This article on strategic management course exposes you to the business of industry environmental
analysis and diagnosis. The business environment comprises both external and
internal environments, which are complex and are constantly changing. There are
many environmental factors that directly or indirectly impact a particular
business. They include factors that are beyond the control of the business
organisations.
To sustain business and also survive in the competitive environment, the strategist must understand his environment through critical and objective analysis using certain criteria. The impact of some necessary changes and their implications on the business organisation must be analysed and appropriate strategic decisions made.
The environment of an organisation
could either be internal or external. The
external analysis is often referred to as environmental analysis while the internal analysis
is the company analysis or strategic
advantage analysis. The environment of an organisation
includes factors outside the firm which can lead to opportunities for or
threats to the organisation. In business, the environment of an organisation is
the pattern of all external conditions and influences that affect the organisation” s life and development. The relevant environmental factors
include the total business community, the city or town, the entire country and
the world at large. They also include technological, economical, physical,
social and political factors.
The corporate strategist must be aware of these
features in the environment. There should be aware that change is taking
place at varying rates in all the environmental factors. Change usually is
fastest in technology, perhaps closely followed by political changes
particularly in developing countries which are politically unstable. Change in
the environment of business necessitates continuous monitoring of a company”s
definition of business. Otherwise, it may fail by becoming obsolete at the time
it comes on stream. The effect of competition in the company”s environment
should not be overlooked. The strategist should be able to monitor
environmental factors well to determine opportunities for threats to the
organisation. Environmental diagnosis consists of management decisions made and
assessing the significance of the data (opportunities and threats) of the
environmental analysis.
Environmental analysis and diagnosis give strategists
time to anticipate opportunities and plan to take optional responses to the
opportunities. It helps the strategist to develop an early warning system to
prevent threats or develop strategies, which can turn a threat to the
organisation”s advantage. The analysis of the environment is important
in that it increases the quality of the strategic decision making by
considering a range of the relevant features well in advance before the need to
make an irrevocable decision.
The strategy of any organisation should be directed at
exploiting the environmental opportunities and blocking the environmental
threats in a way and manner consistent with the organisation”s internal
capabilities. This is porter”s concept of environmental fit which allows
the organisation to maximise its competitive position.
The success or failure of environmental analysis
depends largely on the characteristics of the environment such as the
complexity of the environment, the rate of change and the cost of available
information about the environment in which an organisation floats.
The following process may be followed:
(a)
Audit
the environmental influences.
(b)
Assess
the nature of the environment to determine the level of complexity or
environment.
(c)
Identify
the key environmental forces (using Porter”s five forces model).
(d)
Identify
the competitive position of the organization (using a life circle).
(e)
Identify
the major opportunities and threats (using SWOT/TOWS analysis).
An
organisation”s environment comprises all the events, issues and facts
which can influence its performance, but over which the organisation has little
or no influence. The external
environment is beyond the
control of the organisation. The societal environment
constitutes conditions that have a broad, rather than a direct influence on the
organisation. These conditions include demographic, natural, political,
cultural and economic factors. All these put together constitute the world
within which the organisation functions and operates.
Demographic
Factor: This includes ageing of the population,
geographical population shifts, population growth and better-educated populace.
Natural
Factor: This includes pollution levels,
natural resources management, and increased energy cost, raw material
availability.
Political
Factor: This includes international trade,
investment incentives/controls,
fiscal/monetary policies,
industrial policies, consumer policies, labour policies and regional
policies.
Cultural
Factor: This includes the status of women and
minorities, changes in the family life style, decline in the
traditional lifestyle, improved living standards, shifts to less work and more
leisure.
Economic Factor: These are gross national product,
personal income, employment and unemployment level, inflation rate, government
spending and availability of capital.
There is also a task environment which has a major that impact on the organisation and its strategic planning process among which are the
nature of competition in any particular market.
The nature of competition is very important since it impacts the
profitability and scope of strategic manipulations in the market as shown in the following Figure
Among the elements of the external environment as
indicated by Wendy Robson are the following:
These include life-style changes, career expectations,
rate of family formation, consumer activities, population growth rate, age
distribution, regional shifts, urban-rural migration, birth rates and life
expectancies. The strategist must be abreast of the social developments in the
environment which may include the increasing rate of crime, demands by women
for recognition and opportunity.
These
include gross national product (GNP) trends, interest rates, money supply,
inflation rates, unemployment levels, wage/price control,
devaluation/revaluation, availability of
energy and cost. The consequences of both national and international
economic trends need to be monitored in great detail by any company so that the
company will not be taken by surprise by the changing world.
Organisational spending on research and development
(RXD), focus of technology efforts, patent protection, new products, new
development in technology, transfer from laboratory to market place and productivity
improvement through automation. Technology, developments are the fastest
unfolding and the most far reaching in extending and contracting the
opportunity for any company.
These include antitrust regulations, environmental
protection laws, tax laws, special incentives, foreign trade regulations,
attitudes towards foreign companies, laws on hiring and promoting, stability of
government.
The importance of political forces to the business
must be considered. The relationship between the private companies and
government owned establishment is also important.
Also including in the environmental analysis is the
task environment which includes the following:
Among the demand factors are size and growth of the existing market,
number/size and distribution of customers, physical
distribution channels, nature of market competition (price and
non-price competition).
Market structure factors include number/size
distribution of competition and suppliers, barriers to entry or exist to market
product characteristics and product life cycles. Environmental analysis must
include want for the company”s products or services. There must be
effective market segmentation which will divide the market to pieces that are
identifiable, substantial enough to be profitable and defensible against
competition.
This includes the level of technology and likely
changes, cost structure including economies of scale, dependence on particular
raw material or labour.
Government polices, taxation and legislative apparatus
are important in environmental analysis. The impact of particular legislation
on the industry relating to product or consumption as well as role of the
government as supplier, competitor or customer is a significant environmental factor.
The internal analysis is also called the strategy
advantage analysis and diagnosis. It is the process by which the strategist examines the
firm”s market and distribution, research and development, production and
operations, corporate resources and personnel finance and the accounting
function to determine where the firm has significant competencies so that it
can most effectively exploit the opportunities and also meet the threats to the
company”s weaknesses which would need to be minimised, if not eliminated,
in order to achieve corporate objectives.
Even where competence to exploit an opportunity is
nurtured by experience, the level of that competence may be too low for any
great reliance to be placed on it. It would be good to always be able to
ascertain the distinctive ability that could be brought to a company or firm
that could attract customers away from other competitors.
The distinctive
competence of an organisation is more than what it can do; it is more of what
it can do very well. One has to consider the present strength of opportunities.
Take the old typewriter, for instance, handwriting that a simple. The
typewriter is found to contribute to a broad range of informed action
processing functions, any of which might have suggested an area to be exploited
by the manufacturer.
However, these opportunities where not exploited until
IBM did the electric typewriter and the computer-related input-output devices.
Apart from looking at the functions to which the
present products contribute, it may be more profitable to identify the skill
that underlines whatever successes have been achieved.
Therefore,
we should look beyond the company”s capacity to invest new products. New products are the only major highways to
new
opportunities. Other avenues may include new marketing
services, new distribution methods, new values in quality, price combinations
and creative merchandising. The effort to find or create a competence that is
truly distinctive may hold the real key to a company”s success and future
development.
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