WHAT IS ENVIRONMENTAL

ANALYSIS?
Environmental analysis is a strategic tool. It is a process to identify all the external and
internal elements, which can affect the organization’s performance. The analysis
entails assessing the level of threat or opportunity the factors might present. These
evaluations are later translated into the decision-making process. The analysis helps
align strategies with the firm’s environment.
Our market is facing changes every day. Many new things develop over time and the
whole scenario can alter in only a few seconds. There are some factors that are beyond
your control. But, you can control a lot of these things.

Businesses are greatly influenced by their environment. All the situational factors
which determine day to day circumstances impact firms. So, businesses must
constantly analyze the trade environment and the market.

There are many strategic analysis tools that a firm can use, but some are more
common. The most used detailed analysis of the environment is the PESTLE analysis.
This is a bird’s eye view of the business conduct. Managers and strategy builders use
this analysis to find where their market currently. It also helps foresee where the
organization will be in the future.
PESTLE analysis consists of various factors that affect the business environment.
Each letter in the acronym signifies a set of factors. These factors can affect every
industry directly or indirectly.

The letters in PESTLE, also called PESTEL, denote the following things:

 Political factors
 Economic factors
 Social factors
 Technological factors
 Legal factors
 Environmental factor

Often, managers choose to learn about political, economic, social and technological
factors only. In that case, they conduct the PEST analysis. PEST is also an
environmental analysis. It is a shorter version of PESTLE analysis. STEP,
STEEP, STEEPLE, STEEPLED, STEPJE and LEPEST: All of these are acronyms for
the same set of factors. Some of them gauge additional factors like ethical and
demographical factors.
P FOR POLITICAL FACTORS
The political factors take the country’s current political situation. It also reads the
global political condition’s effect on the country and business. When conducting this
step, ask questions like “What kind of government leadership is impacting decisions
of the firm?”

Some political factors that you can study are:

 Government policies
 Taxes laws and tariff
 Stability of government
 Entry mode regulations

E FOR ECONOMIC FACTORS

Economic factors involve all the determinants of the economy and its state. These are
factors that can conclude the direction in which the economy might move. So,
businesses analyze this factor based on the environment. It helps to set up strategies in
line with changes.

I have listed some determinants you can assess to know how economic factors are
affecting your business below:

 The inflation rate

 The interest rate
 Disposable income of buyers
 Credit accessibility
 Unemployment rates
 The monetary or fiscal policies
 The foreign exchange rate

S FOR SOCIAL FACTORS

Countries vary from each other. Every country has a distinctive mindset. These
attitudes have an impact on the businesses. The social factors might ultimately affect
the sales of products and services.

Some of the social factors you should study are:

 The cultural implications

 The gender and connected demographics
 The social lifestyles
 The domestic structures
 Educational levels
 Distribution of Wealth
T FOR TECHNOLOGICAL FACTORS
Technology is advancing continuously. The advancement is greatly influencing
businesses. Performing environmental analysis on these factors will help you stay up
to date with the changes. Technology alters every minute. This is why companies
must stay connected all the time. Firms should integrate when needed. Technological
factors will help you know how the consumers react to various trends.

Firms can use these factors for their benefit:

 New discoveries
 Rate of technological obsolescence
 Rate of technological advances
 Innovative technological platforms

L FOR LEGAL FACTORS

Legislative changes take place from time to time. Many of these changes affect the
business environment. If a regulatory body sets up a regulation for industries, for
example, that law would impact industries and business in that economy. So,
businesses should also analyze the legal developments in respective environments.

I have mentioned some legal factors you need to be aware of:

 Product regulations
 Employment regulations
 Competitive regulations
 Patent infringements
 Health and safety regulations

E FOR ENVIRONMENTAL FACTORS

The location influences business trades. Changes in climatic changes can affect the
trade. The consumer reactions to particular offering can also be an issue. This most
often affects agri-businesses.

Some environmental factors you can study are:

 Geographical location
 The climate and weather
 Waste disposal laws
 Energy consumption regulation
 People’s attitude towards the environment

There are many external factors other than the ones mentioned above. None of these
factors are independent. They rely on each other.
If you are wondering how you can conduct environmental analysis, here are 5 simple
steps you could follow:
 1. Understand all the environmental factors before moving to the next step.
2. Collect all the relevant information.
3. Identify the opportunities for your organization.
4. Recognize the threats your company faces.
5. The final step is to take action.

It is true that industry factors have an impact on the company performance.

Environmental analysis is essential to determine what role certain factors play in your
business. PEST or PESTLE analysis allows businesses to take a look at the external
factors. Many organizations use these tools to project the growth of their company
effectively.

The analyses provide a good look at factors like revenue, profitability, and corporate
success. If you want to take the right decisions for your firm, employ environmental
analysis. The analysis you should conduct depends on the nature of your company.

business environment

The combination of internal and external factors that influence a company's operating situation.
The business environment can include factors such as: clients and suppliers; its competition and
owners; improvements in technology; laws and government activities; and market, social and
economic trends.

5 Major Components of
Business Environment |
Business Studies
Dimensions of business environment mean all the factors, forces and
institutions which have direct or indirect influence over the business
transactions.

General Environment is the most important dimension of business

environment as businessman cannot influence or change the components
of general environment rather he has to change his plans and policies
according to the changes taking place in general environment.
(i) Economical Environment:
Economic Environment consists of Gross Domestic Product, Income level
at national level and per capita level, Profit earning rate, Productivity and
Employment rate, Industrial, monetary and fiscal policy of the government
etc.

The economic environment factors have immediate and direct impact on

the businessman so businessmen must scan the economic environment
and take timely actions to deal with these environments. Economic
environment may put constraints and may offer opportunities to the
businessman. After the new economic policy of 1991, lots of opportunities
are offered to businessmen. The common factors which have influenced
the Indian economic environment are

(a) Banking sector reform has led to many attractive schemes of deposits
and lending money. The Banks are offering loans at very nominal rate of
interest and with minimum formalities to be completed.

(b) Recent changes in economic and fiscal policy of country have

encouraged NRIs and foreign investors to invest in Indian companies.

(c) Lots of economic reforms are taking place in leasing and financing
institutions. The private sector is allowed to enter in financial institutions; as
a result customers are gaining.

Some Aspects of Economic Environment:

1. Role of Private and Public sector

2. Rate of growth of GDP, GNP, and Per Capita Income

3. Rate of Saving and Investment

4. Balance of Trade

5. Balance of Payment
6. Transport and Communication System

7. Money Supply in the Economy

8. International Debt

(ii) Social Environment:

Social Environment consists of the customs and traditions of the society in
which business is existing. It includes the standard of living, taste,
preferences and education level of the people living in the society where
business exists.

The businessman cannot overlook the components of social environment

as these components may not have immediate impact on the business but
in the long run the social environment has great impact on the business.

For example, when the Pepsi Cola Company used the slogan of “Come
Alive” in their advertisement then the people of a particular region
misinterpreted the word “Come Alive” as they assumed it means Coming
out of Graves. So, they condemned the use of the product and there was
no demand of Pepsi Cola in that region. So, the company had to change its
advertisement slogan as it cannot survive in market by ignoring the
sentiments of the people.

In India also, there are many Social reforms taking place and the common
factors of Indian Social Environment are:

(a) Demand for reservation in jobs for minority and women

(b) Demand for equal status of women by paying equal wages for male and
female workers
(c) Demand for automatic machines and luxury items in middle class
families

(d) The social movements to improve the education level of girl child.

(e) Health and Fitness trend has become popular.

Some Aspects of Social Environment:

1. Quality of life

2. Importance or place of women in workforce

3. Birth and Death rates

4. Attitude of customers towards innovation, life style etc.

5. Education and literacy rates

6. Consumption habits

7. Population

8. Tradition, customs and habits of people

(iii) Political Environment:

Political environment constitutes all the factors related to government
affairs such as type of government in power, attitude of government
towards different groups of societies, policy changes implemented by
different governments etc. The political environment has immediate and
great impact on the business transactions so businessman must scan this
environment very carefully.

The businessman has to make changes in his organisation according to the

changing factor of political environment. For example, in 1977 when Janata
Government came in power they made the policy of sending back all the
foreign companies. As a result the Coca Cola Company had to close its
business and leave the country.

The common factors and forces which have influenced the Indian political
environment are:

(a) The government in Hyderabad is taking keen interest in boosting I.T.

industry, as a result the state is more commonly known as Cyber bad
instead of Hyderabad.

(b) After the economic policy of liberalisation and globalisation, the foreign
companies got easy entry in India. As a result the Coca Cola which was
sent back in 1977 came back to India. Along with Coca Cola, Pepsi Cola
and many other foreign companies are establishing their business in India.

Some Aspects of Political Environment:

1. Present political system

2. Constitution of the country

3. Profile of political leaders

4. Government intervention in business

5. Foreign policy of government

6. Values and ideology of political parties

(iv) Legal Environment:

Legal environment constitutes the laws and various legislations passed in
the parliament. The businessman cannot overlook the legislations because
he has to perform his business transactions within the framework of legal
environment.

The common legislation passed which has affected the business

transactions are Trade Mark Act, Essential Commodity Act, Weights and
Measures Act, etc. Most of the time legal environments put constraints on
the businessman but sometimes they provide opportunities also. The
common instances of Indian legal environment which have influenced
business transactions recently are:

1. Deregulation of capital market has made it easy for businessman to

collect capital from primary market.

2. Removal of control from the foreign exchange and liberalisation in

investment is encouraging foreign investors and NRIs to invest in Indian
capital market.

3. Advertisement of alcoholic product is prohibited.

4. Compulsory to give statutory warning in Tobacco production.

5. Delicencing policy of industries.

Some Aspects of Legal Environment:

1. Various laws and legislative acts.

2. Legal policies related to licensing.

3. Legal policies related to foreign trade.

4. Statutory warnings essential to be printed on label.

5. Foreign Exchange Regulation and Management Act.

6. Laws to keep a check on Advertisements.

(v) Technological Environment:

Technological environment refers to changes taking place in the method of
production, use of new equipment and machineries to improve, the quality
of product. The businessman must closely monitor the technological
changes taking place in his industry because he will have to implement
these changes to remain in the competitive market

Technological changes always bring quality improvement and more

benefits for customers. The recent technological changes of Indian market
are:

1. Digital watches have killed the prospects and the business of traditional
watches.

2. Color T.V. technology has closed the business of black and white T.V.

3. Artificial fabric has taken the market of traditional cotton and silk fabrics.

4. Photo copier and Xerox machines have led to the closure of carbon
paper business.

5. Shift in Demand from vacuum tubes to transistors.

6. Shift from steam locomotives its diesel and electric engine.

7. From typewriter to World Processors.

Some Aspects of Technological Environment:

1. Various Innovations and Inventions.

2. Scientific Improvements.
3. Developments in IT sector

4. Import and Export of Technology.

5. Technological Advances in Computers.

What Is Environmental Scanning?

Environmental scanning is a review of external sources to discover factors that impact a business. The
main goal is to identify and consult sources outside the business. Although these sources are uncontrollable
from the business' perspective, it is important to consider them in decision-making processes.
One popular method of environmental scanning is SWOT analysis. Each letter stands for one area to
review: Strengths, Weaknesses, Opportunities, and Threats. The strengths and opportunities are factors
within the company, and the weaknesses and threats come from sources outside the company.
When companies are putting resources and time toward an environmental scan, they want the results to be
as comprehensive as possible. Most scans include a thorough look at competition, economics, technology,
legal issues, and social/demographic factors. Let's dive a little deeper into each of these areas using The
Pool Stop, an imaginary small business that sells and services swimming pools.

Strategy Analysis And Choice

The first step in evaluating and choosing a strategy is to review the results of the strategic
situation assessment consisting of an analysis of the general, industry, and internal
environments, in terms of factors critical to the success of the business.

George Steiner stated that three types of data are required to perform a situation audit:
identifying threats, strengths, and weaknesses.

1. Past performance of the firm.

2. Data about the current situation, including:
o Analysis of customers and markets.
o Resources of the company.
o Competition.
o Environmental setting.
o Other performance measures or areas of interest.
3. Forecasts of the future.

Critical success factors (CSFs) for any business are the limited number of areas in which
satisfactory results ensure successful competitive performance. Studies have shown that
three to six factors are usually critical to success in most industries.

In general, at least five criteria tend to determine which factors are critical to the business
and their relative importance:

1. Impact on performance measures, such as market share, profits, cash flow, and the
like.
2. Relationship to strategic thrusts, such as differentiation, costs, segmentation,
preemptive, turnaround, renewal, and the like.
3. Relationship to life-cycle stage, that is, introduction, growth, maturity, and aging and
decline.
4. Relates to a major activity of the business, such as marketing at IBM.
5. Involves large amounts of money relative to other activities of the firm.
There are several techniques for identifying CSFs for a business, its industry, and its general
environment. It is important to evaluate the firm, but it is equally important evaluate the
capabilities of competitors.

The development and evaluation of alternatives should be two separate and distinct steps.
Three basic questions must be asked during strategy evaluation:

1. How effective has the existing strategy been?

2. How effective will that strategy be in the future?
3. What will be the effectiveness of selected alternative strategies (or changes in the
existing strategy) in the future?

The form of strategic analysis and choice varies considerably according to the stage of
development of the firm, and the focus differs at the different firm levels.

The evaluation should take place at the corporate, business, and functional levels, with close
scrutiny of policies and plans at each of these levels.

For multi-industry and multiproduct/product firm, strategic analysis begins at the corporate
level.

Corporate strategy provides guidance for resource allocations among businesses and also
indicates standards for adding new businesses or deleting existing ones.

Alternative business-level strategies must be examined within the context of each business
unit in multi-industry firms.

Functional strategies must be identified to initiate and control daily business activities in a
manner consistent with business strategy.

SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic
position of the business and its environment. Its key purpose is to identify the strategies that
will create a firm specific business model that will best align an organization’s resources and
capabilities to the requirements of the environment in which the firm operates.

In other words, it is the foundation for evaluating the internal potential and limitations and the
probable/likely opportunities and threats from the external environment. It views all positive
and negative factors inside and outside the firm that affect the success. A consistent study of
the environment in which the firm operates helps in forecasting/predicting the changing
trends and also helps in including them in the decision-making process of the organization.

An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given
below-

1. Strengths - Strengths are the qualities that enable us to accomplish the organization’s
mission. These are the basis on which continued success can be made and
continued/sustained.

Strengths can be either tangible or intangible. These are what you are well-versed in
or what you have expertise in, the traits and qualities your employees possess
(individually and as a team) and the distinct features that give your organization its
consistency.

Strengths are the beneficial aspects of the organization or the capabilities of an

organization, which includes human competencies, process capabilities, financial
 resources, products and services, customer goodwill and brand loyalty. Examples of
organizational strengths are huge financial resources, broad product line, no debt,
committed employees, etc.

2. Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our
mission and achieving our full potential. These weaknesses deteriorate influences on
the organizational success and growth. Weaknesses are the factors which do not meet
the standards we feel they should meet.

Weaknesses in an organization may be depreciating machinery, insufficient research

and development facilities, narrow product range, poor decision-making, etc.
Weaknesses are controllable. They must be minimized and eliminated. For instance -
to overcome obsolete machinery, new machinery can be purchased. Other examples
of organizational weaknesses are huge debts, high employee turnover, complex
decision making process, narrow product range, large wastage of raw materials, etc.

3. Opportunities - Opportunities are presented by the environment within which our

organization operates. These arise when an organization can take benefit of conditions
in its environment to plan and execute strategies that enable it to become more
profitable. Organizations can gain competitive advantage by making use of
opportunities.

Organization should be careful and recognize the opportunities and grasp them
whenever they arise. Selecting the targets that will best serve the clients while getting
desired results is a difficult task. Opportunities may arise from market, competition,
industry/government and technology. Increasing demand for telecommunications
accompanied by deregulation is a great opportunity for new firms to enter telecom
sector and compete with existing firms for revenue.

4. Threats - Threats arise when conditions in external environment jeopardize the

reliability and profitability of the organization’s business. They compound the
vulnerability when they relate to the weaknesses. Threats are uncontrollable. When a
threat comes, the stability and survival can be at stake. Examples of threats are -
unrest among employees; ever changing technology; increasing competition leading
to excess capacity, price wars and reducing industry profits; etc.

Core competency
A core competency is a concept in management theory. It can be defined as "a harmonized
combination of multiple resources and skills that distinguish a firm in the marketplace".[2]
Core competencies fulfill three criteria:[1]

1. Provides potential access to a wide variety of markets.

2. Should make a significant contribution to the perceived customer benefits of the end
product.
3. Difficult to imitate by competitors.

Managing Stakeholder Expectations

The process of managing stakeholders is an activity of communicating with stakeholders
and managing their expectations and concerns for the purpose of meeting the
stakeholder needs, addressing issues, resolving conflict situations, and achieving the
project goals. The process is generally based on holding communications and taking
change requests to gather feedback and make updates to project documentation.
An effective stakeholder management process is the guarantee that timely and relevant feedback
is provided and that the steering of the change effort is made according to the stakeholder
management strategy. The project manager takes responsibility for managing stakeholder
expectations, resolving conflicts and detecting and settling any issues arising during the project
course. In general, the process of managing stakeholders is comprised of the following key
elements:
 Managing stakeholder expectations: when expectations of the stakeholders are actively
managed, the project gets a higher likelihood for success. The project manager should
continuously negotiate and influence desires of the stakeholders to achieve strict conformity
of project goals and expectations and maintain the project management effort.
 Managing stakeholder perception: it is important to the project success to ensure that the
stakeholders are engaged with the project on a scheduled basis and they are aware of
current status of the project work. High-level stakeholder perception increases the likelihood
that the stakeholders provide the necessary support level and the project can be
implemented as expected.
 Recording stakeholder activity: the project manager is ultimately responsible for recording
and logging all the activities stakeholders undertake. Therefore, the project manager should
formally track all interactions with stakeholders and between them and then make records of
the results the project has achieved, in order to secure stakeholder acceptance and the
project communications plan adherence.
 Solving problems and resolving conflicts: The project manager in cooperation with the
conflict manager should address the stakeholders concerns and assess risks and threats to
prevent issues and conflicts. The project manager may generate solutions by referring to
change requests.
An understanding of the managing stakeholders process elements allows the project manager to
engage with the project stakeholder expectations and needs and to generate actions plans to be
used when conflicts are arisen and issues are appeared. The project manager can use the
following to analyze conflicts and issues and manage the stakeholders at both the individual level
and the group level:
 Issue logs. An issue log is an analyzing tool that lets document resolutions of the issues
detected. It is a document that has a strict structure comprising of categories that let place
each particular issue in the respective category (issue group). The project manager uses
issue logs to ensure the right understanding of the project by each stakeholder and to
maintain constructive working interactions between all the stakeholders, including the
project team members.
 Change Logs. A change log is a tool that lets document all changes occurred during the
course of a project. The project manager uses change logs to record the project changes
and their impact the project goals and deliverables. A change log may include records on
changes to risks, uncertainties, costs, budgets, and it should be communicated to the
project stakeholders.
The process of managing and engaging stakeholders may result in developing a change request
to the project deliverables. It may also cause changes to the stakeholder management strategy
and the stakeholder register. The managing stakeholders process allows reviewing and
modifying the stakeholder benefits identified at previous stages of the project life-cycle. Then the
communications management plan would be changed and appropriate remedial measures and
actions plans would be added.
1. Identifying project stakeholders
2. Planning communications and distributing information
3. Managing stakeholder expectations
4. Reporting communication performance

Scenario Planning
http://www.netmba.com/strategy/scenario/
Industry analysis—also known as Porter’s Five Forces Analysis—is a very useful tool for
business strategists. It is based on the observation that profit margins vary between
industries, which can be explained by the structure of an industry.

The Five Forces primary purpose is to determine the attractiveness of an industry.

However, the analysis also provides a starting point for formulating strategy and
understanding the competitive landscape in which a company operates.

Porter’s Five Forces Analysis

The framework for the Five Forces Analysis consists of these competitive forces:

 Industry rivalry (degree of competition among existing firms)—intense competition

leads to reduced profit potential for companies in the same industry
 Threat of substitutes (products or services)—availability of substitute products will
limit your ability to raise prices
 Bargaining power of buyers—powerful buyers have a significant impact on prices
 Bargaining power of suppliers—powerful suppliers can demand premium prices and
limit your profit
 Barriers to entry (threat of new entrants)—act as a deterrent against new competitors

Industry analysis and competition

Competition within an industry is grounded in its underlying economic structure. It goes
beyond the behaviour of current competitors.
The state of competition in an industry depends upon five basic competitive forces. The
collective strength of these forces determines profit potential in the industry. Profit
potential is measured in terms of long-term return on invested capital. Different industries
have different profit potential—just as the collective strength of the five forces differs
between industries.

Industry analysis as a tool to develop competitive strategy

Industry analysis enables a company to develop a competitive strategy that best defends
against the competitive forces or influences them in its favour. The key to developing a
competitive strategy is to understand the sources of the competitive forces. By developing
an understanding of these competitive forces, the company can:

 Highlight the company’s critical strengths and weaknesses (SWOT analysis)

 Animate its position in the industry
 Clarify areas where strategic changes will result in the greatest payoffs
 Emphasize areas where industry trends indicate the greatest significance as either
opportunities or threats
Industry analysis and structure
The five competitive forces reveal that competition extends beyond current competitors.
Customers, suppliers, substitutes and potential entrants—collectively referred to as an
extended rivalry—are competitors to companies within an industry.

The five competitive forces jointly determine the strength of industry competition and
profitability. The strongest force (or forces) rules and should be the focal point of any
industry analysis and resulting competitive strategy.

Short-term factors that affect competition and profitability should be distinguished from
the competitive forces that form the underlying structure of an industry. Although these
short-term factors may have some tactical significance, analysis should focus on the
industry’s underlying characteristics.

Steps in Strategy Formulation

Process
Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of
organizational goals and objectives and thereby achieving the organizational vision. The process of strategy
formulation basically involves six main steps. Though these steps do not follow a rigid chronological order,
however they are very rational and can be easily followed in this order.

1. Setting Organizations’ objectives - The key component of any strategy statement is to set the long-
term objectives of the organization. It is known that strategy is generally a medium for realization of
organizational objectives. Objectives stress the state of being there whereas Strategy stresses upon the
process of reaching there. Strategy includes both the fixation of objectives as well the medium to be
used to realize those objectives. Thus, strategy is a wider term which believes in the manner of
deployment of resources so as to achieve the objectives.

While fixing the organizational objectives, it is essential that the factors which influence the selection
of objectives must be analyzed before the selection of objectives. Once the objectives and the factors
influencing strategic decisions have been determined, it is easy to take strategic decisions.

2. Evaluating the Organizational Environment - The next step is to evaluate the general economic and
industrial environment in which the organization operates. This includes a review of the organizations
competitive position. It is essential to conduct a qualitative and quantitative review of an organizations
existing product line. The purpose of such a review is to make sure that the factors important for
competitive success in the market can be discovered so that the management can identify their own
strengths and weaknesses as well as their competitors’ strengths and weaknesses.

After identifying its strengths and weaknesses, an organization must keep a track of competitors’
moves and actions so as to discover probable opportunities of threats to its market or supply sources.

3. Setting Quantitative Targets - In this step, an organization must practically fix the quantitative target
values for some of the organizational objectives. The idea behind this is to compare with long term
customers, so as to evaluate the contribution that might be made by various product zones or operating
departments.
4. Aiming in context with the divisional plans - In this step, the contributions made by each department
or division or product category within the organization is identified and accordingly strategic planning
is done for each sub-unit. This requires a careful analysis of macroeconomic trends.
5. Performance Analysis - Performance analysis includes discovering and analyzing the gap between the
planned or desired performance. A critical evaluation of the organizations past performance, present
 condition and the desired future conditions must be done by the organization. This critical evaluation
identifies the degree of gap that persists between the actual reality and the long-term aspirations of the
organization. An attempt is made by the organization to estimate its probable future condition if the
current trends persist.
6. Choice of Strategy - This is the ultimate step in Strategy Formulation. The best course of action is
actually chosen after considering organizational goals, organizational strengths, potential and
limitations as well as the external opportunities.