UNIT II
ENVIRONMENTAL ANALYSIS
Business organizations operate in a turbulent environment and the
changes in the environment impacts business. The changes
that take place in the internal and
external environments impinge on the policy
decisions of business enterprises and cast
profound influence in their working and
efficiency. The external
environmental factors are in a
continual
flux creating new opportunities and new threats to the company. They are
always capable of producing major
shocks, which Peter Drucker
has called as, “an Age of Discontinuity.”
In order to survive
and succeed a company must consider and
understand the environment and make policies to
adapt to or alter the environment.
The
term ‘business environment’ connotes external forces, factors and institutions
that are beyond the control of the business and they affect the functioning of
a business enterprise. These include customers, competitors, suppliers,
government, and the social, political, legal and technological factors etc.
While some of these factors or forces may have direct influence over the
business firm, others may operate indirectly.
Thus,
business environment may be defined as the total surroundings, which have a
direct or indirect bearing on the functioning of business. It may also be
defined as the set of external factors, such as economic factors, social
factors, political and legal factors, demographic factors, and technical
factors etc., which are uncontrollable in nature and affects the business
decisions of a firm.
FEATURES
OF BUSINESS ENVIRONMENT
On
the basis of the above discussion the features of business environment can be
summarized as follows.
(a)
Business environment is the sum total of all factors external to the business
firm and that greatly influences their functioning.
(b)
It covers factors and forces like customers, competitors, suppliers,
government, and the social, cultural, political, technological and legal
conditions.
(c)
The business environment is dynamic in nature, which means, it keeps on
changing.
(d)
The changes in business environment are unpredictable. It is very difficult to
predict the exact nature of future happenings and the changes in economic and
social environment. .
(e)
Business Environment differs from place to place, region to region and country
to country. Political conditions in India differ from those in Pakistan. Taste
and values cherished by people in India and China vary considerably.
IMPORTANCE
OF BUSINESS ENVIRONMENT
There
is a close and continuous interaction between the business and its environment.
This interaction helps in strengthening the business firm and using its
resources more effectively.
As
stated above, the business environment is multifaceted, complex, and dynamic in
nature and has a far-reaching impact on the survival and growth of the
business. To be more specific, proper understanding of the social, political,
legal and economic environment helps the business in the following ways:
(a)
Determining Opportunities and Threats: The interaction between the
business and its environment would identify opportunities for and threats to
the business. It helps the business enterprises for meeting the challenges
successfully.
(b)
Giving Direction for Growth: The interaction with the environment leads
to opening up new frontiers of growth for the business firms. It enables the
business to identify the areas for growth and expansion of their activities.
(c)
Continuous Learning: Environmental analysis makes the task of managers
easier in dealing with business challenges. The managers are motivated to
continuously update their knowledge, understanding and skills to meet the
predicted changes in realm of business.
(d)
Image Building: Environmental understanding helps the business
organisations in improving their image by showing their sensitivity to the
environment within which they are working. For example, in view of the shortage
of power, many companies have set up Captive Power Plants (CPP) in their
factories to meet their own requirement of power.
(e)
Meeting Competition: It helps the firms to analyse the competitors’
strategies and formulate their own strategies accordingly.
(f)
Identifying Firm’s Strength and Weakness: Business environment helps to
identify the individual strengths and weaknesses in view of the technological and
global developments.
Business
Environment has two components:
Internal Environment
External Environment
Internal
Environment: It includes 5 Ms i.e.
man, material, money, machinery and management, usually within the control of
business. Business can make changes in these factors according to the change in
the functioning of enterprise.
External
Environment: Those factors which are
beyond the control of business enterprise are included in external environment.
These factors are: Government and Legal factors, Geo-Physical Factors,
Political Factors, Socio-Cultural Factors, Demo-Graphical factors etc. It is of
two types:
Micro/Operating
Environment
Macro/General
Environment
Micro/Operating
Environment:
The
environment which is close to business and affects its capacity to work is
known as Micro or Operating Environment. It consists of Suppliers, Customers,
Market Intermediaries, Competitors and Public.
Suppliers:
They are the persons who supply raw
material and required components to the company. They must be reliable and
business must have multiple suppliers i.e. they should not depend upon only one
supplier.
Customers:
Customers are regarded as the king of
the market. Success of every business depends upon the level of their
customer‘s satisfaction.
Types of Customers:
Wholesalers
Retailers
Industries
Government
and Other Institutions
Foreigners
Market
Intermediaries: They work as a link
between business and final consumers. It consists of:
Middleman
Marketing
Agencies
Financial
Intermediaries
Physical
Intermediaries
Competitors:
Every move of the competitors affects
the business. Business has to adjust itself according to the strategies of the
Competitors.
Public:
Any group who has actual interest in
business enterprise is termed as public e.g. media and local public. They may
be the users or non-users of the product.
Macro/General
Environment: It includes factors that
create opportunities and threats to business units. Following are the elements
of Macro Environment:
Economic
Environment: It is very complex and
dynamic in nature that keeps on changing with the change in policies or
political situations. It has three elements:
Economic
Conditions of Public
Economic
Policies of the country
Economic
System
Other Economic Factors: Infrastructural Facilities, Banking, Insurance
companies, money markets, capital markets etc.
Non-Economic
Environment: Following are included
in non-economic environment:-
Political
Environment: This includes the
political system, the government policies and attitude towards the business
community and the unionism. All these aspects have a bearing on the strategies
adopted by the business firms. The stability of the government also influences
business and related activities to a great extent. It sends a signal of
strength, confidence to various interest groups and investors. Further,
ideology of the political party also influences the business organisation and
its operations. You may be aware that Coca-Cola, a cold drink widely used even
now, had to wind up operations in India in late seventies. Again the trade
union activities also influence the operation of business enterprises. Most of
the labour unions in India are affiliated to various political parties.
Strikes, lockouts and labour disputes etc. also adversely affect the business operations.
However, with the competitive business environment, trade unions are now
showing great maturity and started contributing positively to the success of
the business organisation and its operations through workers participation in
management.
It
affects different business units extensively.
Components:
Political
Belief of Government
Political
Strength of the Country
Relation
with other countries
Defense
and Military Policies
Centre
State Relationship in the Country
Thinking
Opposition Parties towards Business Unit
Socio-Cultural
Environment: Influence exercised by
social and cultural factors, not within the control of business, is known as
Socio-Cultural Environment. These factors include: attitude of people to work,
family system, caste system, religion, education, marriage etc.
Technological
Environment: A systematic application
of scientific knowledge to practical task is known as technology. Every day
there has been vast changes in products, services, lifestyles and living
conditions, these changes must be analyzed by every business unit and should
adapt these changes. Technological environment include the methods, techniques
and approaches adopted for production of goods and services and its
distribution. The varying technological environments of different countries
affect the designing of products. For example, in USA and many other countries
electrical appliances are designed for 110 volts. But when these are made for
India, they have to be of 220 volts. In the modern competitive age, the pace of
technological changes is very fast. Hence, in order to survive and grow in the
market, a business has to adopt the technological changes from time to time. It
may be noted that scientific research for improvement and innovation in
products and services is a regular activity in most of the big industrial
organisations. Now a days infact, no firm can afford to persist with the
out-dated technologies.
Natural
Environment: It includes natural
resources, weather, climatic conditions, port facilities, topographical factors
such as soil, sea, rivers, rainfall etc. Every business unit must look for
these factors before choosing the location for their business.
Demographic
Environment : It is a study of
perspective of population i.e. its size, standard of living, growth rate,
age-sex composition, family size, income level (upper level, middle level and
lower level), education level etc. Every business unit must see these features
of population and recognize their various need and produce accordingly.
International
Environment: It is particularly
important for industries directly depending on import or exports. The factors
that affect the business are: Globalization, Liberalization, foreign business
policies, cultural exchange
Legal
Environment: This refers to set of laws,
regulations, which influence the business organisations and their operations.
Every business organisation has to obey, and work within the framework of the
law.
Environmental Scanning or Environmental Analysis
Environmental analysis (scanning or appraisal) is the
process by which corporate planners monitor the economic, governmental,
supplier, technological and market setting to determine the opportunities for
and threats to their enterprise. In other words, environmental scanning
consists of identifying and analyzing environmental influences individually and
collectively to determine their potential effects on an organization and the
consequent problems and opportunities. The process by which organizations
monitor their relevant environment to identify opportunities and threats
affecting their business is known as 'environmental scanning'. The importance
of environmental analysis lies in its usefulness for evaluating the present
strategy, setting strategic objectives and formulating future strategies. The
fortunes of business enterprises are known to have been determined by changes
in the social, economic, political, business and industrial conditions.
According to L.R. Jauch and W.F. Glueck, "Environmental analysis is the
process by which strategists monitor the environmental factors to determine
opportunities for and threats to their firms. Environmental diagnosis consists
of managerial decisions made by assessing the significance of the data of the
environmental decisions made by assessing the significance of the data of the
environmental analysis."
Process of
Environment Analysis: Procedure of
Environmental Analysis
Step 1: Assess the Nature of the Environment: It is useful
to take a view of the nature of the organization's environment in terms of how
uncertain it is. Is it relatively static or does it show signs of change, and
in what ways; and is it simple or complex to comprehend? This helps in deciding
what focus of the rest of the analysis is to take.
Step 2: Audit Environmental Influences: The aim is to identify
which of the many different environmental influences have affected the
organization's development or performance in the past. It may also be helpful
to construct pictures - or scenario - of possible futures to consider the
extent to which strategies might need to change.
Step 3: Identify key Competitive Forces through Structural
Analysis: It aims to identify the key forces at work in the immediate or
competitive environment and why they are significant.
Step 4: Identify Strategic Position: It means to analyze the
organization's strategic position, i.e., how it stands in relation to those
other organizations competing for the same resources, or customers, as itself.
This may be done in number of ways
a)
Competitor analysis;
b)
Strategic group
analysis, in terms of similarities and dissimilarities of the strategies they follow;
c)
The analysis of
market segments and market power;
d)
Building on
growth / share analysis, and
e)
Attractiveness analysis
Step 5: Identify key Opportunities and Threats: Develop and
understanding of opportunities which can be built upon the threats which have
to be overcome or circumvented. An understanding which needs to be considered
in terms of the resource base of the organization and which will contribute to
strategy choice is very important.
Analysis
is done by means of a search of verbal and written information, spying,
forecasting and formal studies and information system. At first there is the
gathering of verbal information, the sources of verbal information are:
1. Media such as radio and
television
2. The firm's employees such as
peers, subordinates and supervisors.
Other
sources of verbal information outside the firm are:- Customers of the
enterprise, persons in industry channel (such as wholesalers, brokers, distributors,
etc.), suppliers doing business with the firm, competitors and their employees,
financial executives such as bankers, stockholders, and stock analysts,
consultants and the government.
Besides
verbal sources, information can be gathered by reading. Information about the
environment is readily available in newspapers, trade journals, industry
newsletters, journals and publications, government reports, reports of various
marketing research agencies such as Gallup, ORG, etc. It is said (is it not
true?) that behind every business activity there is one government department
and one association. This department or association publishes information
related to business on regular intervals.
The
second solution to environmental analysis is to design a Management Information
System. A formal MIS gives quick relevant information to the decision-makers,
which helps a lot in making timely decisions. Beside this, information
regarding competitors can be gathered through Corporate Intelligence and
Spying.
Corporate Intelligence: Corporate Intelligence (CI) can be described "as
a technique of adopting industry/research expertise to analyse the information
available on competition from public sources and to draw conclusion based on
this data." A typical CI activity involves collection, organization,
analysis and utilisation of business-related data of competitors to make
informed decisions.
Spying: Corporate espionage can be defined as 'spying' on
business competitors to acquire proprietary information such as product design,
research projects, marketing plan, trade secret, source code for new software,
intellectual property and research information and other business strategies.
In 1996 the US government passed the Economic Espionage Act to restrict
espionage. Similarly, in 1943, a P&G employee reportedly bribed an employee
of Levers Brothers to steal a bar of soap that was under development.
Techniques of
Scanning
There are various scanning techniques used by organizations
i.
Environmental Threats
and opportunities Profile (ETOP)
ii.
Strategic advantage
profile(SAP)
iii.
Functional – area profile
and resource deployment matrix
iv.
SWOT Analysis
I.
Environmental Threats and Opportunities Profile (ETOP)
Assessment of the environmental information and determining
the relative significance of threats and opportunities require a systematic evaluation
of the information developed in the course
of environmental analysis. For this purpose,
preparation of a profile of environmental threat and opportunity
(ETOP) is considered to be a useful device.
An illustrative profile is given in Figure on the basic of environmental
analysis carried out by Bharat Heavy Electricals Ltd.
BHEL:
ENVIRONMENTAL THREAT AND OPPORTUNI- TY PROFILE
(ETOP)
Environmental
Sector
|
Impact (
+) Opportunity
(-) Threat
|
Socio – economic
|
(+_) continued emphasis on infrastructural development
which includes power supply for industry, transport,
and domestic consumption.(-) Severe resource
constraints.
|
Technological
|
(+) High growth envisaged
in industrial production and technology up-gradation.
|
Supplier
|
(-) Sources of technology will become scarce due to
formation of technology cartels.
|
Government
|
(+) Liberalization of technology import policy
|
Competition
|
(-) Customers will become more discerning in their requirements due to an increasing role of power
plant consultants.
|
(-) Public sector will find it increasingly difficult to retain specialists and highly
qualified
personnel.
|
II.
Strategic Advantage Profile (SAP)
A Profile
of strategic advantages (SAP) is a summary
statement, which provides
an overview of the advantages and disadvantages in key
areas likely to affect
future operations of the firm. It is
a tool for making a systematic evaluation of the strategic
advantage factors, which are significant for the company in its environment. The preparation of
such a profile presupposes detailed analysis and
diagnosis of the factors
in each of the functional areas
(Marketing, Production, Finance and Accounting,
Personnel and Human Resources, R&D). The relevant data for the critical areas
may go as a supplement to the profile. The
following Strategic Advantage Profile
relates to a food processing company in
India.
Strategic Advantage Profile (SAP) of ABC India Ltd.
Internal Area
|
(+) Strength (-)Weakness
|
Marketing
|
(+) Capable sales force; sales agents dispensed
with.
(-) Shrinking market for most products.
(-) Stagnating sales performance.
|
Operations
|
(+) Profits after tax picking up after 1982.
(-) Plant facilities are old.
|
R&D
|
(-) No R&D effort so far.
(+) Backing in R &D expected from parent US
company.
|
Finance
|
(-) No additional investment since 1980.
(-) Heavy reliance on fixed deposits and bankloans.
(+)
Parent US company now
interested in expansion.
|
Corporate Resources
|
(+) Management team comprises young, ambitious executives.
|
Since the Strategic Advantage Profile is a summary statement of
corporate capabilities, in summarizing
the functional competencies a comparative
view needs to be taken in the light of
external conditions and
the time horizon of projections.
For example, while comparing the level
of inventory holding, one may find it to be
relatively higher than that of
competing firms; as
such it should be regarded as a weakness. But if the market demand shows an increasing
trend, apparent weakness should be considered
strength.
III.
Functional–area profile
and resource deployment matrix.
Developed by Hofer and Schendel, this method requires the preparation
of a matrix of functional areas
with characteristics common to each, e.g., focus of financial outlay, physical resource position, organizational
system, and technological capability. The functional area profile of a manufacturing company is given by way of illustration. Following this exercise, it
is required
that the resource outlay
and focus of efforts over time
in the respective functional areas be
presented also in the form of a matrix. For example it is shown in following figure of Functional –
Area Resource
– Deployment Matrix
Functional – Area Resource – Deployment Matrix
Functional Area
|
Resource Deployment and Focus of
Efforts
|
|||||||
Marketing
|
Development
|
|||||||
Focus of Effort
|
||||||||
Production
|
Development outlay (%)
Amount `)
|
|||||||
Focus of Effort
|
||||||||
Finance
|
Development outlay (%)
Amount `).
|
|||||||
Focus of Effort
|
||||||||
R&D
|
Development outlay (%)
Amount `)
|
|||||||
Focus of Effort
|
||||||||
Management
|
Development outlay (%)
Amount (`)
|
|||||||
Focus Effort
|
IV.
SWOT Analysis
SWOT is an acronym for the internal Strengths and Weaknesses of a business and
environmental Opportunities and Threats
facing that business. SWOT analysis
is a systematic identification of these
factors and the strategy
that reflects the best match
between them. It is based on the
logic that an effective strategy
maximizes a business’s strengths and
opportunities but at the
same time minimizes its weaknesses
and threats. This simple assumption, if accurately applied, has powerful implications for successfully
choosing and designing
an effective strategy.
Opportunities
An opportunity is a major favorable situation in the firm’s
environment. Key trends represent one
source of opportunity. Identification of a previously
overlooked market segment, changes
in competitive or regulatory
circumstances, technological changes, and improved
buyer or supplier relationships could represent
opportunities for the firm.
Threats
A threat is a major unfavorable situation in the
firm’s environment. It is a key impediment to the firm’s current and / or
desired future position. The entrance of a new competitor, slow market growth,
increased bargaining power of key buyers or supplier, major technologies
change, and changing regulations could represent major threats to a firm’s
future success.
The second fundamental focus in SWOT analysis is identifying
key strengths and weakness based on examination of
the company
profile. Strengths and weaknesses can be defined
as follows:
Strengths
Strength is a resource, skill, or other advantage
relative to competitors and the needs of markets a firm serves or anticipates
serving. a strength is a distinctive competence that gives the firm a
comparative advantage in the marketplace. Financial resources, image, market
leadership, and buyer / supplier relations are examples.
Weaknesses
A weakness is a limitation
(or) deficiency in resources, skills, and capabilities that seriously impedes effective performance.
Facilities, financial resources, management capabilities,
marketing skills, and brand
image could be sources
of weaknesses. Sheer size and level of customer acceptance proved to be key strengths
around which IBM built its successful
strategy in the personal computer
market.
Importance of SWOT Analysis
Understanding the key strengths and weaknesses of the firm further
aids in narrowing the choice
of alternatives and selecting a strategy. Distinct competence and critical
weakness are identified
in relation to key determinants
of success for different
market segments; this provides a useful
framework for making
the best strategic choice.
SWOT analysis can be used in at least three in
strategic choice decisions. The most common application provides a logical
framework guiding systematic discussions of the business’s situation,
alternative strategies, and ultimately, the choice of strategy. What one
manager sees as an opportunity, another may see as a potential threat.
A second application of SWOT analysis is illustrated
in Key external opportunities and threats are
systematically compared to internal strengths and weaknesses in a structured
approach. The objective is
identification of one of four
distinct patterns in
the match between the firm’s internal
and external situation. The four cells in
Figure represent these patterns.
1.
Cell 1 is the
most favorable situation; the firm faces several environmental opportunities
and has numerous strengths that encourage pursuit of such opportunities. This
condition suggests growth – oriented strategies to exploit the favorable match.
IBM’s intensive market development strategy in the personal computer market was
the result of a favorable match between strengths in reputation and resources
and the opportunity for impressive market growth.
2.
Cell2, a firm with key strengths
faces an unfavorable environment. In this
situation, strategies would use current strengths to build
long-term opportunities in other
products/ markets.
3.
Cell 3 faces
impressive market opportunity but is constrained by several internal
weaknesses. Businesses in this predicament are like the question marks in the
BCG matrix. The focus of strategy for such firms is eliminating internal
weaknesses to more effectively pursue market opportunity.
4.
Cell 4 is the least favorable
situation, with the firm facing major
environmental threats from a position
of relative weakness. This
conditionclearlycallsforstrategiesthatreduceorredirectinvolvementin
the products markets examined using SWOT analysis.
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