MODULE-3

ANALYSING COMPANY’S EXTERNAL ENVIRONMENT

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 environment 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
co-operation, trade agreements, Govt support, globalization (MNCs) like sourcing, joint
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 favorable and unfavorable 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 opportunities and shortlist ones which have the

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 potential of becoming promising business.
5. To draw up 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 and 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. Delphi 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. Judgmental 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 total 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 and relationship for
searching opportunities and threats and determining where they come from,
ultimately the analysis of these components is aggregated to have a total view of
the environment. This is because, some elements of environment may indicate
opportunities where others may indicate threats.

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 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 and drawing more rational conditions. .

3. It must be a continuous process rather than one time. It helps to pickup 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 importanance to the
Organization.

Role of Environmental Analysis for an Industry

1. 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.

2. 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.

3. 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.

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 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 or 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 Distribution Channels, Cost Disadvantages Independent of Size, Govt.
policy

3. The threat of substitute products or services. – Rising of a 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

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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. Strategy 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 up 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 ground, 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.

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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,

1. Environmental factors are prime influences of strategy change.

2. Environmental analysis and diagnosis provide the time to the strategist to forecast
opportunities and to plan to respond aptly to these opportunities.
3. Environmental analysis and diagnosis help strategists develop early warning
system to prevent threat to develop strategies which can convert a threat into an
opportunity.
4. They help to determine what factors in the environment present threat to the
organization’ strategy and objectives accomplishment.
5. They help to determine what factors in the environment present opportunities for
optimal utilization of resources and achievement of objectives effectively.
6. They also help in identifying the inherent risks involved in utilizing opportunities
as normally; risks are involved in any opportunity.
7. 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.
8. They help the managers to achieve the organizational objectives effectively than
other organizations.

Why Companies go Global?

Globalization refers too 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 market.
4. To have diversified portfolio of markets.
5. To secure reliable and cheap inputs like raw material, finance and human
resources.
6. due to political stability in some counties and political disturbances in their
countries.
7. To reduce high transportation costs.
8. To set up plants close to the raw material.

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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 behavior, 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.

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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

1. Changes in the long-term industry growth rate

2. Changes in who buys the product and how they use it.
3. Product innovation.
4. Technological change.
5. Marketing innovations
6. Entry or exit of major firms.
7. Diffusion of technical know-how.
8. Increasing globalization of the industry.
9. Changes in cost and efficiency.
10. Emerging buyer prefers for a differentiated product
11. Regulatory influences and govt policy changes.
12. Changing societal concerns, attitudes and life-style.
13. Reduction in uncertainty and business risk.