Environmental Analysis in a Business Policy

Environmental Analysis

Environmental analysis, also known as environmental scanning or appraisal, is the process through which an organization monitors and comprehends various environmental factors and determines the opportunities and threats that are provided by these factors. This type of analysis is relatively qualitative and involves the identifying, scanning, analyzing and forecasting of the environmental variables. Some frameworks of environmental analysis have received large amounts of attention in the world of business management literature, such as SWOT analysis and PESTEL analysis.

 

It evaluates internal and external factors impacting an organization's performance, especially its marketing effort. 

• Internal factors are referred to as the strengths and weaknesses of the organization. 
• External factors are opportunities and threats presented by forces outside of the company. 

In general, this information is used by strategic planners in forecasting trends a year or more in advance. This method is distinct from surveillance, which focuses on a specific area or time. It helps the managers to decide the future path of the organization. Scanning must identify the threats and opportunities existing in the environment. While strategy formulation, an organization must take advantage of the opportunities and minimize the threats. A threat for one organization may be an opportunity for another.

Definition of Environment Analysis

Environmental scanning is a process of gathering, analyzing, and dispensing information for tactical or strategic purposes. Careful monitoring of an organization’s internal and external environments for detecting early signs of opportunities and threats that may influence its current and future plans. 

In comparison, surveillance is confined to a specific objective or a narrow sector. It is monitoring and interpreting sweep of social, political, economic, ecological, and technological events to spot budding trends that could eventually impact industry.

While in external analysis, three correlated environments should be studied and analyzed

1. Examining the industry environment needs an appraisal of the competitive structure of the organization’s industry, including the competitive position of a particular organization and its main rivals. Also, an assessment of the nature, stage, dynamics and history of the industry is essential. It also implies evaluating the effect of globalization on competition within the industry.
2. Analyzing the national environment needs an appraisal of whether the national framework helps in achieving competitive advantage in the globalized environment.
3. Analysis of macro-environment includes exploring macro-economic, social, government, legal, technological and international factors that may influence the environment. 

The analysis of organization’s external environment reveals opportunities and threats for an organization. Strategic managers must not only recognize the present state of the environment and their industry but also be able to predict its future positions.

Purpose of Environmental analysis

1. Effective utilization of resources
2. Constant monitoring of resources
3. Strategy formulation
4. Identification of threats and opportunities
5. Useful for the managers
6. Prediction of future

Process of Environment Analysis

1. Identifying - To measure and/or improve the relative position of the business to the intrinsic environmental factors, one must first identify those factors that affect the business. This will need to be done at various internal levels, the company level, the regional level, the domestic level and the global level. While several frameworks exist as an aid to this step of identification (such as SWOT and PESTEL), they are merely tools that remind the identifier to consider certain types of factors. A good identification of environmental factors can be had as the result of a good brainstorming session with or without such frameworks. Those frameworks exist because of the ease of deployment and should be consulted, flexibly.
2. Scanning - This step in environmental analysis can be somewhat confusing. How does one scan for qualitative factors that have already been identified? Scanning, in the context of environmental analysis, refers to the process of distinguishing which of the identified factors have the most effect. Not all of the factors identified in the first step will carry the same weight, and the recognition of environmental factors most significant to the business will assist in rendering a course of improvement.
3. Analyzing - The next step in environmental analysis is to analyze the effect the relevant environmental variables have on different levels of the business, including the business at large. There is a plethora of tools available for this type of analysis, ranging from scenario building to benchmarking to the Delphi technique. Which every tool, or tools, chosen, the information will be collected and analyzed in similar fashions. Brainstorming, reviewing historical data and polling department heads and managers serves to collect information that will be used for statistical analysis; types of analysis include mean, mode, correlation and regression, among others. The methods of statistical analysis chosen will vary based upon what is being analyzed and the form held by the data itself. Some useful methods of analysis can be found in the techniques of company ratio analysis
4. Forecasting - Once the environmental variables have been identified, deemed significant and analyzed, it becomes necessary to forecast the effect that said variables would have in the future. This is the primary function of the analysis of current and historical data. By looking at the trend each significant environmental variable is forecasted to take, a strategy report can be created, from which management can develop a business strategy in response.

Approaches to Environmental Analysis 

1. Systematic Approach
• Information for environmental scanning collected systematically
• Information pertaining to business and industry could be collected continuously to monitor changes
• Continuous updating necessary not only for strategic management but also for operational activities
• In this approach information is collected relating to market, customers, changes in legislation government policy have a direct impact on organization.
2. Adhoc Approach & Processed from Approach
• Adhoc Approach - Organizations conduct special surveys and studies to undertake special projects, evaluate existing strategies or devise new strategies Changes and unforeseen developments may also be investigated
• Processed from Approach - Information used is supplied by govt. agencies or private institutions, Secondary data available from external and internal sources may also be used.

Factors Affecting Environmental Appraisal

Factors relating to nature of environment

1. Complexity
2. Flexibility
3. Hostility
4. Diversity

Factors relating to the organization

1. Nature of the business
2. Age of the organization
3. Size of the organization
4. Nature of the markets
5. Nature of the products

Factors relating to the Strategies

• This is master level strategy: corporate level strategy to achieve corporate objective.
• Sub level strategy: for specific purpose and to help master strategy.

Functional level strategy: -how the strategy is translated into functions like marketing, finance, production and R & D.

Factors relating to strategists

1. Age, education and experience
2. Motivational level
3. Ability to withstand pressure and strain
4. Interpersonal relations

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