Chapter 1

Business Environment: An Overview

1.1 Meaning of Business Environment

The term Business Environment is composed of two words Business and Environment. In simple
terms, the state in which a person remains busy is known as Business. The word Business in its economic
sense means human activities like production, extraction or purchase or sales of goods and services that
are performed for earning profits. On the other hand, the word Environment refers to the aspects of
surroundings that can have an influence. Therefore, Business Environment may be defined as a set of
conditions Social, Legal, Economic, Political, Institutional, Demographic and Natural that are usually
uncontrollable in nature and affects the functioning of organization. While some of these factors or forces
may have direct influence over the business firm, others may operate indirectly. Thus, business
environment may be defined as the total surroundings, which have a direct or indirect bearing on the
functioning of business.
Understanding the environment within which the business has to operate is very important for running a
business unit successfully at any place. The environmental factors influence almost every aspect of
business, be it its nature, its location, the prices of products, the distribution system, or the human
resource policies. Hence it is important to learn about the various components of the business
environment.
Business involves activities, which links an organization with outside world. Within an organization, a
business is governed by the behaviour of its employees, management or decision makers. But externally a
business is influenced by a score of factors, which range from customers to competitors and government.
Therefore, a business cannot be independent of the influence of these external factors. It should also be
noted that a business has absolute control over all the internal factors, it has no control over the external
factors. So often it becomes necessary for business houses to modify their internal decisions and policies,
on the basis of the pressure from external factors. This highlights the need to be ever- cognizant of
changes and influences of external factors so as to conduct business on healthy lines. It is in this context
that business environment assumes all significance. Business environment therefore refers to the
influences and pressures exerted by external factors on the business.

1.2 Nature of Business Environment

1. Business environment is compound in nature. It includes the aggregate effect of all the economic as
well as non economic factors operating in the surroundings that have some impact on business.

2. Business environment is dynamic in nature. It is never static as it is under a constantly changing

process caused by interaction of various factors of the environment.

3. Business environment is different for different business units. Though there may be certain
macroeconomic or natural phenomena which have an impact on all the units, still the effect may be larger
or smaller depending upon the industry, size and efficiency or experience of the different business units.

4. It has both long term and short term impact. There may be factors in the environment that create
impact for both short and long run. For example, allowing foreign firms in some sector of the economy
may have a negative short term impact of reduction in profits of domestic firms but in the long run it may
force the domestic firms to be more efficient and productive thus increasing their profitability.

5. External environment factors are uncontrollable in nature. The various economic, socio-cultural,
politico-legal and technological factors which constitute the external environment cannot be controlled by
any organization. The business unit can only adapt to the changes in the external environment by
changing its internal environment.

6. Business Environment is very uncertain. Due to the constantly changing factors and their interactions
in the business environment, it becomes very uncertain and hence difficult to analyze.

7. Components of business environment are inter-related. Various economic and non economic factors
are interdependent on each other. Any change in one of the components leads to a change in the other
components too. For example, a change in the political environment due to change in the government will
lead to a change in the economic environment as the new government will make new industrial, fiscal and
trade policies.

8. It includes both internal and external environment. Though generally we refer to business
environment as external environment as the major component of business environment that creates
opportunities and threats is the external environment, but the internal environment of the organization is
equally important as it helps us to analyze the strengths and weaknesses of the business.

1.3 Significance of Business Environment

There is a close and continuous interaction between the business and its environment. This interaction
makes it essential for the firm to understand its environment so that it is able to use its resources more
effectively and make gains.
Business environment is multifaceted, complex, and dynamic in nature and has a far-reaching impact on
the survival and growth of the business.
Proper understanding of the business environment helps the business in the following ways:

(a) Determining Opportunities and Threats: There are positive as well as negative influences in the
external environment. Positive factors provide opportunities to business and negative factors pose threats.
The analysis of business environment helps the business firm to identify opportunities and threats and
helps the business enterprises for meeting the challenges successfully.

(b) Planning for Future Growth: The interaction with the environment leads to opening up of new
avenues of growth for the business firms. It enables the business to identify the areas for growth and
expansion of their activities.

(c) Getting the First Mover Advantage: Early identification of opportunities helps an enterprise to be
the first to exploit them instead of losing them to competitors. For example, Nestle became the leader in
the noodles (fast food) market because it was the first to recognize the need in India for fast food that
could be made at home.

(d) Reading Early Warning Signals: Business environment is dynamic and keeps on changing whether
in terms of technological improvement, shifts in consumer preferences or entry of new competition in the
market. Analysis of business environment enables the business firm to identify any threats early and thus
prepare for coping with the challenge.
(e) Coping with rapid changes: Environmental analysis makes the task of managers easier in dealing
with business challenges. The managers are motivated to continuously update their knowledge,
understanding and skills to meet the predicted changes in realm of business. All sizes and all types of
enterprises are facing increasingly dynamic environment. In order to effectively cope with these
significant changes, managers must understand and examine the environment and develop suitable
courses of action.

(f) Improving performance: the enterprises that continuously monitor their environment and adopt
suitable business practices are the ones which not only improve their present performance but also
continue to succeed in the market for a longer period.

(g) Facing Competition: Every firm operates in an environment where it has to face stiff competition
from other firms producing similar types of products. Analysing business environment helps the firms to
identify the competitors strategies and formulate their own strategies accordingly.

(h) Identifying Firms Strength and Weakness: Business environment helps to identify the individual
strengths and weaknesses from the internal environment of the organization in view of the developments
in the economic and non economic components of the external business environment.

1.4 Components of Business Environment

Business Environment has two major components:

1. Internal Environment
2. External Environment

Let us discuss these components in detail.

1.4.1 INTERNAL ENVIRONMENT
The internal environment consists of the resources and inherent competencies of the firm, the structure of
its internal systems and processes and the organizational culture. It is imperative for the organization to
conduct an internal analysis to obtain a profile of its strengths and weaknesses. This helps the
organization to design suitable strategies towards leveraging its strength to gain sustainable competitive
advantage in the market. The internal environment plays a crucial role in the strategic management of the
organization. It is a direct reflection of how the organization can cope with any business-related exigency.
The organizations core competencies help it to sustain in the long run in times of stiff competition.
The internal environment of a business organization is constituted by the following:
1. Vision and Mission: Vision is the future aspiration of a business. In other words it is what the
organization would like to become. Vision thus underlines the core values of the firm and sets up
the priorities and goals. Mission refers to the purpose of existence of an organization and the
nature of its business. Vision and Mission are the foundations of strategic management of an
organization which is required to adapt to the dynamic business environment.
2. Philosophy and Strategy: The philosophy and strategy of a business firm determine the course
of action it takes to achieve its objectives and goals while operating in the fast changing external
environment over which it has little or no control.
3. Resources: Resources of a business refer to its strengths in terms of the skills, knowledge,
capital, innovativeness and access to materials and other assets, both tangible and intangible
which provide a competitive edge to the firm over its competitors. Resources if utilized optimally
can help position the business firm in a sustainable growth path.
 4. Structure: Structure of the firm refers to the hierarchy of the organization. It consists of the way
in which the various levels of management are organized, the lines of communication, span of
control and the concentration or decentralization of authority in the organization. Only if the
structure of the business firm is such that it facilitates communication, decision making and
decision implementation will it be able to sustain in the face of adverse changes in the external
environment of business and use the existing opportunities to its advantage by adapting to the
environment in time.
5. Culture: Culture refers to the values, beliefs, ethics and the work culture of an organization. It
also refers to the industrial relations i.e., the relations between the management and the
employees. This is the most crucial aspect of the internal environment as it determines the
tendencies and commitment of the members of the organization towards work, team participation,
quality control and other areas of responsibility. A business will be successful in utilizing its
resources only when there prevails a healthy culture in the internal environment which is not
plagued by the problems of non co-operation, absenteeism, lack of team spirit, corruption, etc.

1.4.2 EXTERNAL ENVIRONMENT: Those factors which are beyond the control of business enterprise
are included in external environment. These factors are of two Types:
1. Micro/Operating/Task Environment
2. Macro/General Environment

1. Micro/Operating/Task Environment

The environment which is close to business and affects its capacity to work is known as Micro
Environment. It is also called Task or Operating Environment. It consists of Suppliers, Customers,
Marketing Intermediaries, Competitors and Publics.

(i) Suppliers: They are the persons who supply raw material and required components to the company.
They must be reliable and business must have multiple suppliers i.e. they should not depend upon only
one supplier. An increase in raw material prices will have a negative effect on the marketing mix strategy
of an organization. Organizations may be forced to raise prices as a result. Maintaining close supplier
relationships is one way of ensuring competitive and quality products for an organization. The suppliers
of a company are also an important aspect of the microenvironment because even the slightest delay in
receiving supplies can result in customer dissatisfaction. Marketing managers must watch supply
availability and other trends dealing with suppliers to ensure that product will be delivered to customers
in the time frame required in order to maintain a strong customer relationship.

(ii) Customers: - Customers are regarded as the king of the market. Success of every business depends
upon the level of their customers satisfaction. Organizations survive on the basis of meeting the needs
and wants of customers by providing them with benefits. Failure to focus on them will result in a failed
business strategy. Types of customers may include:
(i) Wholesalers (ii) Retailers (iii) Industries (iv) Government
(v) Foreigners (vi) End consumers

(iii) Marketing Intermediaries: - They work as a link between business and final consumers. Marketing
intermediaries refers to resellers, physical distribution firms, marketing services agencies, and financial
intermediaries. These are the people that help the company promote, sell, and distribute its products to
final buyers. Resellers are those that hold and sell the companys product. They match the distribution to
the customers and include places such as Wal-Mart, Target, and Best Buy. Physical distribution firms are
places such as warehouses that store and transport the companys product from its origin to its destination.
Marketing services agencies are companies that offer services such as conducting marketing research,
advertising, and consulting. Financial intermediaries are institutions such as banks, credit companies and
insurance companies.

(iv) Competitors: - Competitors are also a factor in the microenvironment and include companies with
similar offerings for goods and services. Every move of the competitors affects the business. Business has
to adjust itself according to the strategies of the Competitors. The name of the game in business is
differentiation. The crucial question is that what benefit can the organization offer which proves it to be
better than its competitors and how can it sustain this differentiation over a period of time. Competitor
analysis and monitoring is crucial if an organization is to maintain its position within the market. To
remain competitive a company must consider who their biggest competitors are while considering its own
size and position in the industry. The company should try to develop a strategic advantage over their
competitors.

(v) Publics: - Any group that has an interest in or impact on the organizations ability to meet its goals is
termed as publics e.g. media, local citizens, ethnic groups, etc. They may be the users or non-users of the
product. Positive media attention can make an organisation (or its products) and negative media
attention can break an organisation. Organisations need to manage the media so that the media help
promote the positive things about the organisation and conversely reduce the impact of a negative event
on their reputation. Consumer programmes with a wide and direct audience can also have a very powerful
and positive impact within the media. The strength of the media may sometimes force organizations to
change their tactics. Similarly, local groups like student unions or ethnic groups following certain
ideologies may influence customer perception about various products in both positive and negative
aspect. Citizen-action publics including environmental groups and human rights activists can question the
actions of a company and put them in the public spotlight.

2. Macro/General Environment

It includes factors that affect the general scenario of all the business units and are not specific to a single
business unit like micro environmental factors. It creates opportunities and poses threats to business units
and is uncontrollable in nature. The business firm cannot influence the macro environment; it can only
adapt to the changes in the macro environment and work towards achieving its objectives.

Following are the components of Macro Environment:

(I) Economic Environment: - It is very complex and dynamic in nature that keeps on changing with the
change in policies or political situations. Economic environment refers to the overall economic factors
like economic philosophy of the country, economic system, economic structure, planning, economic
policies, controls and regulations, etc. All these have a serious impact on the functioning of business
organizations in a country. Other Economic Factors include infrastructural facilities, banking, insurance,
money markets, capital markets etc. All these factors are discussed in detail in section 1.5 of this chapter.

(II) Non-Economic Environment: - We discuss here in brief the various components that are included
in non-economic environment. The factors are discussed in detail in section1.5 of this chapter. Following
are the components that constitute the non economic environment of business:-

(i) Political Environment: It affects different business units extensively. As the business decisions are
based on government policies, frequent changes in these policies due to political disturbances would force
business organizations to change their policies too which, makes functioning very difficult.
(ii) Legal environment: It is well known that every country has a number of legal regulations to ensure
that the interests of business organizations do not run counter to national interests. Right from the stage
of incorporation of organizations, their listing in stock exchange, reprisal of customer complaints,
payment of tax to government, manufacturing practices, human resources development to pricing of
products and services, a number of legal regulations have to be fulfilled.

(iii) Socio-Cultural Environment: Influence exercised by social and cultural factors, not within the
control of business, is known as Socio-Cultural Environment. It includes factors include: attitude of
people to work, family system, caste system, religion, education, etc.

(iv) Technological Environment: A systematic application of scientific knowledge to practical task is

known as technology. Everyday there are vast changes in products, services, lifestyles and living
conditions. Modern organizations have recognized that research and development alone can ensure
organizational growth and stability. Governments have also become more technology conscious.
Manufacturing activities have become more and more technically sophisticated. Therefore technological
business environment has become highly dynamic. These changes must be analysed by every business
unit and it should adapt to these changes.

(v) Natural Environment: It includes natural resources, weather, climatic conditions, port facilities,
topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors
before choosing the location for their business.

(vi) Demographic Environment :- It is the component of business environment concerned with the
perspective of population i.e. its size, standard of living, growth rate, age-sex composition, family size,
income level (upper level, middle level and lower level), education level etc. Every business unit must see
these features of population and recognize their various needs and produce accordingly.

(vii) Global Environment: - It is particularly important for industries directly depending on import or
exports. The factors that affect the business are: globalisation, liberalisation, foreign trade policies,
foreign exchange fluctuations, cultural exchange, etc.

1.5 Factors Affecting Business Environment

1. Economic Factors: Economic factors are concerned with the economic conditions in the business
environment and include the following:
i. Economic System: Economic system defines the role of government in economic activities
and the degree of freedom given to private enterprises. There are broadly three types of
economic systems with their variants Capitalism, Socialism and Mixed Economic System.
Business environment would be different in different economic systems. For example, in a
Capitalistic economic system, business organizations would be subjected to limited
government regulations and controls and would be more governed by market forces [demand
and supply]. On the other hand, in a Socialist system, the government would take all the
economic decisions and private entrepreneurs will not be free to take their own decisions. In a
Mixed economic system, government would be selective in allowing the presence of private
enterprises, reserving some spheres completely for governmental operations i.e. for public
sector. Hence, the economic philosophy of the country directly determines the scope and
functions of business organizations in that country.
ii. Economic Structure: Economic structure defines the relative share and importance of each
sector in the economy. An economy may be predominantly agricultural or industrial in
 structure. Indian economy is termed as a service economy as the major share of Indian GDP
comes from the service sector. Hence the relative share of primary, secondary and tertiary
sectors determine the structure of an economy and the type of business that belong to
different sectors flourish accordingly.
iii. Economic Planning: Every country plans for the future economic activities so as to allocate
the available resources in the optimum manner. The sectors which get priority in these
development plans are given better facilities and greater investment opportunities by the
government. Hence the business firms of such sectors have benefit over firms in the other
sectors.
iv. Economic Policies: Economic policies include fiscal policy, monetary policy, industrial
policy, trade and foreign investment policy, etc. Economies follow expansionary or
contractionary policies according to the economic conditions in the country. Business is
facilitated if expansionary policies are being followed.
v. Economic Regulations: Every economy has certain economic rules and regulations in place
for proper implementation of economic policies. In India too we have laws like FEMA,
Competition law, etc. to control illegal or unfair practices in business. There are also
regulatory bodies like SEBI and TRAI to oversee the functioning different sectors of the
economy. These regulations make the business environment secure and saves both the
customers and business firms from fraudulent practices.
vi. Economic Growth & Development: An economy witnessing high growth will be a better
market for business firms as demand in such economy will be higher. Also, with greater
economic development, technology advancement and better human resources become
available to the business organizations. Economic development also leads to better economic
infrastructure in the form of better transport and communication facilities, and better power
supply. This too facilitates business firms which otherwise have to face power shortage and
transport problems due to bad or no connectivity through road.
vii. Other Economic Factors: Banking facilities, insurance coverage, well developed capital and
money market, and ease of economic functioning are other economic factors which facilitate
business.

2. Non Economic Factors: The factors other than economic factors are clubbed under this head.
Following factors are included in non economic factors:
i. Political Factors: Political factors include the following -

(a) Political Belief of Government

(b) Political Strength of the Country
(c) Relation with other countries
(d) Defence and Military Policies
(e) Centre State Relationship in the Country
(f) Thinking of Opposition Parties towards Business Unit

Political stability is one important factor which determines the business growth or downfall. A country
with relative political stability would witness inflow of foreign capital and collaboration. By political
stability we mean that the policies of government should remain consistent. Sometimes, when the policies
determined by a party in power are reversed by the succeeding party forming the government, there
would be far reaching changes in business environment For example, India was following a policy of
protectionism till late 1980s. Hence, the industrial development and economic development could not
take place at a rapid rate. In the absence of competition, the business organizations made inferior quality
goods and services and consumers had no choice. Once, the liberalization policy is adopted, the scene has
completely changed. Today, no business can survive unless it provides quality goods or services at par
with the multinational corporations.
Another aspect of political environment is the political ideology of the ruling party, which would make
the government follow the lines of countries with similar ideologies.

ii. Legal Factors: It is well known that every country has a number of legal regulations to ensure that the
interests of business organizations do not run counter to national interests. A number of legal regulations
have to be fulfilled right from incorporation of organizations, their listing in stock exchange, redressal of
customer complaints, payment of tax to government, manufacturing practices, human resources
development to pricing of products and services. In India too there are various laws such as Consumer
Protection Act, Competition Law and Foreign Exchange Management Act (FEMA) which govern the
legal environment of business.

iii. Socio-cultural Factors: It includes the various social and cultural beliefs and value systems. Social
environment today has brought compulsions on business organizations to adhere to certain business ethics
and morals. Social responsibility of business is an important force that modern business organizations
cannot ignore. Therefore each social group has a specific interest, the combination of all these, exerts
enormous pressure on the business unit. A business unit which succeeds in meeting the interests of all
these groups remains successful and grows.
Educational environment in a country determines the quality of population. A country with very high
illiterate population would always experience political and economic instability. Similarly, lack of
education may also give scope for the existence of superstitious beliefs, fatalistic attitude, etc. People's
choice of goods and services would be more governed, by their religious faiths and beliefs.
The economic development of a country completely depends on the literacy level which alone can pave
the way for improvement in science and technology, modernization, industrialization, etc. In such a
country, the business opportunities are plenty.
Cultural environment refers to the values, norms, customs, ethics, goals and other accepted behaviour
pattern of people in a country. Business should be aware of this while addressing the requirements of
people in different regions and nations. In olden days, religion was the basis of all activities in a society.
The religious leaders and institutions determined what business should do and what people must
consume. In India, the existence of caste system has led to caste based politics becoming the order of the
day which has created unrest among various sections of the society leading to difficult business situations
at times of agitation. Another serious aspect of the cultural environment is the attitude and behaviour of
the people in urban and rural areas. The urban - rural divide has created enormous problems for
administrators and specifically business organizations prefer urban educated person to persons from rural
areas.
Another important example of socio-cultural factor is the women's employment. While in olden days
women were destined to domestic works, today women entrepreneur lead several fields. Attitude towards
work is yet another area when Indian culture lags much behind the Western and Japanese culture.
iv. Technological Factors: This is a very significant external factor determining the destiny of
business organizations. Supported by computerize operations, modem business organizations have
succeeded in analyzing customers, minimizing the defects in products, ensuring service at the right time
and place, etc. While communications use to take unduly long time in those days, business
communications are instantaneous these days, thanks to modem satellite technology. The advancement in
technology and the absorptive capacity of a country along with the attitude of consumers towards
adoption of new technology together constitute the technological environment of business.
v. Demographic Factors: This refers to the size and behaviour of population in a country. Suppose a
country has a huge size of population, then, the country would provide extensive business or marketing
opportunities for all types of business organizations. On the other hand, a country with low size of
population would force the business organizations to seek external market for their products or services.
The age and gender composition also affects the type of business that will do better in an economy and
the quality of human resources available to business. For example a country where children constitute a
large section of population, there is more demand for baby products and toys. Similarly the demand of the
people of cities and towns are different than the people of rural areas. The high rise of population
indicates the easy availability of labour. These encourage the business enterprises to use labour intensive
techniques of production. Availability of skilled labour in certain areas motivates the firms to set up their
units in such area. For example, the business units from America, Germany, UK, etc. are coming to India
due to easy availability of skilled manpower. Hence, the size and quality of population emerges as a vital
factor influencing business environment.

vi. Natural / Ecological Factors: Natural environment refers to climatic conditions and natural
resources, which determines manufacturing scope and the nature of the products that could be marketed.
For example, a country like Kenya has to manufacture more of products based on forest resources, while
the Gulf countries can produce only crude, Japan can have business in fish, fruits, etc., Countries in the
different regions would have organizations specializing in products from geographical resources
available in abundant in that region.
Ecological imbalance is taking place at an alarming rate in the world today, and deforestation and hunting
of rare species of animals for food are all prohibited now. Carbon emissions have to be controlled not
only as a part of social responsibility but also as a source of revenue through carbon credit. Hence, while
identifying the business opportunities, business organizations have to be conscious of the limitations
posed by the geographical and ecological considerations.
vii. Global Factors: These include the extent of global competition due to globalization policy of the
country, foreign exchange risk and multilateral agreements among nations through forums like World
Trade Organization (WTO), International Monetary Fund (IMF) and World Bank.
Free imports and Foreign Direct Investment create competition for domestic producers while providing
opportunities to expand market worldwide. Countries which are more globalized are affected more by
global economic crises but also have greater opportunities for business firms.
The analysis of Political, Economic, Socio-cultural, Technological and Legal factors is also called
PESTEL or PESTLE Analysis. Other factors are studied separately or merged with these factors only.
 Chapter 2
Environmental Analysis

2.1 MEANING OF ENVIRONMENTAL ANALYSIS

Environmental analysis consists of identifying and analyzing environmental influences individually and
collectively to determine their potential effects on an organization and the consequent problems / threats
and opportunities.
Aguilar (1967), in his study of the information gathering practices of managers, defined analysis as the
systematic collection of external information in order to (1) lessen the randomness of information flowing
into the organization and (2) provide early warnings for managers of changing external conditions.
Brown and Weiner (1985) define environmental analysis as "a kind of radar to scan the world
systematically and signal the new, the unexpected, the major and the minor".
More specifically, Coates (1985) identified the following objectives of an environmental analysis system:
detecting scientific, technical, economic, social, and political trends and events important to the
institution, defining the potential threats, opportunities, or changes for the institution implied by those
trends and events, promoting a future orientation in the thinking of management and staff, and alerting
management and staff to trends that are converging, diverging, speeding up, slowing down, or interacting.
Environmental Scan is an analysis and evaluation of internal conditions and external data and factors
that affect the organization. Environmental analysis was originally a concept from the business
management world by which businesses gathered information from the environment to give themselves a
competitive advantage. Environmental analysis is now widely used by the public and private sector as
part of any strategic or business planning process.
An effective environmental analysis program should enable decision makers to understand current and
potential changes taking place in their institutions' external environments. Analysis provides strategic
intelligence useful in determining organizational strategies. The consequences of this activity include
fostering an understanding of the effects of change on organizations, aiding in forecasting, and bringing
expectations of change to bear on decision making.
Environmental analysis is the broader activity of understanding the changing external environment that
may impact the organization. Environmental analysis includes scanning the environment to identify
changing trends and patterns, monitor specific trends and patterns, forecast the future direction of these
changes and patterns, and assess their organizational impact. Merged with internal analysis of the
organization's vision, mission, strengths, and weaknesses, external environmental analysis assists decision
makers in formulating strategic directions and strategic plans.

2.2 OBJECTIVES OF ENVIRONMENTAL ANALYSIS

The goal of environmental analysis is to alert decision makers to potentially significant external changes
before they crystallize so that decision makers have sufficient lead time to react to the change.
Consequently, the objective of environmental analysis is broad. It includes:

i. Detecting scientific, technical, economic, social, and political trends and events important to the
institution,
ii. Defining the potential threats, opportunities, or changes for the institution implied by those trends
and events,
 iii. Promoting a future orientation in the thinking of management and staff, and
iv. Alerting management and staff to trends that are converging, diverging, speeding up, slowing
down, or interacting.
A key to success for any agency is planning, and successful planning requires that the people
involved have a comprehensive understanding of their current environment. Conducting an
Environmental Scan involves collecting pieces of external and internal information to assist the
agency in focusing on the appropriate short and long-term goals. Your Environmental Scan will help
you understand your agencys internal needs and assets, and the external environment in which youre
operating. The Environmental Scan provides information that can help your agency form its vision
and identify its Strengths, Weaknesses, Opportunities and Threats (SWOT). Environmental Analysis
and SWOT Analysis are sometimes referred to as strategic assessment tools and are commonly used
to establish the level of understanding needed for a successful plan

2.3 STEPS IN ENVIRONMENTAL ANALYSIS

Environmental Analysis involves the following steps:
1. Assess the nature of environment
The first step in environmental analysis is to take a view of the organizations environment in
terms of how uncertain it is .It should be checked if the environment is relatively static or does it
show signs of change and in what ways, and is it simple or complex to comprehend. This helps in
deciding what focus of the rest of the analysis is to take.
2. Data Collection
The second step in conducting an Environmental Scan is to collect external and internal data
relevant to the organization. An agency needs to thoroughly understand the external and internal
factors, and trends, that may affect its current position in order to successfully plan for the
future. An Environmental Scan/ Analysis can be completed by the organizations staff or by an
external agency.
3. Audit environmental influences
Aim is to identify which of the environmental influences have affected the performance of the
organization in the past. It may also be helpful to construct pictures or scenarios of possible future
to consider the extent to which strategies might need to change.
4. Identify key competitive forces through structural analysis
Aims to identify the key forces at work in the immediate or competitive environment and why
they are significant.
5. Identify strategic position
Analyze the organizations strategic position, i.e., how it stands in relation to those other
organizations competing for the same resources or customers as itself.
6. Identify key opportunities and threats
Develop an understanding of opportunities which can be built upon the threats which have to be
overcome. An understanding which needs to be considered in terms of the resource base of the
organization and which will contribute to strategy choice is very important.
2.4 MODES OF ENVIRONMENTAL ANALYSIS
There are a number of ways to conceptualize analysis. Aguilar (1967) identified four types of analysis.
1. Undirected Viewing
In undirected viewing, the individual is exposed to information with no specific informational need in
mind. The goal is to scan broadly in order to detect signals of change early. Many and varied sources of
information are used, and large amounts of information are screened. The information is not very fine, but
large chunks of information are quickly dropped from attention. As a result of undirected viewing, the
individual becomes sensitive to selected areas or issues.
2. Conditioned Viewing
In conditioned viewing, the individual directs viewing to information about selected topics or to certain
types of information. The goal is to evaluate the significance of the information encountered in order to
assess the general nature of the impact on the organization. The individual wishes to do this assessment in
a cost-effective manner, without having to dedicate substantial time and effort in a formal search. If the
impact is assessed to be sufficiently significant, the analysis mode changes from scanning to searching.
3. Informal Search
During informal search, the individual actively looks for information to deepen the knowledge and
understanding of a specific issue. It is informal in that it involves a relatively limited and unstructured
effort. The goal is to gather information to elaborate an issue so as to determine the need for action by the
organization. If a need for a decision or response is perceived, the individual dedicates more time and
resources to the search.
4. Formal Search
During formal search, the individual makes a deliberate or planned effort to obtain specific information or
information about a specific issue. Search is formal because it is structured according to some pre-
established procedure or methodology. The granularity of information is fine, as search is relatively
focused to find detailed information. The goal is to systematically retrieve information relevant to an issue
in order to provide a basis for developing a decision or course of action. Formal searches could be a part
of for example, competitor intelligence gathering, patents searching, market analysis, or issues
management. Formal searches prefer information from sources that are perceived to be knowledgeable, or
from information services that make efforts to ensure data quality and accuracy.
The following table will help in understanding the difference between the four modes of environmental
analysis:
Table 2.1
Analysis Information Need Information Use Amount of Number Tactics
Modes Targeted of
Effort Sources
Undirected General areas of Serendipitous Minimal Many - Scan broadly a
Viewing interest; specific discovery diversity of sources,
need to be revealed Sensing" taking advantage of
what's easily
accessible -
"Touring"
Conditioned Able to recognize Increase Low Few - Browse in pre-
Viewing topics of interest understanding selected sources on
 "Sensemaking" pre-specified topics of
interest
- "Tracking"

Informal Able to formulate Increase Medium Few - Search is focused on

Search queries knowledge within an issue or event, but a
narrow limits good-enough search is
"Learning" satisfactory -
"Satisficing"
Formal Able to specify Formal use of High Many - Systematic gathering
Search targets information for of information on a
planning, acting target, following some
"Deciding" method or procedure -
"Retrieving"

In order to be effective, environmental analysis needs to engage all four modes of viewing and searching.
Undirected viewing helps the organization to scan broadly and develop peripheral vision so that it can see
and think "outside the box." Conditioned viewing tracks trends and gives the organization early warning
about emerging issues. Informal search draws a profile of an issue or development, allowing the
organization to identify its main features and assess its potential impact. Formal search systematically
gathers all relevant information about an issue to enable intelligent decision making.

2.5 FREQUENCY OF ENVIRONMENTAL ANALYSIS

i. Ad-hoc: Only when need arises. It is done only when the environment is otherwise stable and
analysis is not required on a regular basis. It may also be done if some unexpected problem
crops up during the regular course of business.
ii. Periodic: At regular intervals like monthly, quarterly or annually. It is normally done when
the nature of business is seasonal or cyclic fluctuations are common.
iii. Continuous: On a regular basis throughout the year. If the competition is stiff and
environmental factors keep changing rapidly, continuous analysis becomes necessary to adapt
to these changes.

2.6 SIGNIFICANCE OF ENVIRONMENTAL ANALYSIS

1. Environmental analysis helps in effective utilization of resources by informing the managers

about the potential opportunities in the market. Every business wants to earn maximum
possible profit and this is possible only if the available resources are employed in the right
avenue.

2. Environmental analysis helps in converting threats into opportunities by letting the

manager know about the danger signals in time. Appropriate action can be taken to counter
 the threats and strengths can be developed to convert threats into opportunities if the manager
is informed about the negative influence coming up in the environment.

3. Strategic management starts with environmental analysis. No organization can function

profitably by ignoring the competition and general environment in which it is operating as
strategies are bound to fail if they are not made according to the business environment in
which one operates.

4. Environmental analysis enables constant monitoring of the environment which helps the
manager to keep track of the changes taking place in the business environment and act
accordingly in terms of strategy formulation.

5. Environmental analysis helps the manager to reduce uncertainties in the business

environment by estimating the future trends based on the analysis of past data about the
various environmental factors.

6. Environmental analysis helps in narrowing down the alternatives which makes the manager
more comfortable and accurate in taking business decisions.

2.7 ROLE OF ENVIRONMENTAL ANALYSIS

The specific organizational rules or functions to ensure the success of analysis exercise however can vary
drastically from organization to organization. There are three such roles:
i) Function-Oriented Role: The main purpose of function oriented environmental analysis is to improve
organizational performance by providing environmental information concerning effective performance of
specific organizational functions.
ii) Integrated Strategic Planning Role: The main purpose of this kind of environmental analysis is to
improve organizational performance by making top managers and divisional managers aware of issues
that arise in the firms environment.
iii) Policy-Oriented Role: The policy oriented role is broadest in scope and is most loosely related to
formal organizational planning. The function oriented role seems to be most specifically targeted at
particular organizational issues.
2.8 FACTORS INFLUENCING ENVIRONMENTAL ANALYSIS
1. Cost Related Factors:- There are many factors related to cost considerations, which affect the process
of environment appraisal. Since resource constraints have an impact on the extent to which the
organizations are able to appraise their environment and on how well they are able to do it.
2. Age of the Organization:- The age of the organization may also determine the type of information that
can be sought by it. The organizational growth over the period of time requires different type of
interaction with its environment.
3. Size and Power of Organization:- Large organization has to interact regularly with various
environmental forces and its environmental search will have to be more intensive. Because of greater risk
exposure and frequency of taking of new ventures, these organizations have to provide high weightage to
trends in economic and competitive environments.
4. Geographic Dimension of the Organization:- The geographic dimension of the organization leads to
decisions about the frequency and mode of environmental analysis. An organization with wider
geographic spread will have to incur more cost in analysis as its customers, suppliers, competitors and
macro environment would be more diverse.
5. Type of Business:- The type of business the organization is in or intends to be in determines the nature
of information sought. Moreover, how an organization defines its business also becomes an important
factor determining the information requirement.
6. Influence of Business Organization:- The more power an organization has in relation to
environmental forces the lower will be its need for appraisal of such forces. For example, a monopolistic
organization such as BHEL or ONGC, need not analyze the competitive environment.
7. Volatility of Environment:- Emphasis on environmental study and type of information needed by an
organization are also dependent upon the nature of the environment. Environmental analysis becomes
more essential and difficult in a volatile environment while in a stable environment it is not necessary to
be taken up very frequently.
8. Managerial Caliber:- Organization employing highly qualified executives show greater concern for
environmental analysis than those devoid of such expertise. One of the factors contributing to the
comprehensive and systematic environment study by large and multinational organizations is that they are
rich in managerial skills and technical knowledge.
Environmental analysis has to balance the tensions between control and creativity, centralization and
decentralization, focus and exploration. While analysis is a formal, planned activity, it should also provide
the space and freedom for participants to challenge assumptions and create new interpretations. While the
analysis program is centrally coordinated, it is also a distributed activity where many groups and
individuals gather and share information. While analysis is focused on the organization's information
needs, it should also provide the peripheral vision and long-range perspective for the organization to
grow. Ultimately, analysis as information seeking in support of organizational learning will always remain
much more of an art than a science.
2.9 SWOT Analysis
Another commonly used strategic assessment tool used to establish the level of understanding needed for
successful planning is a SWOT (Strengths, Weaknesses, Opportunities and Threats) Analysis. The
technique is credited to Albert Humphrey, who led a research project at Stanford University in the 1960s
and 1970s. The background to SWOT stemmed from the need to find out why corporate planning failed.
The research was funded by the fortune 500 companies to find out what could be done about this failure.

The usefulness of SWOT analysis is not limited to profit-seeking organizations. SWOT analysis may be
used in any decision making situation when a desired end-state (objective) has been defined. A SWOT
Analysis is simple to use and the results are easy to understand. It can be effective in identifying and
evaluating the internal strengths and weaknesses of an organization, and is also used to identify and
evaluate the external opportunities and threats that may affect the organization.

While the Environmental Scan is about collecting information and data to gain understanding, the SWOT
analysis is about categorizing this information into action buckets. Information and trends discovered
during the Environmental Scan process can provide the foundation for a SWOT Analysis finding. For
example, if the Environmental Scan predicts that there will be a shortage of trained workers, this shortage
would likely be identified as a Threat in the SWOT Analysis. After environmental analysis, an
Environmental Threats and Opportunities Profile (ETOP) is created. It provides the raw material to do
more extensive internal and external analysis after which SWOT follows and it provides an overview of
the strategic situation.

An OPPORTUNITY is a chance for firm growth or progress due to a favorable juncture of circumstances
in the business environment.
Possible Opportunities may be emerging customer needs, quality improvements, expanding global
markets, vertical integration, etc.
A THREAT is a factor in your companys external environment that poses a danger to its well-being.
Possible Threats may be new entry by competitors, changing demographics/shifting demand, emergence
of cheaper technologies, regulatory requirements.
By examining opportunities, the business firm can discover untapped markets, and new products or
technologies, or identify potential avenues for diversification.
By examining threats, you can identify unfavorable market shifts or changes in technology, and create a
defensive posture aimed at preserving your competitive position.

Strengths are internal factors that may impact organizational achievements positively. Examples of
strengths could include an experienced staff or good employee training program. Weaknesses are internal
factors that may impact organizational achievements negatively. Examples of weaknesses could include
an absence of procedural manuals or lack of an employee mentoring program. It is possible that a strength
could also be a weakness. For example, long-time employees could be a strength because of their
experience, but may be a weakness because it might indicate a workforce close to retirement.

Analysis of the SWOT matrix will give an assessment of the strengths of the organization which can be
brought forth to take advantage of opportunities in the environment and counter threats. Similarly
weaknesses which may make threats bigger can be removed as they exist in the internal environment
which is in control of the business firm.

2.10 Porters Five Forces Analysis of Industry Environment (Competitive Structure of Industry)

The five forces are environmental forces that impact on a companys ability to compete in a given market.
The purpose of five-forces analysis conceptualized by M.Porter is to diagnose the principal competitive
pressures in a market and assess how strong and important each one is.

Porter's five forces analysis is a framework for industry analysis and business strategy
development formed by Michael E. Porter of Harvard Business School in 1979. It draws
upon industrial organization (IO) economics to derive five forces that determine the competitive
intensity and therefore attractiveness of a market. Attractiveness in this context refers to the
overall industry profitability. An "unattractive" industry is one in which the combination of these
five forces acts to drive down overall profitability. A very unattractive industry would be one
approaching "pure competition", in which available profits for all firms are driven to normal
profit.
Three of Porter's five forces refer to competition from external sources. The remainder are
internal threats.
Porter referred to these forces as the micro environment, to contrast it with the more general
term macro environment. They consist of those forces close to a company that affect its ability to
serve its customers and make a profit. A change in any of the forces normally requires a business
unit to re-assess the marketplace given the overall change in industry information. The overall
industry attractiveness does not imply that every firm in the industry will return the same
profitability. Firms are able to apply their core competencies, business model or network to
achieve a profit above the industry average. A clear example of this is the airline industry. As an
industry, profitability is low and yet individual companies, by applying unique business models,
have been able to make a return in excess of the industry average.
Porter's five forces include - three forces from 'horizontal' competition: threat of substitute
products, the threat of established rivals, and the threat of new entrants; and two forces from
'vertical' competition: the bargaining power of suppliers and the bargaining power of customers.

Porter identified five factors that act together to determine the nature of competition within an
industry. These are the:
Threat of new entrants to a market
Bargaining power of suppliers
Bargaining power of customers (buyers)
Threat of substitute products
Degree of competitive rivalry

Threat of new entrants to an industry

If new entrants move into an industry they will gain market share & rivalry will intensify
The position of existing firms is stronger if there are barriers to entering the market
If barriers to entry are low then the threat of new entrants will be high, and vice versa
Barriers to entry are, therefore, very important in determining the threat of new entrants. An
industry can have one or more barriers. The following are common examples of successful
barriers:
Barrier
Notes

Investment cost High cost will deter entry

High capital requirements might mean that only large businesses
can compete

Economies of scale available Lower unit costs make it difficult for smaller newcomers to break
to existing firms into the market and compete effectively

Regulatory and legal Each restriction can act as a barrier to entry

restrictions E.g. patents provide the patent holder with protection, at least in the
short run

Product differentiation Existing products with strong USPs and/or brand increase customer
(including branding) loyalty and make it difficult for newcomers to gain market share

Access to suppliers and A lack of access will make it difficult for newcomers to enter the
distribution channels market

Retaliation by established E.g. the threat of price war will act to discourage new entrants
products But note that competition law outlaws actions like predatory pricing

What makes an industry easy or difficult to enter? The following table helps summarise the
issues you should consider:

Easy to Enter
Difficult to Enter

Common technology Patented or proprietary know-how

Access to distribution channels Well-established brands
Low capital requirements Restricted distribution channels
No need to have high capacity and output High capital requirements
Absence of strong brands and customer loyalty Need to achieve economies of scale for
 acceptable unit costs

Bargaining power of suppliers

If a firms suppliers have bargaining power they will:
Exercise that power
Sell their products at a higher price
Squeeze industry profits
If the supplier forces up the price paid for inputs, profits will be reduced. It follows that the more
powerful the customer (buyer), the lower the price that can be achieved by buying from them.
Suppliers find themselves in a powerful position when:
There are only a few large suppliers
The resource they supply is scarce
The cost of switching to an alternative supplier is high
The product is easy to distinguish and loyal customers are reluctant to switch
The supplier can threaten to integrate vertically
The customer is small and unimportant
There are no or few substitute resources available
Just how much power the supplier has is determined by factors such as:

Factor
Note

Uniqueness of the input If the resource is essential to the buying firm and no close
supplied substitutes are available, suppliers are in a powerful position

Number and size of firms A few large suppliers can exert more power over market prices
supplying the resources that many smaller suppliers each with a small market share

Competition for the input from If there is great competition, the supplier will be in a stronger
other industries position

Cost of switching to alternative A business may be locked in to using inputs from particular
sources suppliers e.g. if certain components or raw materials are
designed into their production processes. To change the supplier
may mean changing a significant part of production
Bargaining power of customers
Powerful customers are able to exert pressure to drive down prices, or
increase the required quality for the same price, and therefore reduce profits
in an industry.

Several factors determine the bargaining power of customers, including:

Factor
Note

Number of customers The smaller the number of customers, the greater their
power

Their size of their orders The larger the volume, the greater the bargaining power of
customers

Number of firms supplying The smaller the number of alternative suppliers, the less
the product opportunity customers have for shopping around

The threat of integrating If customers pose a threat of integrating backwards they will
backwards enjoy increased power

The cost of switching Customers that are tied into using a suppliers products (e.g.
key components) are less likely to switch because there
would be costs involved

Customers tend to enjoy strong bargaining power when:

There are only a few of them
The customer purchases a significant proportion of output of an industry
They possess a credible backward integration threat that is they threaten to buy the
producing firm or its rivals
They can choose from a wide range of supply firms
They find it easy and inexpensive to switch to alternative suppliers
Threat of substitute products
A substitute product can be regarded as something that meets the same need
Substitute products are produced in a different industry but crucially satisfy the same customer
need. If there are many credible substitutes to a firms product, they will limit the price that can
be charged and will reduce industry profits.
The extent of the threat depends upon
The extent to which the price and performance of the substitute can match the industrys
product
The willingness of customers to switch
Customer loyalty and switching costs
If there is a threat from a rival product the firm will have to improve the performance of their
products by reducing costs and therefore prices and by differentiation.
Degree of competitive rivalry
If there is intense rivalry in an industry, it will encourage businesses to engage in
Price wars (competitive price reductions),
Investment in innovation & new products
Intensive promotion (sales promotion and higher spending on advertising)
All these activities are likely to increase costs and lower profits.Several factors determine the
degree of competitive rivalry; the main ones are:

Factor
Note

Number of competitors in the Competitive rivalry will be higher in an industry with

market many current and potential competitors

Market size and growth prospects Competition is always most intense in stagnating
markets

Product differentiation and brand The greater the customer loyalty the less intense the
loyalty competition
The lower the degree of product differentiation the
greater the intensity of price competition

The power of buyers and the If buyers are strong and/or if close substitutes are
availability of substitutes available, there will be more intense competitive
rivalry
Capacity utilisation The existence of spare capacity will increase the
intensity of competition

The cost structure of the industry Where fixed costs are a high percentage of costs then
profits will be very dependent on volume
As a result there will be intense competition over
market shares

Exit barriers If it is difficult or expensive to exit an industry, firms

will remain thus adding to the intensity of competition