In order to survive and flourish in a highly competitive and turbulent environment every organization must strike a happy balance between environment, values, and resources. Because organizations are open systems, environmental factors inevitably influence them and it is up to managers to ensure that this influence is harnessed in a positive way, leading to organizational success. Environmental Analysis is the process of monitoring the organizational environments to identify both present and future threats and opportunities that may influence the firm’s ability to reach its goals.
If properly used, environmental analysis can help ensure organizational success in many ways:
1) It helps firms to adjust to environmental change at the right time, that is, enchasing opportunities as they arise and eliminating the negative impacts of environmental threats through proactive planning. It also helps the organizations to come out with an early warning system to ward off threats from competitive forces and develop suitable strategies and turn problems into opportunities.
2) It tries to improve organizational performance by making managers and divisional managers aware of issues that arise in the firm’s environment by having direct impact on planning and by linking corporate and divisional planning.
3) It helps strategies to focus alternatives that help achieve predetermined goals and eliminate those options that are not in line with anticipated opportunities or threat.
Features of environmental analysis:
Holistic Exercise: EA takes a holistic, broad view of the environment instead of scanning trends in a piecemeal fashion. It is a way of looking at the forest, rather than the trees.
Exploratory process: EA tries to explore the unknown terrain, putting emphasis on what could happen. The focus is clearly on alternatives future choices, seeking clarification of the assumptions about future, speculating systematically about various outcomes, assessing probabilities and drawing more rational conclusions.
Continuous Activity: EA is not a one shot deal it is a continuous process of picking up new signals from the environment and keeping track of shifts in the overall pattern of trends. To this end detailed studies are carried out from time to time to keep a close watch on previously identified trends that were found to be important from the organization’s point of view.
Components of external environment:
Most managers readily agree that an organization’s external environment is more difficult to understand and manage than the internal environment. The reasons are fairly obvious. The external forces are frustratingly large in number, difficult to assess and predict and are not easily amendable to advance planning and policy making. In the external environment very significant managers must be able to recognize opportunities and threats from outside and respond to these properly. Essentially organizations have to deal with economic social, political, technological, regularly market and have supplier related effects which offer opportunities and pose threats at regular intervals. To remain competitive, organizations must visualize these trends and deploy their resources judiciously. We will examine each one of the external environmental forces to understand better how they affect strategic management.
Economic factors throw light on the nature and direction of the economy in which a firm operates. Consumption patterns are usually governed by the relative affluence of market segments. Therefore, while carrying out strategic planning exercises, the firm must focus attention on economic trends in the segments that affect its industry. Low interest rates on personal savings for example could compel individuals to move towards equity and bond markets, leading to a boom for the capital market activity and mutual fund industry. At the national and international level, the firm must look into the general availability of credit, the level of disposable income and the propensity of people to spend. Interest rates, inflation rates, and trends in the gross national product, governmental policies, sectoral growth rates of agriculture, industry, infrastructure etc are the other economic influences it must consider.
Source: Strategic Management