0\u00a0\u00a0 The foreign exchange rate etc<\/span>\r\n\r\n<\/div>\r\n

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Social factors: <\/strong>This set of factors includes the social, behavioral or attitudinal characteristics of a business\u2019s current or prospective clients. These are:<\/p>\r\n \r\n\r\no\u00a0\u00a0 Socio-economic status\r\n\r\no\u00a0\u00a0 The gender and connected demographics\r\n\r\no\u00a0\u00a0 Lifestyle\r\n\r\no\u00a0\u00a0 The domestic structures\r\n\r\no\u00a0\u00a0 Level of Education\r\n\r\no\u00a0\u00a0 Income Level\r\n\r\n \r\n

Technological factors: <\/strong>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:<\/p>\r\n \r\n\r\no\u00a0\u00a0\u00a0 Rate of technological obsolescence\r\n\r\no\u00a0\u00a0\u00a0 Rate of technological advances\r\n\r\no\u00a0\u00a0\u00a0 Innovative technological platforms\r\n\r\no\u00a0\u00a0\u00a0 Research and Developmental advancements\r\n\r\n \r\n

Legal factors: <\/strong>The legal factors include the legislative forces which may have a direct or indirect bearing on the business.<\/strong> Various important legal factors are:<\/p>\r\n \r\n\r\no\u00a0\u00a0\u00a0 Employment regulations\r\n\r\no\u00a0\u00a0\u00a0 Competitive regulations\r\n\r\no\u00a0\u00a0\u00a0 Patent infringements\r\n\r\no\u00a0\u00a0\u00a0 Health and safety regulations\r\n\r\no\u00a0\u00a0\u00a0 Product regulations etc\r\n\r\n<\/div>\r\n

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Environmental factors: <\/strong>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:<\/p>\r\n \r\n\r\no\u00a0\u00a0\u00a0 Geographical location\r\n\r\no\u00a0\u00a0\u00a0 The climate and weather\r\n\r\no\u00a0\u00a0\u00a0 Waste disposal law\r\n\r\no\u00a0\u00a0\u00a0 Energy consumption regulation\r\n\r\n \r\n\r\nPros of PESTLE Analysis<\/strong>\r\n\r\n \r\n

o\u00a0\u00a0\u00a0 Simple and easy to use framework.<\/p>\r\n

o\u00a0\u00a0\u00a0 Involves cross-functional skills and expertise.<\/p>\r\n

o\u00a0\u00a0\u00a0 Helps to reduce the impact and effects of potential threats.<\/p>\r\n

o\u00a0\u00a0\u00a0 Aids strategic thinking and decision making.<\/p>\r\n

o\u00a0\u00a0\u00a0 Helps in identification and exploitation of environmental opportunities.<\/p>\r\n \r\n\r\nCons of PESTLE Analysis<\/strong>\r\n\r\n \r\n\r\no\u00a0\u00a0\u00a0 Oversimplification of information\r\n\r\no\u00a0\u00a0\u00a0 Needs to be monitored on timely basis.\r\n\r\no\u00a0\u00a0\u00a0 Chances of 'paralysis by analysis'\r\n\r\no\u00a0\u00a0\u00a0 Time consuming and costly\r\n

o\u00a0\u00a0\u00a0 Users' access to quality external information is often restricted because of the cost and time needed to collate it.<\/p>\r\n \r\n

Often, managers choose to learn about political, economic, social and technological factors only. In that case, they conduct the PEST analysis. <\/a>PEST<\/strong> is<\/strong> also an environmental analysis. <\/strong>It is a shorter version of PESTLE analysis. STEP, STEEP, STEEPLE, <\/a>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.<\/p>\r\n\r\n<\/div>\r\n \r\n

3.3 Michael Porter\u2019s Five Force Model: <\/strong>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:<\/p>\r\n\r\n