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Sm Chapter 3 Environmental Analysis

Sm Chapter 3 Environmental Analysis

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Published by MD. ANWAR UL HAQUE

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Published by: MD. ANWAR UL HAQUE on Jun 12, 2010
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3
Environmental Analysis
“Businesses and managers are now faced with highly dynamic and ever morecomplex operating environments.-
Robert Paton.
 
3.1 The Concept of Organizational Environment
Organizational environment is always dynamic. It is ever changing.Changes today are so frequent and every change brings so manychallenges that it is highly essential for managers and leaders of the organization to be vigilant about the environmental changes.Every organization, whether business or non-business, has its ownenvironment. Environment of an organization consists of itssurroundings – anything that affects its operations, favorably or unfavorably. Environment embraces such abstract thing asorganization’s image and such remote visible issues as economicconditions of the country and political situations. The environmentalforces –abstracts and visibles – need a careful analysis. Systematicand adequate analysis produces information necessary for making judgments about what strategy to pursue. Managers cannot makeappropriate and sound strategy simply on the basis of their guessesand instincts. They must use relevant information that directly flowsfrom the analysis of their organization’s environment.
3.2: Understanding Environmental Influences
Business managers must understand the various facets of theimpacts of external environment. They need to recognize thatexternal environment has many aspects that can have significantimpact on the operations of a firm. They need to undertake analysisof environment on a regular basis. This is particularly important for the reason that developments/changes in the
remote environment 
1
influence the business organizations. They also need to understandthe influences of changes in the
industry environment.
Managersare benefited in several ways when they have a deepunderstanding and appreciation of the impact of environmentalfactors on business:
1
Remote environment refers to general external environment, as apposed to ‘specificenvironment’ or industry environment.
Environment of anorganization consistsof its surroundings –anything that affectsits operations,favorably or unfavorably.Managers arebenefited in several ways when they havea deep understanding and appreciation of the impact of environmental factorson business.
 
42
Strategic Management / Dr. M A Mannan
Knowledge of 
 
environment helps mangers identify thedirection to which they should proceed. They will travel alongwith a distinct way of changing direction, whenever necessary.Without an understanding of environment, managers are like abicycle without a handlebar – no way of maneuvering whileriding on a street.
Managers can isolate those factors, especially in theexternal environment, which are of specific interest to theorganization.
Managers can take preparation to deal with predicted crisisin any of the factors in the
 
environment. They can develop crisisplans for overcoming crises that affect organization.
The key to achieving organizational effectiveness isunderstanding of the
 
environment in which the firm operates itsbusinesses. No knowledge or inadequate knowledge is verylikely to lead managers to ineffectiveness because of ‘runningon the wrong road for reaching the goals.’
3.3 Types of Organizational Environment
We can classify the organizational environment into two broadcategories. These are:
1.
External environment, and2.Internal environmentAn organization’s operations are affected by both the types of environment. Therefore, it is essential for the managers to make in-depth analysis of the elements of the environments so that they candevelop in themselves an understanding of the internal andexternal situations. Based on their understanding, they will bebetter able to set required objectives for their organizations andformulate appropriate strategies to achieve those objectives.This chapter has two major sections: Section A deals with theanalysis of the external environment and Section B discusses theanalysis of internal environment.
Section A:Analysis of External Environment
3.4 External Environment: Meaning and Nature
External environment consists of an organization’s external factorsthat affect its businesses indirectly. The organization has no or littlecontrol over these factors. The external environmental factors
Managers candevelop crisis plansfor overcoming crisesthat affect organization.
 
An organization’soperations areaffected by both thetypes of environment –internal and external.
 
C H A P T E R 3 Environmental Analysis
43
reside outside the organization, which can lead to opportunities or threats. For convenience of analysis, we can divide externalenvironmental factors into two groups: (a)
general environment 
(or remote environment), and (b)
industry environment 
(or immediateoperating environment). The strategy-makers must understand thechallenges and complexities of both the remote environmentalfactors and the immediate operating environmental factors. Theyneed to appreciate that the remote environmental factors arelargely uncontrollable because of their distantly located externalnature. However, they can undertake appropriate strategies to dealwith these factors, usually collectively with other actors in theindustry, to reduce the intensity of their impact on the businesses.On the other hand, the operating environmental factors are those inthe immediate competitive situations of a company. These are oftenregarded as ‘task environment’ or ‘specific environment.’ Thesefactors basically constitute the competitive environment of acompany. When strategists take into cognizance of both the remoteand operating environments, they can become more proactive instrategic planning and more dynamic in grabbing opportunities. Inthe following discussions, you will find a broad description of general environment. The industry environment (operatingenvironment) will be discussed in chapter 4.
3.5 The General Environment
The general environment includes the distant factors in the externalenvironment that are general or common in nature. Its impact onthe operations of the firm, its competitors and customers make itsanalysis imperative. We can use
PESTLED
model
 
for theidentification and analysis of the factors in the general environment.PESTLED Model covers political, economic, sociocultural,technological, legal, environmental (natural), and demographicaspects. Some authors prefer to use each factor as ‘environment’such as political environment, economic environment etc. In thisbook, we will use both the term interchangeably.A list of the general environmental factors is given below:
Factor-wise PESTLEDEnvironment-wise PESTLED
Political factorsEconomic factorsSociocultural factorsTechnological factorsLegal factorsEnvironmental (natural)factorsDemographic factorsPolitical environmentEconomic environmentSociocultural environmentTechnological environmentLegal environmentEnvironment (natural)Demographic environment
Political environment:
The government of a country intervenes inthe national economy through setting policies/rules for business. In
The strategy-makersmust understand thechallenges and complexities of boththe remoteenvironmental factorsand the immediateoperating environmental factors.We can use
PESTLED
model 
 
for the identification and analysis of the factorsin the general environment.The government of acountry intervenes inthe national economy through setting  policies/rules for business.

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