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.
Process of Environment Analysis
- 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.
- 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.
- 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
- 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.
- Immediate / industry environment
- National environment
- Broader socio-economic environment / macro-environment
- 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.
- Analyzing the national environment needs an appraisal of whether the national framework helps in achieving competitive advantage in the globalized environment.
- 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.
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