Environmental analysis in Management

This article on strategic management course exposes you to the business of industry environmental analysis and diagnosis. The business environment comprises both external and internal environments, which are complex and are constantly changing. There are many environmental factors that directly or indirectly impact a particular business. They include factors that are beyond the control of the business organisations.

To sustain business and also survive in the competitive environment, the strategist must understand his environment through critical and objective analysis using certain criteria. The impact of some necessary changes and their implications on the business organisation must be analysed and appropriate strategic decisions made.

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Meaning of Business or Industry Environment

The environment of an organisation could either be internal or external. The external analysis is often referred to as environmental analysis while the internal analysis is the company analysis or strategic

advantage analysis. The environment of an organisation includes factors outside the firm which can lead to opportunities for or threats to the organisation. In business, the environment of an organisation is the pattern of all external conditions and influences that affect the organisation” s life and development. The relevant environmental factors include the total business community, the city or town, the entire country and the world at large. They also include technological, economical, physical, social and political factors.

The corporate strategist must be aware of these features in the environment. There should be aware that change is taking place at varying rates in all the environmental factors. Change usually is fastest in technology, perhaps closely followed by political changes particularly in developing countries which are politically unstable. Change in the environment of business necessitates continuous monitoring of a company”s definition of business. Otherwise, it may fail by becoming obsolete at the time it comes on stream. The effect of competition in the company”s environment should not be overlooked. The strategist should be able to monitor environmental factors well to determine opportunities for threats to the organisation. Environmental diagnosis consists of management decisions made and assessing the significance of the data (opportunities and threats) of the environmental analysis.

Environmental analysis and diagnosis give strategists time to anticipate opportunities and plan to take optional responses to the opportunities. It helps the strategist to develop an early warning system to prevent threats or develop strategies, which can turn a threat to the organisation”s advantage. The analysis of the environment is important in that it increases the quality of the strategic decision making by considering a range of the relevant features well in advance before the need to make an irrevocable decision.

The strategy of any organisation should be directed at exploiting the environmental opportunities and blocking the environmental threats in a way and manner consistent with the organisation”s internal capabilities. This is porter”s concept of environmental fit which allows the organisation to maximise its competitive position.

The success or failure of environmental analysis depends largely on the characteristics of the environment such as the complexity of the environment, the rate of change and the cost of available information about the environment in which an organisation floats. The following process may be followed:

(a) Audit the environmental influences.

(b) Assess the nature of the environment to determine the level of complexity or environment.

(d) Identify the competitive position of the organization (using a life circle).

(e) Identify the major opportunities and threats (using SWOT/TOWS analysis).

Nature of the Environment

External Analysis

An organisation”s environment comprises all the events, issues and facts which can influence its performance, but over which the organisation has little or no influence. The external environment is beyond the

control of the organisation. The societal environment constitutes conditions that have a broad, rather than a direct influence on the organisation. These conditions include demographic, natural, political, cultural and economic factors. All these put together constitute the world within which the organisation functions and operates.

Demographic Factor: This includes ageing of the population, geographical population shifts, population growth and better-educated populace.

Natural Factor: This includes pollution levels, natural resources management, and increased energy cost, raw material availability.

Political Factor: This includes international trade, investment incentives/controls, fiscal/monetary policies, industrial policies, consumer policies, labour policies and regional policies.

Cultural Factor: This includes the status of women and minorities, changes in the family life style, decline in the traditional lifestyle, improved living standards, shifts to less work and more leisure.

Economic Factor: These are gross national product, personal income, employment and unemployment level, inflation rate, government spending and availability of capital.

There is also a task environment which has a major that impact on the organisation and its strategic planning process among which are the nature of competition in any particular market. The nature of competition is very important since it impacts the profitability and scope of strategic manipulations in the market as shown in the following Figure

Among the elements of the external environment as indicated by Wendy Robson are the following:

Socio-Cultural Forces

These include life-style changes, career expectations, rate of family formation, consumer activities, population growth rate, age distribution, regional shifts, urban-rural migration, birth rates and life expectancies. The strategist must be abreast of the social developments in the environment which may include the increasing rate of crime, demands by women for recognition and opportunity.

Economic Forces

These include gross national product (GNP) trends, interest rates, money supply, inflation rates, unemployment levels, wage/price control, devaluation/revaluation, availability of energy and cost. The consequences of both national and international economic trends need to be monitored in great detail by any company so that the company will not be taken by surprise by the changing world.

Technological Forces

Organisational spending on research and development (RXD), focus of technology efforts, patent protection, new products, new development in technology, transfer from laboratory to market place and productivity improvement through automation. Technology, developments are the fastest unfolding and the most far reaching in extending and contracting the opportunity for any company.

Legal Forces

These include antitrust regulations, environmental protection laws, tax laws, special incentives, foreign trade regulations, attitudes towards foreign companies, laws on hiring and promoting, stability of government.

The importance of political forces to the business must be considered. The relationship between the private companies and government owned establishment is also important.

Also including in the environmental analysis is the task environment which includes the following:

Demand

Among the demand factors are size and growth of the existing market, number/size and distribution of customers, physical distribution channels, nature of market competition (price and non-price competition).

Market structure

Market structure factors include number/size distribution of competition and suppliers, barriers to entry or exist to market product characteristics and product life cycles. Environmental analysis must include want for the company”s products or services. There must be effective market segmentation which will divide the market to pieces that are identifiable, substantial enough to be profitable and defensible against competition.

Technology

This includes the level of technology and likely changes, cost structure including economies of scale, dependence on particular raw material or labour.

Government

Government polices, taxation and legislative apparatus are important in environmental analysis. The impact of particular legislation on the industry relating to product or consumption as well as role of the government as supplier, competitor or customer is a significant environmental factor.

Internal Environmental analysis and Diagnosis

The internal Environmental analysis is also called the strategy advantage analysis and diagnosis. It is the process by which the strategist examines the firm”s market and distribution, research and development, production and operations, corporate resources and personnel finance and the accounting function to determine where the firm has significant competencies so that it can most effectively exploit the opportunities and also meet the threats to the company”s weaknesses which would need to be minimised, if not eliminated, in order to achieve corporate objectives.

Even where competence to exploit an opportunity is nurtured by experience, the level of that competence may be too low for any great reliance to be placed on it. It would be good to always be able to ascertain the distinctive ability that could be brought to a company or firm that could attract customers away from other competitors.

The distinctive competence of an organisation is more than what it can do; it is more of what it can do very well. One has to consider the present strength of opportunities. Take the old typewriter, for instance, handwriting that a simple. The typewriter is found to contribute to a broad range of informed action processing functions, any of which might have suggested an area to be exploited by the manufacturer.

However, these opportunities where not exploited until IBM did the electric typewriter and the computer-related input-output devices.

Apart from looking at the functions to which the present products contribute, it may be more profitable to identify the skill that underlines whatever successes have been achieved.

Therefore, we should look beyond the company”s capacity to invest new products. New products are the only major highways to new

opportunities. Other avenues may include new marketing services, new distribution methods, new values in quality, price combinations and creative merchandising. The effort to find or create a competence that is truly distinctive may hold the real key to a company”s success and future development.

At any rate, opportunity must be matched with competence after each has been accurately identified and its future significance esteemed. It is this combination that establishes a company”s economic mission and its position in its environments. The combinations should minimise organisation”s weaknesses and maximise its strength.

An essential part of strategic analysis is assessing the effects of possible change in the environment. According to Robson (1997), there are two steps to the process: (i) to consider how the societal, task/or internal environmental factors may change to assess the strategic implications of such changes for the organization.

Brannan (1992) refer to the potential major changes facing business organisations as a “complex web of near chaos. He described the possible framework for such changes as PEST, political, economical, sociological and technical developments. For an organisation to sustain its business and remain competitive there must be constant, effective and environmental analyses to inform and allow the strategic decisions that keep the organisation competitively healthy to be made. Quite often, change in the business environment could be very expensive and difficult. At times, it could be psychologically difficult to bear while strategic adjustments become increasingly difficult. However, the suggestion of Brannan on how to deal with interpreting change is not to forecast the future but to consider a range of futures which he calls scenario planning.