Business Environment Analysis
Background
Environmental analysis is a systematic process that starts from identification of environmental factors, assessing their nature and impact, auditing them to find their impact to the business, and making various profiles for positioning. A common process of environmental analysis or scanning is discussed in the following section.
Environmental Analysis Process
A business manager should be able to analyze the environment to grasp opportunities or face the threats. Organizations need to build strength and repair their weakness available in the business environment. Therefore, this process consists not only a single steps but a process of various steps.
Environmental analysis comprises scanning, monitoring, analyzing, and forecasting the business situation. Scanning is to get the relevant information from the information overload. It is to focus on the most relevant information.
Monitoring is to check the nature of the environmental factors. Analyzing requires data collection and use of different required tools and techniques.
Forecasting is to find the future possibilities based on the past results and present scenario.
Environmental analysis process is not static but a dynamic process. It may differ depending on the situation. However, a general process with few common steps can be identified as the process of environmental analysis these are a) Monitoring or identifying environmental factors, b) Scanning and selecting the relevant factors and grouping them, c) Defining variables for analysis, d) Using different methods, tools, and techniques for analysis, e)
Analyzing environmental factors and forecasting, f) Designing profiles, and g)
Strategic positioning and writing a report. Brief discussion is made on each of the step of this environmental analysis process.
Identifying environmental factors
First of all a strategist should identify all the relevant factors that might affect his or her business. In this process, one should first know what the internal areas of the business are. This includes all the systems, internal structure, strategies followed, and culture of the organization. All these areas can be covered into the five functional areas in classical approach. Similarly, a business daily interacts with the close environmental components outside the business such as customer, competitor, and supplier. It might cover all other stakeholders such as trade union, media, and pressure group. Furthermore, general such business environment factors as political-legal, economic, sociocultural, and technological factors are to be identifiedScanning and selecting relevant and key factors
Out of all the business environmental factors, a strategist should focus only on the relevant factors for further analysis. All the factors are not equally important and affecting to the business. In this context, a strategist has to scan the environmental trend to select only the most affecting environmental factors from the information overload. This step paves the way of environment analysis and forecasting.
Defining Variables for Analysis
Selected environmental factors are to be further specified into the variables. A concept can be interpreted into different variables. For example, political situation can be measured using few variables such as instability, reliability, and long-term effect. Economic environment might cover many variables such as Per Capita, GDP, and Economic policies that can be further classified into many other variables. Variables are the basis of measurement in environmental analysis process. Variables can be compared, grouped, correlated, and predicted to find the clearer picture of the broader concept. It is, therefore, necessary to define the variables first in any kind of analysis including the environmental analysis.
Using Different Methods, Techniques, and Tools
Different types of methods, tools, and techniques are used for analysis. Some of the major methods of analysis can be Scenario Building, Benchmarking, and Network methods. Scenario presents overall picture of its total system with affecting factors. Benchmarking is to find the best standard in an industry and to compare the one’s strengths and weakness with the standard. Network method is to assess organizational systems and its outside environment to find the strength and weakness, opportunity and threats of an organization.
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Some of the techniques of primary information collection can be Delphi,
Brainstorming, Survey, and Historical enquiry. Delphi technique collects independent information from the experts without mixing them. Brainstorming is information collection technique being open minded without criticizing others. Survey is to design questions and to ask them to the participants whereas the historical enquiry is a kind of case analysis of past period.
Analysis tools can be statistical such general descriptive tools as mean, median, mode, frequency. Tools can be inferential as ANOVA, correlation, regression, factor, cluster, and multiple regression analysis. There are many tools of analyzing functional areas. Finance and accounting use mostly profitability, leverage, fund flow and other similar accounting and financial tools for analysis. Human resources use employee turnover, training, satisfaction and many others as the basis of evaluating strength and weakness.
Production area is assessed using quality control, productivity, breakdown, and many others. Similarly, marketing effectiveness is judged from the salesvolume and market coverage. Research and development is perceived successful if it can really develop the strength in an organization.
Forecasting Environmental Factors
Collecting relevant information from the selected areas and to identify the variables in such areas are the basics of analysis. Analyzing the past information to predict the future is the main objective of this step. As discussed earlier, use of different methods, techniques, and tools comes under the analysis process. It is, therefore, a comprehensive process that analyzes collected information using different tools and techniques.
Designing Profiles
After analyzing the environmental factors they are recorded into the profiles.
Such profiles record each component or variables into left side and their positive, negative, or neutral indicators including their statement in the right side. Internal areas are recorded in Strategic Advantages Profile (SAP) and external areas are recorded in Environmental Threat and Opportunity Profile
(ETOP). Strength, Weakness, Opportunity, and Threat (SWOT) profile can be designed combining both of these two profiles into one.
There are varieties of reporting formats or profiles used for external and internal business environment analysis. Environmental Threat and Opportunity
Profile (ETOP) is commonly used to report the external environmental situation whereas Strategic Advantages Profile (SAP) to report the internal environmental situation
1
. Both of these profiles can be merged into StrengthWeakness-Opportunity-Threat (SWOT) profile.
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(See: annex...). David used
External Factor Evaluation (EFE) Matrix to present weighted score of external environmental factors. Similarly, he used Internal Factor Evaluation (IFE)
Matrix to make the reporting of internal environmental audit. (See: annex-...).
Whellen & Hunger used External Factors Analysis Summary (EFAS) and
Internal Factors Analysis Summary (IFAS) that are presented in annex- ....
Environmental threats and opportunities profile (ETOP) is a commonly used profile related to external business environment. Strategic advantages profile
(SAP) is related to internal business environment. Nowadays, strength & weakness and opportunities & threats (SWOT) profile has become very popular. Present writing pursued the approach of reporting external and internal business environment using the same approach.
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Preparing ETOP
Environmental threat and opportunity profile is referred as ETOP profile. It identifies the relevant environmental factors. Such factors might be general environmental factors and task environment factors. Thereafter, it is necessary to identify their nature. Some factors are positive to the organization whereas
1
see Jauch, Gupta, and Glueck, 2003
2
see Jauch, Gupta, and Glueck, 2003; Johnson & Scholas, 2003others are negative. Therefore, it is necessary to find out their impact to the organization. Positive, neutral, and negative sign in ETOP denotes the relevant impact of environmental factors.
Preparing SAP
Strategic advantage profile is known as SAP. It shows strength and weakness of an organization. Preparation of SAP is very similar process to the ETOP.
There are generally five functional areas in most of the organizations. These areas are Production or Operation, Finance or Accounting, Marketing or
Distribution, Human Resource & Corporate Planning, and Research &
Development. These functional areas are listed to identify their relative strength and weakness in SAP. Very similar to the ETOP, positive, neutral, and negative signs are denoted and brief description is written in SAP profile.
Each functional area is very broad having many components inside.
All these above described profiles provide a clear picture to understand the strategic position of an organization.
Strategic Position and Report Writing
After analysis of business environment a strategist knows the actual situation and can make some future forecasting based on the environmental analysis.
After preparing the profiles strategists prepare formal report that describes the business environment. The report might present issues and best strengths of business environment in a systematic process. One can draw future strategies based on the strategic analysis followed.
In conclusion, a strategist or a manager first identifies the relevant environmental factors then analyzes using different tools and techniques to find out the actual situation. This overall process is sometimes known as
SWOT analysis, environmental scanning, environmental analysis, or monitoring-forecasting. This process is very important for a manager to make his or her organization success by choosing the best available alternative strategy. Some Approaches of Specific Environmental Scanning
In this section, a brief discussion is made on the potential approaches, tools, and techniques that are commonly used to analyze the sector wise business environment. The sectors of business environment are external business environment, industry level business environment, and internal business
environment.