MODULE-3

ANALYSING COMPANY’S EXTERNAL ENVIR0NMENT

Business decisions are influenced by two sets of factors, i.e., internal factors (the internal
environment) and external factors (external environment). However, the business environment is
referred to External environment which has an impact on the Strength and Weakness of the
Company. The external factors, on the other hand are, by and large, beyond the control of a
company. Factors such as economic factors, socio-cultural factors, government and legal factors,
demographic factors, geo-physical factors etc are regarded as uncontrollable factors. The success
will depend upon the larger extent on its adaptability to the environment i.e., its ability to properly
design and adjust the internal (controllable) variables to take advantage of the opportunities and to
combat upon the threats in the environment which forms the basis for Strategic
management/corporate planning process.

“Environmental analysis is defined as the process by which strategists monitor the economic,
governmental/legal, market/competitive, supplier/technological, geographic and social setting to
determine opportunities and threats to their firms”.

Environmental diagnosis consists of managerial decisions made by analyzing the significance of the
data (opportunities and threats) of the environmental analysis

External Environment consists of (1) Micro environmental and (2) Macro environment. The Micro
environment is also known as – task environment and operating environment. It consists of
suppliers, marketing intermediaries, competitors, customers and public. Whereas the macro
environment consists of the larger societal forces that affects factors like, demographic, economic,
natural, technological, political and cultural forces.

In a Global Scenario, factors like political & economic environment, regional economic cooperation,
trade agreements, Govt. support, globalization (MNCs) like sourcing, joi8nt ventures, mergers and
acquisitions, strategic alliance etc.

Environmental Survey

Spotting the opportunities and threats. Short listing the opportunities that can be pursued.

The purpose of survey is to,

1. To learn about events and trends in the environment, and project the future position in each
factor of the environment.
2. To identify the favourable land unfavourable factors in the environment from the standpoint of
the firm.
3. To figure out the opportunities and threats hidden in environmental events and trends.
4. To assess the scope of various opportuniti9es and shortlist ones which have the potential of
becoming promising business.
5. To draw the probability-attraction position of these opportunities.
6. To draw up the opportunity-threat profile.
7. To highlight those opportunities, the pursuit of which will fill the firm’s strategic planning gap.

Since a business firm functions as a part of the environment and has no existence separated from
the environment study of environment becomes central to strategic planning.

Environmental Scanning

The systematic collection land analysis of information about relevant macro environmental trends.
It helps in increased general awareness of environmental changes, better strategic planning and
decision-making, greater effectiveness in governmental matters and proper diversification and
resource allocation decisions.

Environmental scanning also forecast future trends and changes. A number of forecasting
techniques are available to strategic managers and they are,

a). Time series analysis – an empirical forecasting procedure in which certain historical trends are
used to predict such variables as a firm’s sales or market share.

b) Delphic technique – a forecasting procedure whereby experts are independently and repeatedly
questioned about the probability of some event’s occurrence until consensus is reached regarding
the particular forecasted events.

c) Judgemental forecasting – A procedure whereby employees, consumers, suppliers and/or trade

associations serve as sources of qualitative information regarding future trends.

d) Multiple scenarios – a forecasting procedure in which management formulates several plausible

hypothetical descriptions of sequence of future events and trends.

Concept of Environmental Analysis

Environmental Analysis is also known as environmental scanning.

1. It is a holistic exercise in which tot al view of environment is taken rather than viewing trends
piecemeal. Although the analysis of environment is divided into different components to find out
their nature, function land relationship for searching opportunities and threats and determining
where they come from, ultimately the analysis of these components is aggravated to have a total
view of the environment. This is because, some elements of environment may indicate
opportunities where others may indicate threats.
2. It is a heuristic exploratory process Since future are unknown, the analysis emphasizes on “what
could happen and not necessarily what will happen”. The emphasis must be on alternative futures,
seeking clarification of the assumptions about the future, speculating systematically about
alternative customers, assessing probabilities land drawing more rational conditions.
It must be a continuous process rather than one time. It helps to pick up new signals or triggers in
the overall pattern of developing trends. Detailed studies are undertaken to focus closely on the
track of previously identified trends which has been analyzer and assessed and found to be
particular importance to the Organization.

Role of Environmental Analysis for an Industry

The environment changes so fast that new opportunities and threats are created which may result in
disequilibrium into organization’s existing equilibrium strategists have to analyze the environment to
determine what factors in the environment present opportunities for greater accomplishment of
organizational objectives and that factors in the environment present threats to the organization’s
objective accomplishment so that suitable adjustment in stagiest can be made to derive maximum
benefits.
Environmental analysis allows strategists time to anticipate opportunities and plan to take optional
responses to threes opportunities. Similarly, it helps to develop an early warning system to prevent
the threats or to develop strategies which can turn the threats to the organization’s advantages.
Environmental analysis helps strategists to narrow the range of available alternatives and eliminate
options that are clearly inconsistent with forecast opportunities or threats. The analysis helps in
eliminating unsuitable alternatives and to process most promising alternatives. Thus it helps
strategists to reduce time pressure and to concentrate on those which are important.

Strategically relevant constituent of a Company’s External Environment

Macro environment – the general environment that affects all business firms in an industry, which
includes political-legal, economic, social and technological forces.
PEST- An acronym referring to the analysis of the four macro environmental forces are Political,
Economic, Social and Technology.

1. Political-legal - include such factors as the outcomes of elections, legislation and judicial court
decisions, as well as decisions rendered by various commission and agencies in the Govt. Trade
restrictions will always exist to some of the optically sensitive areas like trade sanctions.

2. Economic – significantly influence business operations including growth deadline in Gross

Domestic Product and increases or decreases in inflation rate, and exchange rate.

3. Social – such as social values, trends, traditions, religion, culture, societal trends.

4. Technology – include scientific improvement and innovations and productivity.

Competitive Environment Analysis – Porter’s Five Force Model

Each business operates among a group of companies that produce competing products or services
known as an Industry. Industry is a sector from the point of subject Economics. Although there are
usually some differences among competitors, each Industry has its own set of “rules to combat”
governing such issues as product quality, pricing, and distribution.

Industry factors have been found to play a dominant role in the performance of many companies
with the exception of those that are its notable leaders of failures. As such, one needs to
understand these factors at the outset before delving into the characteristics of a specific firm.
Michel Porter, a leading authority on industry analysis, proposed a systematic, means of analyzing an
industry’s potential profitability known as Porter’s “Five Forces” model. According to Porter, an
industry’s overall profitability depends on five basic competitive forces, the relative weights of which
vary by industry.

1. The Intensity of Rivalry among incumbent firms - Concentration of competitors, High Fixed
or Storage Costs, Slow, Lack of Differentiation of Low, Switching costs, Capacity Augmented in Large
Increments, Diversity of Competitors, High strategic Stakes, High Exit Barriers.
2. The Threat of new competitors entering the industry – Economies of Scale, Brand Identity
and Product Differentiation, Capital Requirements, Switching Costs, Access to Distributor, Channels,
Cost Disadvantages Independent of Size, Govt. Policy.
3. The Threat of substitute products or services – Rising of Substitute Products that satisfy
similar consumer needs.
4. The bargaining power of buyers – Buyers raising the weaknesses on the product, costs, credit
etc. to bring down the rates or threaten to discontinue buying. Or buyers go to their own production
for economic reasons.
5. The bargaining power of suppliers – On the guise of rising costs, the suppliers bargain to raise
the rates or threaten to stop supplies. Competitor cornering the production of the supplier as a
threat. Monopoly of the supplier.

Key Success Factors – Concept and Implementation

Kenichi Ohmae in his “The Mind of the Strategist” observes, “A Good business strategy is one by
which a company can gain significant ground on its competitors at an acceptable cost to itself.
Finding a way of doing this is real task of the strategist. He suggests the following four ways of
strengthening a Company’s position relative to that of its competitors.

1.Strategy Based on KFS – Key Factors for Success – to identify such critical factors in the areas like
sourcing raw materials, production, marketing and concentrate resources on them to gain strategic
advantage over the competitors.
2.Strategic based on Relative Superiority – Avoids head on competition and seeks to exploit
competitor’s weaknesses. Even when the competitors are very strong on the whole, there may be
some critical factors or market segments where the company enjoys relative superiority which it can
build into a strategic advantage. The relative superiority may be in respect of technology, cost,
product quality, suitability of the product to market environment, distribution, after sales service,
customer relations, cultural factors etc.
3. Strategy Based on Aggressive Initiatives – When competitors are so well established that it may
be hard to dislodge. Sometimes the only answer is in unconventional strategy aimed at upsetting
the key factors for success on which the competitor has built an advantage. Ask every point as
“Why”? You will get a point.
4. Strategy Based on SDF : Strategic degrees of freedom (SDF). Superior competitive performance is
to exploit the strategic degrees of freedom. This is relevant for consumer goods companies and cost-
conscious industrial goods manufacture. Successful deployment of innovations is an alternative.
These innovations may involve the opening of new markets or the development of new products.

In the words of Ohmae, “in each of these, the principal concern is “to avoid doing the same thing, on
the same battle grounds, as the competition. The aim is to attain a competitive situation in which
your company can (1) gain a relative advantage through measures is competitors will find hard to
follow and (2) extend that advantage still further.

Competitive Environmental Analysis : Need for and Diagnosis

Environmental analysis is the process by which strategists monitor the environment factors to
determine opportunities for and threats to their firms. Analysis also involves studying the minutes
of each factor to find its nature, function and relationship. Strategic manager, essentially searches
for opportunities and threats their sources and their impact on the business. Environmental
diagnosis consists of managerial decisions made by assessing the significance of the data
(opportunities and threats) of the environmental analysis : Reasons for analysis and diagnosis are
for.

Environmental factors are prime influences of strategy change.

Environmental analysis and diagnosis provide the time to the strategist to forecast opportunities and
to plan to respond aptly to these opportunities.
Environmental analysis and diagnosis help strategists develop early warning system to prevent
threat to develop strategies which can convert a threat into an opportunity.
They help to determine what factors in the environment present threat to the organization’ strategy
and objectives accomplishment.
They help to determine what factors in the environment present opportunities for optimal utilization
of resources and achievement of objectives effectively.
They also help in identifying the inherent risks involved in utilizing opportunities as normally; risks
are involved in any opportunity.
Systematic analysis and diagnoses enable the managers to predict the future and to have enough
time for other activities. This minimizes the time pressure of the managers on the unanticipated
events.
They help the managers to achieve the organizational objectives effectively than other organizations.
Why Companies go Global ?

Globalization refers to the process of integration of the world into one huge market. This type of
unification calls for removal of all trade barriers among economies.

1. Rapid shrinking of time and distance across the globe owing to the significant development of
transportation and telecommunication facilities.
2. Inadequacy of and low purchasing ability in the domestic markets.
3. To short span of product life-cycle in the domestic markets.
4. To have diversified portfolio of markets
5. To secure reliable and cheap inputs like raw material, finance and human resources.
due to political stability in some countries and political disturbances in their countries.
6. To reduce high transportation costs.
7. To set up plants close to the raw material.

What is Socio-culture Environment ?

Refers to the influence exercised by certain social factors which are beyond the Co’s gate. They
include, attitude of people to work, attitude to wealth, family marriage, religion, education and
ethics. Culture creates people like hardworking, sincere, committed, individualistic, and people
working in a team. Culture broadly determines the type of goods and services a business should
produce, the type of food, clothes, beverages, building materials etc. The need for understanding
and appreciating cultural differences across countries is essential as business units to go
international.

Social Factors describe characteristics of the society in which the organization exists. Literacy rates,
educational levels, customs, beliefs, values, lifestyles, the age distribution, the geographic
distribution and the mobility of the population all contribute to the social environment.

Socio-cultural factors also include the family structure and changes, attitude towards the family, the
post-married life, role of women in the family, in employment/earning and in society, religious
beliefs, status symbols, social institutions, motivations etc. The strategies should take into
consideration, the trend towards small families and thereby demand for housing and durable goods,
changing culture of eating outside and thereby demand for hotel industry.

Economic Environment

Industrial Policy, Industrial Licensing, Foreign Investment, Foreign Technology Agreements, Public
Sector, Monopolies & Restrictive Trade Practices, Foreign Trade, Privatization, Small Scale Industries,
Financial Sector, Infrastructure, Income Levels, Five Year Plans, Agricultural Sector etc.

Political Environment

Power vested with Legislature, Executive and Judiciary to know the authority of policy making, law
making, budget approving, executive control etc on public opinion, legislature influence, judiciary
activism etc.

Industry Environment

Market environment – product design, demand, market, customer taste, preferences, competitor’s
price, sales promotion etc.

Customer – Buyer Identification, consumer behaviour, target audience etc.

Demographic Factors – change in population size and structure, age shifts, income distribution etc.

Geographic Factors – To avoid congestion, migrate to other places

Suppliers

Competitors

Concept of Driving Forces

Industry conditions change because important forces driving industry participants (competitors,
customers, suppliers) to alter their actions, the driving forces in an industry are the major underlying
causes of changing industry and competitive conditions. Several factors can affect an industry
powerful enough to act as driving forces.

Changes in the long-term industry growth rate

Changes in who buys the product and how they use it
Product Innovation
Technological change
Marketing Innovations
Entry or exit of major firms
Diffusion of technical know-how
Increasing globalization of the industry
Changes in cost and efficiency
Emerging buyer prefers for a differentiated product
Regulatory influences and govt. policy changes
Changing societal concerns, attitudes and life-style
Reduction in uncertainty and business risk.