ENVIRONMENTAL

ANALYSIS
INTRODUCTION
Business decisions are influenced by two sets of
factors
Internal factors (The Internal Environment
External Factors( The External Environment)

Business Environment presents two challenges to

the enterprise
The challenge to combat the environmental threats
Exploit the business opportunities

Environmental Analysis is one of the first steps in

Strategic Management
definition
“The process by which strategists monitor the
economic, governmental/legal,
market/competitive, supplier/technological,
geographic and social settings to determine
opportunities and threats to their firms”

“Environmental diagnosis consists of managerial

decisions made by analysing the significance of
data (opportunities and threats) of the
environmental analysis”
ENVIRONMENT SCANNING
Environmental Scanning is the monitoring,
evaluating and disseminating of information from
the external and internal environments to key
people within the corporation.

A corporation uses this tool to avoid strategic

surprise and to ensure its long-
term health.
TYPES OF ENVIRONMENT
1) INTERNAL ENVIRONMENT
2) EXTERNAL ENVIRONMENT

INTERNAL BUSINESS EXTERNAL

FACTORS DECISION FACTORS
INTERNAL ENVIRONMENT
Important internal factors are
1) Value System
The value system of founders and those at the
helm of affairs has important bearing on the
choice of business, the mission and objectives
of the organization, business policies and
practices.

2) Mission and Objectives

The business domain of the company ,
priorities , direction of development, business
philosophy, business policy etc. are guided by
the mission and objectives of the company
INTERNAL ENVIRONMENT
3) Management Structure and Nature
The organizational structure, the composition of
the Board of Directors, extent of
professionalization of management etc. are
important factors influencing business decisions.

4) Internal Power Relationship

Factors like the amount of support the top
management enjoys from lower levels and
workers, share holders and Board of Directors
have important influence on the decisions and
their implementation.
The relationship between the members of Board
of Directors is also a critical factor.
INTERNAL ENVIRONMENT
5) Human Resources
The characteristics of the human resources like
skill, quality, morale, commitment, attitudes etc.
could contribute to the strength and weakness of
the organization.
The involvement, initiative etc. of the people at
different levels may vary from organization to
organization.
6) Company Image and Brand Equity
The image of the company matters while raising
finance, forming joint ventures or other
alliances, soliciting market intermediaries,
entering purchase or sale contracts , launching
new products etc.
INTERNAL ENVIRONMENT
OTHER FACTORS
1. Physical Assets and Facilities
2. R&D and Technological Capabilities
3. Marketing Resources
4. Financial Factors
ORGANIZATIONAL ANALYSIS
SWOT
• SWOT analysis evolved during the 1960 at Stanford Institute .
• It is very popular strategic planning Technique
• It helps to understand the external environment
• It is acronym for strengths weakness, opportunities and
threasts
• Its also known as WOTS-UP Or TOWS analysis
• It helps to I dentify stregths and make best use of them to
meet opportunities and identify weakness and minimise their
impact which in turn helps to neutralise threats
SWOT
• STRENGTH: Strength is an organizational capability that an
organization can use to gain strategic advantage.Eg: Good
reputation, resources, assets
• WEAKNESS: A limitation or constraints which created a
strategic disadvantage Eg: financial deadlines, low morale,
overdependence on single product line, gaps in capabilities.
• OPPORTUNITY : It is a favorable condition in organization ‘s
environment that helps to strengthen its position Eg:
economic Boom, new technology , loosening of regulations
• THREATS: These are unfavorable conditions that create the risk
for r cause damage to the organization
Organizational capability
factors
• These are those factors that are strategic strengths and
weakness existing in various functional areas of the
organization.
• Financial Capability: Access to financial resources, amicable
relation with financial institutions, High creditworthiness,
efficient capital budgeting, low cost of capital
• Marketing Capability: Wide variety f products, Better quality of
products, Sharp positioning, Low prices as compared to
competitors
• Operations capability: Favorable plant location, reliable sources
of supply effective control of operational costs.
• HR: organization is fair employer, excellent training facilities,
congenial working environment,highlymotivated wok force.
SWOT
• Steps to apply SWOT
• Setting objectives of organization
• Identifying Strengths , Weakness, Opportunities and Threats
• Ask questions:
• How do we maximize our strengths?
• How do we minimize our weakness?
• How do we make best use of opportunities in external
environment?
• How do we protect ourselves from threats in external
environment?
• Recommend strategies that will answer above four questions
Benefits of SWOT:

• Simple to use
• Low Cost
• Flexible –can be adapted to various situations
• Leads to clarification of various issues
• Development of goal oriented alternatives
VALUE CHAIN ANALYSIS
• It is a method of assessing the strenths and the weakness of
the organizaton
• Porter-1985 introduced it
• A value chain is the set of interlinked value creating activities
performed byan organization
• Theseactivities may begin with procuring raw mateirals and
processing them and marketing them to ultimate consumer.
VALUE CHAIN ANALYSIS
• Value chain analysis is divided into:
• Primary activities
• Support activities
Porter s generic value chain
• Primary activities:
• Inbound Logistics: All activities that organization does in receiving
storing and trasporting inputs of production process E.G: Materials
handling,warehousing and inventory control
• Operations: All activities required for trasformation of raw materials
to finished products ,Eg: assembling, fabricatiing ,packaging
• Outboundlogistics: All activities for receiving, storing, and
transporting outputs going out of production process.Eg order
processing ,physical distribution and warehousing
• Marketing and sales: All activities organization does to market and
sell its products to customers.Eg: Pricing,developing
products ,advertising,promoting and distributing
• Service: All activities organization uses to enhance its product svalu:
Eg:Installation,repair ,maintainance
• Support activities:
• Firm Infrastructure: Allactivities that an organization uses for
ascertaining the external opportunities and threats,identifying
strengths and weakness and generally managing the organziation
to achieve its objectives.Eg: accounting, finance,planning ,
general management
• Human Resource Management: All activities that the organization
uses for maintaining human resources E; recruitment , Selection
• Technology Development: All activities that a firm does for
creating ,developing andimproving products and services.Eg
R&D,Product design ,equipment design
• Procuurement: All activities that organization uses for procuring
the inputs needed to produce products and provide service.Eg:
Purchasing Equipment, Machines, Raw materials and supplies.
• Steps:
• I dentify activities and classify them into primary and support
• Identifythings that provide value to the customer
• Identify how the value constribution can be increased and
thereby increasing the profit margin

• Identify how value can be increased by recombining activities

• Looks simple but difficult to implement
• Applies to inductrial organizaytion bu needs to be adapted to
the service organziations

• Concept of value is hazy

• Traditional cost accounting methoda cannot identify costs
• It requires collection of data fromvarious resources
• IT revolution application upsets calculation as it increases
valus and decreases costs simultaneously
Pitfalls of SWOT
• Too simplistic
• Result in just compiling lists rather than thinking what is really
important for organization
• Usually reflect the viewpoint of evaluator and can be
misinterpreted
• Strengths may be confused with opportunities weakness may
be confused with threats
• May encourage organizations to take lazy course of action
EXTERNAL ENVIRONMENT
Two Types
a) Micro Environment
Consists of actors in the company’s immediate
environment, that affects the performance of the
company.
b) Macro Environment
Consists of larger societal forces that affect all the
actors in company’s micro environment.
MICROENVIRONMENT
Also known as task environment and
operating environment
Include
The suppliers
Marketing intermediaries
Competitors
Customers
Publics
More intimately linked with the company than
macro factors
The micro forces need not necessarily affect all
the firms in a particular industry in the same way.
Some of the micro factors are particular to a firm
suppliers
Those who supply the inputs to the company.
Source/Sources should be Reliable
Uncertainty regarding the supply or other supply
constraints compel companies to maintain high
inventories causing cost increases.
Very risky to depend on a single supplier
The purchasing department should “market” itself
to suppliers, to obtain favourable treatment
during the periods of shortages.
customers
Major task of business is to create and sustain
customers
Different categories of consumers
Individuals
Households
Industries and other commercial establishments
Government and other institutions
Depending on single customer is too risky
Choice of customer should be done by considering
Relative profitability
dependability
stability of demand
growth prospectus
extent of competition
competitors
A firm’s competitors include not only the other
firms which market the same or similar product
but also all those who compete for the income of
the consumers
Desire competition
Generic competition
Product form competition
Brand competition
Marketing intermediaries
Firms that aid the company in promoting, selling
and distributing its goods to final buyers.
Include
the middlemen and merchants who “help the company
find customers or close sales with them”
Physical distribution firms which “ assist the company
in stocking and moving goods from their origin to their
destinations”
Marketing service agencies which “assist the company
in targeting and promoting its products to the right
markets”
Financial intermediaries which “finance marketing
activities and insure business risks”
Vital links between the company and the final
consumers.
publics
Any group that has an actual or potential interest
in or impact on an organization’s ability to achieve
its interests

E.g. Media publics, citizens action publics, local

publics
Media attack on any company can influence the
government decisions affecting the company.
Environmental pollution is an issue often taken up
by number of local publics
Publics are not always threat to the business.
Fruitful cooperation between a company and the
local publics may be established for the mutual
benefit.
MACRO ENVIRONMENT
Consists of larger societal forces that affect all the
actors in company’s micro environment-namely
 the demographic,
 economic,
 natural,
 technological,
 political and
 cultural forces
Also known as Societal Environment
The Societal Environment includes general forces that
do not directly touch on short-run activities of the
organization but that can, and often do, influence its
long-run decisions.
Economic Environment
Important factors are:
Economic conditions
Economic policies
Economic systems
Economic condition
The economic conditions of a country –for example,
the nature of the economy, the stage of
development of the economy, economic resources,
the level of income, the distribution of income and
assets, etc.- are among the very important
determinants of business strategies.
In a developing country, the low income may be the
reason for the very low demand for the product.
Economic Environment
Economic policies
 Some types or categories of business are favourably
affected by government policy, some adversely affected,
while it is neutral to some others.
 E.g. a restrictive import policy may greatly help the
import competing industries, while a liberalisation of the
import policy may create difficulties for such industries

Economic System
 The scope of the private business depends on the
economic system.
 The freedom of the private enterprise is the greatest in
the free market economy.
Political & Environment
Has close relationship with the economic system
and economic policy.
In many countries regulations to protect
consumer interests have become stronger.
Some governments specify certain standards for
the products to be marketed in the country; some
even prohibit the marketing of certain products.
Promotional activities are subject to various types
of controls.
Eg: In India, Advertisement of alcoholic product is
prohibited.
 and the packages must carry “injurious to
health” warnings
socio-cultural
environment
Major factors are:
the buying and consumption habits of people,
their language beliefs and values,
customs and traditions,
tastes and preferences,
Education
Strategy should be appropriate in the socio-
cultural environment.
Eg: nestle brews a very large variety of instant
coffee to satisfy different national tastes
Even when people of different cultures use the
same product; the mod of consumption,
conditions of use, purpose of use or the
perceptions of the product attributes may vary so
much so that the product attributes, method of
presentation, positioning or method of promoting
the product may have to be varied to suit the
characteristics of different markets.
E.g.: Vicks Vaporub, the popular pain balm is used as
mosquito repellent in some tropical countries
Language difference pose a serious problem.
e.g.
 Preet-> Prestige for overseas market
 In Japanese, General Motors’ “body by Fisher” means
“Corpse by fisher”
Colour
Blue: feminine and warm in Holland ; but masculine
and cold in Sweden
Green: favourite in Muslim world; but represents
illness in Malaysia
Red: popular in communist countries; but represents
disaster in Africa
White: death and mourning in China and Korea; but it
expresses happiness in some countries. Also it is the
colour of bridal dress.
Demographic
environment
Factors:
Size, growth rate, age composition, sex
composition of population, family size,
educational levels, economic stratification of the
population, language, caste, religion, etc.
E.g.
Decline in birth rates in USA have affected the
demand for baby products. So Johnson &Johnson
repositioned their products like baby shampoo
and baby oil, to the adult segment, particularly to
females.
Natural environment
Geological and ecological factors, such as natural
resources endowments, weather and climatic conditions,
topographical factors, location aspects in the global
context, port facilities etc., are relevant to business.
Differences in geographical conditions between markets
may some times call for changes in the marketing mix.
Geographical and Ecological factors also influence the
location of certain industries. E.g. industries with high
material index tend to be located near the raw material
sources.
Topographical factors may affect the demand pattern
 E.g.. In hilly areas with difficult terrain, jeeps may be in a
greater demand than cars.
Ecological factors have recently assumed great
importance. The depletion of natural resources,
environmental pollution and the disturbance of ecological
balance have caused great concern.
Physical & technological
environment
Business prospects demands availability of certain physical
facilities
 E.g. demand for electrical appliances is affected by the extent
of electrification and the reliability of power supply.
 Demand for LPG stoves depend on rate of growth of gas
connections
 differing technological environment of different markets
may call for product modifications
 E.g. Many appliances are designed for 110 V in USA. They
should be converted for 240v in India
Technological developments may increase or decrease the
demand for some existing products
 E.g. voltage stabilizers help increase in sale of electrical
appliances in markets characterised by frequent voltage
fluctuations
 Introduction of TVs, Refrigerators, etc. with in-built stabilizers
adversely affects the demand for voltage stabilizers.
International Environment
Particularly important for the industries directly
depending on imports or exports and import-
competing industries
Recession, economic boom, liberalization
Major international developments have their
spread effects on domestic business.
E.g. Oil price hikes increased the cost of production
and the prices of certain products such as fertilizers ,
synthetic fibres. So usually, the demand for natural
fibres and manures increased.
Also demand for automobiles that economise energy
consumption got increased.
The oil crisis also promoted some companies to
resort to demarketing
“demarketing” refers to the process of cutting
consumer demand for a product back to the level
that can be supplied by the firm.
E.g. The Indian Oil Corporation have publicised
tips on how to cut oil consumption
TECHNIQUES FOR
ENVIRONMENTAL
SCANNING
Involve two phases: Information gathering and
Evaluation
1) Verbal & Written Information:
verbal information includes, information obtained by direct
talk with people, by attending seminars, meetings, etc..
Written or documentary information includes both
published and unpublished materials
2) Search and Scanning:
this involves research for obtaining the required
information
3) Spying:
Eve though it is not considered as ethical, spying to get
information about the competitor is not uncommon
These 3 pertains to source of information/methods of
gathering information
4) Forecasting:
done by corporate planners or other staff personnel
or consultants
This pertains to use the information gathered by
above mentioned 3 methods for picturing the future
scenario.
references
 STRATEGIC MANAGEMENT
by Francis Cherunilam,
Himalaya Publishing House
STRATEGIC MANAGEMENT
by J. David Hunger and Thomas L. Wheelen,
Addison-Wesley
EXPAND YOUR BUSINESS
by Robert Zegers and Cornelius J. Murombedzi
THANK YOU….