Environmental Appraisal

2nd Year MBA Group 3:

Environmental Appraisal is the process of identifying Strength, Weakness, Opportunities and Threats facing an organization.

Concept of Environment
Environment literally means the surroundings, external objects, influences or circumstances under which someone or something exists. The environment of any organization is the aggregate of all conditions, events and influences that surround and affect it.

Characteristics of Environment
Environment is complex Environment is dynamic Environment is multi-faceted Environment has a far-reaching impact

External Environment
Includes all the factors outside the organization which provide opportunities or pose threats to the organization.

Internal Environment
Refers

to all the factors within an organization which impart strengths or cause weaknesses of a strategic nature.

SWOT Analysis

It is a systematic approach to understanding the environment. Business firms undertake SWOT analysis to understand the external and internal environment. It is also known as WOTS-UP analysis. Through such an analysis, the strengths and weaknesses can be matched with the opportunities and threats operating in the environment so that an effective strategy can be formulated.

Opportunities and Threats

Opportunity
A condition in the general environment that if exploited, helps a company achieve strategic competitiveness

Threat
A condition in the general environment that may hinder a companys efforts to achieve strategic competitiveness

General Environment
Dimensions in the broader society that

influence and industry and the firms within it

Economic Sociocultural Global Technological

Political/legal
Demographic

Industry Environment
Set of factors directly influencing a firm and its competitive actions and competitive responses
Threat of new entrants

Power of suppliers
Power of buyers Threat of product substitutes Intensity of rivalry among competitors

Competitor Environment
All of the companies that the firm competes against.

Analysis of the External Environments

General environment
Focused on the future

Industry environment
Focused on factors and conditions influencing a firms profitability within an industry

Competitor environment
Focused on predicting the dynamics of competitors actions, responses and intentions

General Environment (contd)

The Economic Segment

Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal savings rate Business savings rates

Gross domestic product

General Environment (contd)

The Sociocultural Segment

Women in the workplace Workforce diversity Attitudes about quality of worklife Concerns about environment Shifts in work and career preferences Shifts in product and service preferences

General Environment (contd)

The Global Segment

Product innovations Applications of knowledge Focus of private and governmentsupported R&D expenditures

New communication technologies

General Environment (contd)

The Technological Segment

Product innovations
Applications of knowledge

Focus of private and governmentsupported R&D expenditures

New communication technologies

General Environment (contd)

The Political/Legal Segment

Antitrust laws
Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies

General Environment
The Demographic Segment

Population size
Age structure Geographic distribution Ethnic mix Income distribution

Environmental Scanning
It is the process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business.

Approaches to Environment Scanning

Systematic approach Ad hoc approach Processed-form approach

Systematic Approach
Under this approach, information for environmental scanning is collected systematically. Information related to markets and customers, changes in legislation and regulations that have a direct impact on an organization's activities, govt. policy statements pertaining to the organization's business and industry, etc. could be collected continuously to monitor changes and take the relevant factors into account.

Ad hoc Approach
Using this approach, an organization may conduct special surveys and studies to deal with specific environment issues from time to time. Such studies may be conducted when an organization has to undertake special projects, evaluate existing strategies or devise new strategies.

Processed-form Approach
For adopting this approach, the organization uses information in a processed form available from different sources both inside and outside the organization.

Sources of Information for Environmental Scanning

Documentary or secondary information like different publications. Mass media Internal sources External agencies Formal studies sources types of of

Methods and Techniques Used for Environmental Scanning

Trend analysis Regression analysis The Delphi technique Benchmarking MIS of the firm QUEST (Quick environmental technique)

scanning

QUEST
Proposed by B. Nanus. It is a four-step process which uses scenario-writing for scanning the environment and identifying strategic options. 1. Strategists make observations about the major events and trends in the industry. 2. Then, they speculate on a wide range of important issues that might affect the future of their organizations by scanning the environment. 3. The QUEST director prepares a report summarizing the major issues and their implications. 4. The report and scenarios are reviewed by the group of strategists who identify feasible strategic options to deal with the evolving environment. The options are ranked and teams are designated to develop strategies.

Environmental Appraisal
Glueck suggested a technique for environmental appraisal i.e. ETOP (Environmental Threat and Opportunity Profile). It involves dividing the environment into different sectors and then analyzing the impact of each sector on the organization. It requires subdividing each environmental sector into sub factors and then the impact of each sub factor on the organization is described in the form of a statement. A summary ETOP may show the major factors for the sake of simplicity.

ETOP for a bicycle company

Environmental sectors Social Political Impact of each sector Customer preference for sports cycles which are fashionable, easy to ride and durable. No significant factor.

Economical
Legal Technological

Growing affluence among urban consumers; exports potential high.

Bicycle industry a thrust area for exports. Technological up gradation of industry in progress; introduction of mountain bike and commuter folding bikes.

Environmental

Environmental factors such as a renewed interest in healthy lifestyles and the desire to reduce pollution.

Up arrows indicate favourable impact, down arrows (if used) indicate unfavourable impact, while horizontal arrows indicate a neutral impact.

Michael Porters Five Forces Model of Competition

Threat of New Entrants Threat of Substitute Products

Bargaining Power of Suppliers

Bargaining Power of Buyers Rivalry among Existing Competitors

Michael Porters Five Forces Model of Competition

Threat of New Entrants: 1. New entrants are always a powerful source of competition. 2. The new capacity and product range they bring in throw up new competitive pressure. 3. The bigger the new entrants, the more severe the competitive effect. 4. New entrants also place a limit on prices and affect the profitability of existing players.

Determinants:
1. 2. 3. 4. 5. Govt. policy Access to distribution Switching costs Brand identity Economies of scale

 Threat of Substitute Products:

1. Substitute products is a latent source of competition in an industry. 2. In many cases they become a major constituent of competition. 3. Substitute products offering a price advantage and/or performance improvement to the consumer. 4. They can drastically alter the competitive character of an industry. 5. Substitutes usually limit the prices and profits in an industry.

Determinants:
1. Relative price performance of substitutes 2. Switching costs 3. Buyer potential to substitutes

 Bargaining Power of Suppliers:

1. Suppliers exercise considerable bargaining power over companies. 2. The more specialised the offering from the supplier, greater is his clout. 3. The bargaining power of suppliers determines the cost of raw materials and other inputs of the industry and, therefore, industry attractiveness and profitability.

 Bargaining Power of Buyers:

1. The bargaining power of the buyers influences not only the prices that the producer can charge but also influences in many cases, costs and investments of the producer because powerful buyer usually bargain for better services which involve costs and investment on the part of the producer. 2. Determinants: Buyer volume, Buyer information, Ability to backward integrate, etc.

 Rivalry among Existing Competitors:

1. For any player, the competitors influence prices as well as the costs of competing in the industry, in the production facilities, product development, advertising, sales force, etc. 2. Rivalry Determinants: Industry growth, product differences, brand identity, switching goals, exit barriers, corporate stakes, etc.

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