Environmental Analysis

ENVIRONMENTAL ANALYSIS

Business Environment

  • Surrounding of any living creature be it natural or man-made is known as environment e.g. friends, family, neighbors, hospitals and schools, etc. Business is also surrounded an environment as technology, competition, supply and demand, etc.
  • It doesn’t exist in isolation. Similar to environment living creature business environment too is surrounded many a things which are not within it’s control. Like living creature business also interact with it’s environment to gain certain advantage and for the same influences environment and get influenced it.
  • The success or failure of a business depends on how it handles the environmental factors and how better it can harness it. The environment is a vital source of not only the provider of all input but after processing and conversion for getting return the business gets potential customer and that is again an environment.

Characteristics of Business Environment

  • Environment is complex: An environment consists of many interrelated factors and understanding these factors in group are difficult tasks and hence complex. It can be easily understood in parts and taking every factors independently.
  • Environment is dynamic: Business environment changes continuously due to changing needs of customers and effect of competitions.
  • Environment is multi-faceted: Environmental developments are taken differently different people.

What is Strength or opportunity from one point of view is weakness or threat from other.

  • Environment has a far reaching impact: The effect of environment and environmental factor is long lasting and effects several issues related to business. Since the environment can effect in many ways and can harm even future the environmental factors need to be handled carefully.

 

Importance of environmental analysis

  1. Provide the understanding of current and potential changes in the environment;
  2. Provide needed inputs for strategic decision making such as data on possible demand, changes in functionality, pricing, tastes and preferences etc.;
  3. Facilitate strategic thinking in the organization which helps to provide rich source of ideas for growth of organization.

To understand the environment the management has to create a framework to deal with environment. The framework can take the following forms and ways:

  1. Understanding Environment: Organization should take initial view on environment in terms of uncertainty, complexity, etc. This will help to analyze factors that are within control of entity and those that are not.
  2. Impact of environment on organisation: Impact in terms of continuity, growth, profit, etc. and accordingly organisation should handle those factors in the most careful ways.
  3. Handling competition: Competitors are also a part of environment. Competitors are that man/entity providing same or similar goods or services and compete for the same customer (group). Final step is to focus on competition factor of environment because this is the factor for which organization should have a special strategy and focus to deal with.

 

Problems in understanding Environmental Influences of Business

  1. Multifaceted impact: The environment comprises many different influences; it becomes a tough job to comprehend the impact in statistic format. The manager should list down all alternative impact. But, it will not give a very clear picture as environment is most dynamic in nature.
  2. Uncertainty: The second difficulty is uncertainty. It is an open threat to managers to counter change of technology and change of broader social aspect. The rate of global communication is faster than ever and this results prediction of environmental influences more difficult.
  3. Personal opinions: Managers are also human being and is not different from normal individual. They too want to cope with complexity and want to make an attempt to simplify the situation. One of the tasks of the strategic manager is to find ways and means to handle oversimplification or personal opinion or feelings in the understanding of environment and presenting an effective analysis.

 

RELATIONSHIP BETWEEN ORGANIZATION AND ENVIRONMENT

Organisation interacts with environment for different things which could take any of the following form:

  • Exchange of Information:

Organization continuously, exchange information with environment which helps them in better planning and functioning of business. It takes information as product requirement (demand), pricing structure (based on competition), and at the same time passes certain information to the environment in the form of product availability, advertisement, etc.

  • Exchange of Resources:

Organization gets the resources from environment for their functioning. It consumes material, labour, capital, etc. all belongs to society and the society gets product or services from it as organizational output.

  • Exchange of Power and Influences:

This exists in the form of Government controls, regulations, etc. that enforce business to work in a controlled manner. Organisation gets power of monopoly that is possible only when the society puts reliance on product or services delivered an organisation and on the same time the quality product or services society gets from those organisations.

 

COMPONENTS OF BUSINESS ENVIRONMENT

The environment of organization can be divided into two parts:

  • Internal Environment known as Micro Environment
  • External Environment known as Macro Environment

An external environment provides the opportunities and threats, and the internal environment need the understanding of the strengths and weaknesses for the existence, growth and profitability of any organization.

Business firms undertake SWOT (Strength, Weakness, Opportunity and Threat) analysis to understand the external and internal environment and can be effectively utilized for strategy formulation.

THE MICRO AND MACRO ENVIRONMENT

MICRO/INTERNAL ENVIRONMENT

The immediate environment with which organization interacts for its day to day operations is known as Micro Environment. The Micro Environment components results in strengths and weaknesses of organization. The Micro Environment being internal environment is in little control of organisation.

Elements of Micro Environment:

  1. Customers/Consumers: Customers are the most important components for organization without which no organization can survive. Customers are buyers while consumers of users. Customers buy the product of organization and pay money which help organization to achieve growth and profitability. Consumers are actual users of goods of organization and these may be different from customers. Organization should continuously monitor the use and acceptance of goods and consider feedback consumers to sustain competition.
  2. Suppliers: Suppliers provide the raw material for production of goods. Suppliers also form an important part of competition. Nowadays even the manpower supplier is in light and most sought avenue and services as Human resources are the most sought, sensitive and rare resources among all.
  3. Organization: The organizations are formed with many individuals and these individual influences the workings of organization in direction with the long term goals and objectives of organizations. Organization’s individuals are normally divided into Governing Body (Board of Directors), Working group (Employees) and Controlling/Owning group (Owners/Entrepreneurs).
  4. Competitors: Competitors are other business entities who compete for same resources and market. Competition forces and provides the correct shape to business. Competition can be direct or indirect. Competition between two Accounts or two Tax teachers is direct competition and competition between Accounts and Audit or Strategic Management teacher is indirect competition.
  5. Market: Market is an extended form of customers and consumers. Market provides a structure to organization and an opportunity to their growth. The important elements of market are: Cost structure, Price sensitivity, Distribution system, Technological structure, Market stability.
  6. Intermediaries: The intermediaries such as distributors, dealers and retailers play an important role in establishing distribution system of goods and services to end users or consumers of goods.
  7. MACRO/EXTERNAL ENVIRONMENT

The Macro Environment covers the broader areas or issues with which organization deals for its long terms working and plays an important role in strategic planning of organization growth. It provides opportunities and threats which may results in either growth or decay of organization.

Elements of Macro Environment:

Macro Environment components are treated as broad components and these components are environments in themselves.

Followings are some important components of Macro Environment:

  1. Economic Environment:

Economic environment in itself is a very broad component. It covers the region and nation in which firm operates. It broadly describes the conditions of money market, manpower markets, buying power of consumers, supply and demand for goods, etc. It represents the size of market, income distributions, taste and preferences of consumers etc. There are many economic indicators or factors to be considered for strategic planning such as;

(a) GDP size and growth rate

(b) Unemployment, Interest, Taxation and Inflation Rates

(c) Liquidity position and Monetary and Fiscal policies (SLR, CRR, etc)

(d) Income Distribution

(e) Consumption pattern and regional disparity

(f) Foreign exchange reserve, rates and policies

(g) Stock market conditions, etc.

  1. Demographic Environment:

Demography means characteristics of population. It includes factors such as race, age, income, education level, employment status and location. Businesses often analyze the demographic data and trend to understand what factors determines Opportunities and Threats and what determines/creates Market Size of industry, e.g. most of the software companies like to open their centers in Bangalore, Pune and other metropolitan cities because the demographic environment of these cities best suits their skilled manpower requirements. These cities provide opportunities as manpower at appropriate cost but also present threats in the form high turnover of manpower.

Different types of companies have different types of demographic interest and the major factors in demographic environment are:

  1. a) Population Size
  2. b) Income Distribution
  3. c)

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    level
  4. d) Ethnic Mix
  5. e) Geographic profile in terms of urban and rural distribution
  6. Global Environment

Globalization refers to integration of world into one huge market as organization can’t think to be performing at regional or national level. The globalization is also a part of organization planning and growth. The global organizations are known as MNC (Multi National Corporation) or TNC (Trans National Corporation), e.g.Unilever, Nestle, Nokia and Microsoft, etc. These organization setup manufacturing facilities at one place,

R&D centers at other place and raise the capital and other resources at third place wherever from these can be raised in cheapest mode.

At organization level ‘Globalization’ means three things:

  • It is an organization of multiple units linked with common ownership.
  • Multiple units draw on common pool of resources (information, goodwill, etc.)
  • Units respond to common strategy.

Reasons of globalization / Why do companies go global?

There are many reasons for companies to go global, such as;

  1. i) The shrinking time, distance and low cost communication.
  2. ii) Domestic markets are no longer adequate.

iii) International demand for the product forces companies to setup the facilities in the other part of world.

  1. iv) Cheap labour and Government incentives/ subsidy or relief.
  2. v) Consolidation of business and resources to achieve economy of scale
  3. vi) Environmental restrictions also forces organizations to go global.

Benefits of Globalization: There are many effects of globalization such as

  1. a) Global Location of Different Operations: Companies can locate their operation anywhere in the world depending upon the economy of operation, availability of raw material and low cost labour, etc.
  2. b) Infrastructure Development: Globalization has helped in providing better infrastructure in the form of better roads, ports, airport and telecom network, etc
  3. c) Improvised Entrepreneurship: Globalization has given great opportunities to professionals way of entrepreneurship to setup their own enterprise way of providing cheap capital.
  4. Technological Environment:

Technology and business are inter-related and inter-dependent. Newer and advanced technology makes the way for business innovations and advancement. Use of technologies influences business operations which and present many opportunities for business and also makes many existing operation obsolete.

Therefore, it is very important to analyze the impact of technology environment carefully on business functioning.

Followings are some of the factors that business should consider for technologies impact on business:

  • Impact of technology on business operation, e.g. banks, auditor, software, etc. technology dependent organisations. These organizations should make use of latest technology as an integral part of their business operation.
  • Opportunities arising out of technological innovations or advancement
  • Risks and uncertainties from technological changes

Issues for consideration in selection of technology

  1. a) Type of technologies used business
  2. b) Technologies are developed in-house or procured externally.
  3. c) If procured externally will these be always available or there is a risks of discontinuity
  4. d) Technologies used are latest and ahead of used competitors
  5. e) Technologies which are must and which require to be curtailed, etc
  6. Legal- Political Environment:

There are three important elements organization should analyze to understand the legal political impact: The Government, The Laws and Regulations, and The Political environment.

The government has great influences on businesses. It guides the business environment in country. No business can isolate itself from legal-political system of country.

Business should analyze the followings for impact of legal-political system;

  • General state of political development
  • Degree of political impact on business and economic activity.
  • Political stability
  • Law and order situation
  • Legal framework of country and implications of various laws under which business need to functions
  • Effectiveness of implemented laws
  • Government policies such as labour, fiscal, EXIM, FDI (foreign investment) and industrial development
  1. Social- Cultural Environment:

Organizations are an entity only still it responses to environment similar to human entity and this response

can be in three forms:

(a) Conservative/Slow-moving: Such enterprises are passive in their operation and these enterprises react only when external environment force them to do so e.g. Nationalised banks, PSU, etc. These entity moves slowly to change themselves in response to environment.

(b) Cautious/Adaptive: These organizations take intelligent approach to response to environment. These organizations adapt themselves to changing environment quickly but take a cautious approach before taking actions, e.g. TATA.

(c) Confident/Aggressive: These organizations work aggressively and some time converts threats into opportunities. These are highly dynamics organizations and known as trend setter or mover and shaker of market. Their feedback system is highly dynamic, e.g. Reliance.

ENVIRONMENTAL SCANNING/ MONITORING

The process of Gathering information regarding company’s environment, analyzing it and Forecasting the impact of all predictable environmental changes is called Environmental Scanning.

The purpose of an environmental analysis is to help in strategy development keeping decision-makers within an organization informed on the external environment. This may include changing of political parties, increasing regulations to reduce pollution, technological developments, and shifting demographics. If a new technology is developed and is being used in a different industry, a strategic manager would see how this technology could also be used to improve processes within his business. An analysis allows businesses to gain an overview of their environment to find opportunities or threats.

Approaches to environmental scanning

  • Systematic Approach– under this approach information for environmental scanning is collected systematically. Information related to markets and customers, the changes in legislation and regulations, governmental policies and so on, is collected continuously to monitor changes.
  • Ad hoc approach-In this organization may conduct special surveys to deal with specific environment issues from time to time. e.g. special projects, evaluate existing strategies .
  • Processed –form approach– In this the organization uses information in a processed form, available from different sources both inside and outside the organization (various Govt. agencies)
  •  It requires evaluation of both internal and external environment. The main external factors include:

COMPETITIVE ENVIRONMENT:

Competition is the major threat of losing market and thus become obsolete and accordingly dealing it is the most vital for strategic management. While preparing strategic plans, organizations should seriously consider the competitors strategies, products, cost and profits level, etc.

Organization should consider followings major points to deal with competitions:

  1. Who are the competitors?
  2. What are their products and services?
  3. What are their market shares?
  4. What are their major strength: financial positions, regional dominance, resource/market advantage?
  5. What are their potential strategies?

Effect of Competitions:

Competition is good for both consumers and organizations and also for economy. It helps to bring the true economic value of any product and service to consumer and forces organization to invent cost effective and high quality products. Sometimes too much competition is bad for organization and economy as whole.

Cooperation in Competitive Environment: Businesses cooperate with each other to maximize the profit out of their products or cutting the cost to minimum.

There are three types of cooperation in competition:

1) Cartelization:

Enterprises sometimes form a group or cartel to create the market conditions to suits their interest. This type of cooperation provides a situation of oligopoly but indirectly it is a monopoly kind of situation, e.g. OPEC try to create the price and supply scenario of oil to protect their interest. Cartel in reference to the stock market implies set of brokers grouping together to manipulate the price of any particular stock.

Cartelization is not good for development of industry, consumers and country as whole because it does not provide true economic value of products.

2) Kieretsus:

Cooperative network of business is known as Kieretsus (a Japanese term). This is cooperation in business to extract the maximum benefits of already existing setup. The cooperation between two entity in completely diverse operation is one such example as Black Berry and Airtel, Mother Dairy and BSNL even cooperation of similar business enterprise also take the form e.g. Tata Motors selling Fiat cars through its dealer and distributors network. Kieretsus is different from conglomerate as in Kieretsus every member is an independent company but conglomerates means same owner own the majority of capital in different companies. Members remain independent, the only strategy they have in common is to prefer to do business with other members, both when buying and when selling.

3) Internal Co-operation (Family Owned co-operation):

Cooperation in business owned same family is normally an automatic process. Decisions are made family members who manage the enterprise. The interests of the family largely influence the managerial decisions and activities of the enterprise. Quarrels and conflicts among the managing members of the family on family matters tend to distort their behavior in managing the enterprise also and theredamage its functioning.

ENVIRONMENTAL ANALYSIS

This is the process of monitoring and forecasting the organizational environment so as to identify present and future factors that may influence its ability to attain certain goals.

External environmental analysis

  1. Task environment i.e. customers and suppliers
  2. General environmental factors e.g. technology, social economic factors and financial factors
  • Identifying and evaluating these factors enables the organization to develop a clear mission and design appropriate strategies.
  • The main sources of external information includes journals, newspapers, books Government documents etc

Internal environmental analysis

  • Internal evaluation is the assessment of internal environment. This audit attempt to identify and evaluate the strengths and weaknesses of the organization so as to establish appropriate strategies.
  • Be based on a realistic assessment of the firm’s internal resources and capabilities. An internal analysis provides the means to identify the strengths to build on and the weaknesses to overcome when formulating strategies. The internal analysis process considers the firm’s resources; the business the firm is in; its objectives, policies, and plans; and how well they were achieved.
  • All organizations irrespective of their size, nature, and scope of business perform the functions of finance, production, marketing, and human resource development. For efficient strategic management, careful planning, execution, and coordination of various functions — marketing, production and operations, finance and accounting, research and development, and human resource management — is highly essential.
  • The management can be evaluated on the basis of the organizational profile of strengths and weaknesses in light of what it has or has not done, or what it has or has not achieved. Similarly, the role of the board of directions should also be analyzed. An organization’s culture (shared values) should have a good fit with its strategy and other factors such as structure, systems, management style, and human resources (staff and their skills), as depicted in the McKinsey 7-S framework. If the existing culture will not be suitable for a desired strategic alternative, the management has to decide whether it will be feasible to change the culture and how much time and other resources would be required to achieve this culture change.
  • Value chain analysis divides a firm’s activities into two major categories — primary and support activities. Primary activities are those activities that are involved in the physical creation of the product (inbound logistics, operations, and outbound logistics), marketing and sales, and after-sales support. Firm infrastructure, human resource management, technology development, and procurement are the support activities.
  • While carrying out internal Analysis of the following factors must be considered
  1. marketing
  2. finance
  3. production
  4. Personnel and labour relations
  5. R& D
  6. Management

METHOD OF ANALYSIS

A SWOT analysis

A SWOT analysis is done as part of a business’s strategic planning process. The internal analysis reviews the business’s strengths and weaknesses, while the external environmental analysis takes a look at the opportunities and threats. The role of environmental analysis in strategic management is to find any potential opportunities and threats, and to create a plan to take advantage of opportunities or to avoid threats. If a threat cannot be avoided, such as a shifting demographic that is causing a decline in sales, then a plan should be created to minimize its effects. For instance, the business could develop a product to target the new demographic majority.

How often this type of analysis should be conducted depends on the nature of the industry. If the industry is fast-paced or susceptible to changing legislation, then the business should consider doing its analysis quarterly or semi-annually. An industry that does not face constant changes or is not sensitive to changes in the external environment May only need an annual analysis. A business that conducts an environmental analysis often is more aware of opportunities opening and can take advantage of them quicker than can its competitors. Increasing how often an environmental analysis is conducted can also help the business see potential risks sooner, allowing it additional time to develop a strategic plan to avoid or decrease its potential affects.

PESTLE analysis

There are many strategic analysis tools that a firm can use, but some are more common. The most used detailed analysis of the environment is the PESTLE analysis. This is a bird’s eye view of the business conduct. Managers and strategy builders use this analysis to find where their market currently.  It also helps foresee where the organization will be in the future.

PESTLE analysis consists of various factors that affect the business environment. Each letter in the acronym signifies a set of factors. These factors can affect every industry directly or indirectly.

The letters in PESTLE, also called PESTEL, denote the following things:

  • Political factors
  • Economic factors
  • Social factors
  • Technological factors
  • Legal factors
  • Environmental factor

P for Political factors

The political factors take the country’s current political situation. It also reads the global political condition’s effect on the country and business. When conducting this step, ask questions like “What kind of government leadership is impacting decisions of the firm?”

Some political factors that you can study are:

  • Government policies
  • Taxes laws and tariff
  • Stability of government
  • Entry mode regulations

E for Economic factors

Economic factors involve all the determinants of the economy and its state. These are factors that can conclude the direction in which the economy might move. So, businesses analyze this factor based on the environment. It helps to set up strategies in line with changes.

I have listed some determinants you can assess to know how economic factors are affecting your business below:

  • The inflation rate
  • The interest rate
  • Disposable income of buyers
  • Credit accessibility
  • Unemployment rates
  • The monetary or fiscal policies
  • The foreign exchange rate

S for Social factors

Countries vary from each other. Every country has a distinctive mindset. These attitudes have an impact on the businesses. The social factors might ultimately affect the sales of products and services. Some of the social factors you should study are:

  • The cultural implications
  • The gender and connected demographics
  • The social lifestyles
  • The domestic structures
  • Educational levels
  • Distribution of Wealth

T for Technological factors

Technology is advancing continuously. The advancement is greatly influencing businesses. Performing environmental analysis on these factors will help you stay up to date with the changes. Technology alters every minute. This is why companies must stay connected all the time. Firms should integrate when needed. Technological factors will help you know how the consumers react to various trends.

Firms can use these factors for their benefit:

  • New discoveries
  • Rate of technological obsolescence
  • Rate of technological advances
  • Innovative technological platforms

L for Legal factors

Legislative changes take place from time to time. Many of these changes affect the business environment. If a regulatory body sets up a regulation for industries, for example, that law would impact industries and business in that economy. So, businesses should also analyze the legal developments in respective environments.

I have mentioned some legal factors you need to be aware of:

  • Product regulations
  • Employment regulations
  • Competitive regulations
  • Patent infringements
  • Health and safety regulations

E for Environmental factors

The location influences business trades. Changes in climatic changes can affect the trade. The consumer reactions to particular offering can also be an issue. This most often affects agri-businesses.

Some environmental factors you can study are:

  • Geographical location
  • The climate and weather
  • Waste disposal laws
  • Energy consumption regulation
  • People’s attitude towards the environment

There are many external factors other than the ones mentioned above. None of these factors are independent. They rely on each other.

If you are wondering how you can conduct environmental analysis, here are 5 simple steps you could follow:

  1. Understand all the environmental factors before moving to the next step.
  2. Collect all the relevant information.
  3. Identify the opportunities for your organization.
  4. Recognize the threats your company faces.
  5. The final step is to take action.

It is true that industry factors have an impact on the company performance. Environmental analysis is essential to determine what role certain factors play in your business. PEST or PESTLE analysis allows businesses to take a look at the external factors. Many organizations use these tools to project the growth of their company effectively. The analyses provide a good look at factors like revenue, profitability, and corporate success. If you want to take the right decisions for your firm, employ environmental analysis. The analysis you should conduct depends on the nature of your company

 

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