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Subject COMMERCE

Paper No and Title 12: Strategic Management

Module No and Title 10: Environmental Scanning- Micro Environment

Module Tag COM_P12_M10

COMMERCE PAPER NO. 12: Strategic Management

MODULE NO.10: Environmental Scanning- Micro Environment
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TABLE OF CONTENTS
1. Learning Outcomes
2. Introduction
3. Concept of Environment
4. Components of Environment
5. Environmental Scanning
6. Techniques of Environmental Analysis
7. Limitations of Environmental Analysis
8. Summary

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1. Learning Outcomes
After studying this module, you would be able to

 Understand the meaning of environment.

 Learn the different components of environment.
 Understand the meaning of environmental scanning.
 Know the different techniques of environmental analysis.

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2. Introduction
A business is an outcome of its environment. The functioning and growth of the business is
influenced by the environment in several ways. The totality of the conditions, events and influences
that affects the functioning of the business is known as business environment. It is very essential
for an organization to understand and appreciate the environment in which it has to operate. There
are two categories in which environment forces can be classified: Internal Environment and
External Environment. Internal environment refers to the conditions and forces existing within an
organization that influences its management. It includes organization culture, mission and
objectives, top management structure, image and human and other resources. External environment
comprises of forces and factors outside an organization. Thus, an organization must have to adapt
to the changes occurring in the environment in order to succeed and survive in the long run.

3. Concept of Environment
The environment of business is the set of all the forces and factors which are external to and
uncontrollable in nature but affect the functioning and growth of the organizations. These consists
competitors, customers, suppliers, government and the political, legal, social, cultural and
technological factors etc. These factors influence an organization directly or indirectly. It is
important for an organization to recognize, respect, adapt, manage, monitor, influence and respond
to the environment in which it operates.

Features of Environment
There are many characteristics that are exhibited by the business environment. These are:
1. Dynamic- The organizational environment is dynamic and keeps on changing.
Organizations are compelled to shift gears and change directions due to changes in
government regulations, technology, competitive forces etc.
2. Unpredictable- The changes in environment are not predictable. It is not an easy task to
forecast the future changes that may occur in the environment. When an environment
changes very fast, uncertainty rises.
3. Relative- Environment is a relative concept. It differs from region to region and from
country to country. For example, the political conditions of India are different from those
of China. Or North Eastern States have more markets for umbrellas than in Rajathan.
4. Composite- The environment of an organization is the totality of all the forces and factors
that are external to and greatly influence their functioning and growth.
5. Challenging- All organizations are influenced by the legal, political, technological,
economic and social systems. Jointly, these components constitute the macro environment
of an organization. The changes in these forces presents innumerable opportunities and
threats to strategic managers.

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4. Components of Environment
There are two components of business environment:

1. Internal Environment
2. External Environment
Internal Environment includes those forces and factors that are controllable by an organization.
An organization can modify these factors to suit the changes in the environment.

External Environment includes those forces and factors that are not controllable by an
organization. An organization has no control over these factors. It includes- political and legal
factors, socio-cultural factors, economic and financial factors, technological factors, natural factors,
global factors etc.
There are two types of external environment:

1. Micro or Operating Environment

2. Macro or General Environment

Micro Environment

Micro environment consists those factors which are close to the business and exerts a direct
influence on the capacity to work of an organization. These includes customers. Competitors,
suppliers, market intermediaries and publics.

Macro Environment

Macro environment consists those factors that offer opportunities and pose threats to the
organizations. In order to remain competitive, organizations must envisage these trends and utilize
their resources carefully. It consists the following components:
1. Economic Environment- Economic environment comprises those economic factors
which have an impact on the operations of the business. Some of the main forces and
factors that operates in the economic environment are:
 The economic systems- capitalist, socialistic or mixed economy.
 The policies of an economy such as fiscal, industrial, monetary, export and import
policy.
 Economic infrastructure such as banks, transportation and communication
facilities etc.
 Economic indices- GNP, per capita income, rate of saving and investment, export
and import value, position of balance of payments, distribution of income, price
level etc.
 Product and factor markets.

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Strategists have the knowledge about the impact of economic environment on their business. They
will have to observe all the economic indicators for various reasons. A reduction in interest rate
decreases the cost of capital for the organizations. Reforms in industrial and fiscal policies have led
to the development of new businesses such as leasing companies, mutual funds, venture capital
funds etc.
2. Social and Cultural Environment- Social and cultural environment includes those factors
which have a considerable influence and are beyond an organization’s premises. These
includes:
 Demographic factors such as population, age distribution, literacy levels, income
distribution etc.
 Social institution and groups.
 Customers, values, attitudes, beliefs, rituals and lifestyles.
 Tastes and preferences of people.
Social and cultural environment is highly important for an organization as its crucial decisions
depend upon cultural atmosphere in which the business functions. For example, due to increase in
the number of working women, the demand for life style products increases. This also increase the
demand for convenience foods, ovens, day care centres etc. due to their absence from their homes.
The concept of nuclear families with single child have come up due to change in composition of
the family.

3. Political Environment- Political environment includes those factors that affects the
formulation and implementation of the strategies adopted by the organizations such as
political system, the policies of the government and attitude towards the business
community. The business and related activities are also influenced by the stability of the
government to a great extent. Political decisions have significant business and economic
consequences. For example, Bangalore and Hyderabad became the hub of information
technology firm due to its supportive political climate. Similarly, due to deregulation of
capital markets, Initial Public Offers (IPO) have increased. The entry of multinationals and
FDI has increased due to abolishing of control over foreign exchange. Also, the operations
of business organizations are adversely affected by the strikes, lockouts and labour disputes
etc.
4. Legal Environment- The legal environment plays a very significant role in business. It
provides the framework within which every organization has to work. The important
legislations that forms the legal business environment includes:
 Companies Act 2013
 The Factories Act, 1948
 Industrial Disputes Act, 1972
 Essential Commodities Act,2002
 Competition Act, 2002
Apart from these, the following also forms the legal business environment:
 Provisions of the Constitution- the functions of business organizations are also
influenced by the provisions of the constitution such as principles, duties and rights
of the citizen, legislative powers of the state and central governments.
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 Judicial Decisions- The activities of the business are also influenced by the various
judgments given by the courts related to trade and industry.
5. Technological Environment- Technological factors includes rate of technological
change, new processes and equipment, system of research and developments and
approaches to production of goods and services. The designing of the products is affected
by the changing technological environments of different countries. For example, Radio and
Cinema are adversely affected by the introduction of cable TV. The business prospects of
traditional watches is destroyed by digital watches.
6. Natural Environment- Natural environment consists geographical, ecological and
topographical factors that affects the operations of the business. These factors includes
climate conditions, location of the place, availability of the natural resources etc.. for
example, those places are suitable for sugar factories where sugarcane can be grown. It is
advantageous to set up manufacturing units near the sources of inputs. Also, the
responsibilities of the business sector is increased due to the policies of the government to
maintain ecological balance, conservation of natural resources etc.
7. International Environment- International environment is essential for those industries
that depends on export or imports. A slowdown in foreign market may create problems for
the exporters. Import liberalization may assist some industries but may be unfavourable for
other countries e.g. the market share of domestic business firms like Videocon is adversely
affected due to the coming of multinationals such as LG in the electronic industry. The
productivity of some domestic industrial units has increased due to import liberalization of
capital goods, technology, raw materials etc.
Also, due to certain developments such as hike in crude oil price, many industries such as
cement industry, fertilizer industry and automobile industry etc. has seriously affected.
The business is also affected by the various international political factors such as war,
political tension etc. for example, the trade between India and Pakistan has increased due
to improvements in relations between these two countries.

5. Environmental Scanning
Environmental scanning is a systematic process through which organizations monitor and
understand their external and internal environment so as to identify opportunities and threats that
affects their business. This helps the management to decide future direction of an organization. it
involves analyzing and evaluating the information about external and internal environment that can
be obtained from various different sources. Using environmental scanning, an organization can
examine the impact of different trends, events, issues and expectation on the process of strategic
management.
Approaches to Environmental Scanning

There are three approaches which could be adopted for environmental analysis. These are:
1. Systematic Approach- In this approach, information is collected systematically for
analyzing the environment. Information about markets and customers, changes in
legislations and regulations, policy statements of the government related to organization
business and industry is collected regularly to monitor changes in the environment.
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Regularly updating such information is essential not only for strategic management but
also for the operational activities of the organizations.
2. Ad hoc Approach- In this approach, special surveys and studies are conducted by an
organization to comprehend trends in the environment from time to time. For example,
organizations conduct such studies when it has to launch new projects or to devise new
strategies. Unpredicted developments may also be scrutinized with respect to their
influence on the organization.
3. Processed Form Approach- In this approach, an organization uses different sources to
obtain information in a processed from. These sources are available both inside and outside
the organization. When an organization obtains information provided by the government
agencies and private institutions, it uses secondary data which is accessible in a processed
form.

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6. Techniques of Environmental Analysis

Companies use several techniques for analyzing and diagnosing the environment. These are:
SWOT Analysis: SWOT is acronym for Strengths, weaknesses, opportunities and threats. A
company can identifies its strengths and weaknesses by analyzing the internal environment (also
known as corporate appraisal) and opportunities and threats by analyzing the external environment.
An effective strategy is one that exploit the opportunities and offset the threats faced by an
organization.
 Strengths: A strength is an intrinsic capability of a firm which it can use to obtain
competitive advantage over its competitors.
 Weakness: A weakness is an intrinsic limitation or constraint of a firm which creates
competitive disadvantage for it.
 Opportunity: An opportunity is a beneficial conditions in the firm’s environment which
make it possible for the firm to strengthen its position.
 Threats: A threat is an adverse condition in the firm’s environment which may cause a
damage or risk to its position.
A brief list of strength, weakness, opportunities and threats are given below:

Strengths Opportunities
 Powerful brand image  Delicensing
 High quality manpower  Relaxations in import
 Economies of scale  FDI norms
 Research and development  Reforms in capital market
ability  Growing market
 Location facilities  Growing urban incomes and
 Genial industrial relations population
 Modern technology  Upgrading consumers
 Effective cost control

Weaknesses Threats
 Poor brand image  Low priced competition
 Low credit rating  Political instability
 Dispersed manufacturing  Recession
location  Liberalization of imports
 Poor quality of products  Consumerism
 Excess manpower
 Poor morale
 Weak research and development
skills

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Conducting the audit

An analyst must keep the following point in mind while doing a corporate audit to identify the
strengths and weaknesses of a firm:
 Verbal Information- Information can be collected from external and internal groups
through searching questions using structured questionnaires, depth interviews etc.
 Spying- The analyst can obtain information by contacting with suppliers, dealers,
customers, creditors etc.
 Company records- Records can be used to obtain information about past performance of
the company and other information such as employee turnover, dear relations etc. It is very
difficult to get such type of information through surveys and perusal observations.

Matching the Strengths and Weaknesses

In the next stage, the analyst tries to find a match between corporate strengths and environmental
opportunities for competitive advantage. For example, to fill the gap in existing product mix, a firm
can acquire a competing firm whose offerings can fill these gaps. When the products of the firm
enjoy good position in the local market and there is strong chance that it can enjoy good reputation
in export market as well, then the firm can go for strategic alliance with a reputed foreign firm.

ETOP
ETOP is the acronym for environmental threat and opportunity profile. It determines the relevant
environmental factors and their impact on the organization.
ETOP is generally constructed in the manner given below:

List Environmental Factors

A list is prepared for the different elements of the relevant environment. For example, economic
environment may be categorized into economic growth rate, national income, investment, saving,
reforms in capital market, industrial policy, monetary policy etc.

Evaluate Importance of Environmental Factors

In this stage, the significance of each factor of the environment is closely evaluated and indicated
in quantitative or qualitative factors.

 Assessing the impact- The impact of the relevant factor so analyzed can be positive or
negative.
 Combine to get a bigger picture- In this final stage, the significance and impact of each
factor is compared to create a concise overall picture.

Forecasting Techniques

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Forecasting is a method in which future events that can have a major impact on an organization are
estimated. This technique helps the managers in predicting the future elements of the organizational
environment so that they can make decisions today to deal with the tomorrow environment. There
are four techniques of forecasting given below:
 Time Series Analysis- In this technique, variables are predicted by using historical trends
such as growth of population, innovation in technology, changes in income etc.
 Judgemental Forecasting- This technique involves using customers, suppliers,
employees, trade association etc. to obtain qualitative information related to future trends.
For example, sales representative can forecast growth in sales in various categories of
products based on their interaction with the customers. In order to get the judgements,
survey instruments may be send to customers, suppliers etc.
 Delphi Technique- In this technique, experts from the suitable field of study are
questioned independently about the probability of occurrence of some event. After this,
expert’s responses are compiled and precis is sent to each expert. This process is repeated
until all the experts give their consent regarding a particular forecasted event.
 Multiple Scenario- It is very difficult to predict future trends because of various reasons
such as wrong assumptions, changing trends, unexpected things etc. To deal this, manager
should try to formulate several alternative descriptions of future trends and events.

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7. Limitations of Environmental Analysis

There are many limitations of environmental analysis which are given below:

1. Based on Assumptions- Forecasting is based on certain assumptions which may prove to

be wrong. Generally in forecasting it is assumed that events do not change randomly, which
may not good in all cases. Thus, forecasting become unreliable.
2. No Sufficient Guarantee- The forecasting techniques only predict the future trends and
does not give any guarantee that a particular trend will occur or not. Sometimes,
organizations have to face situations that they had not expected while environment
analysis.
3. Time Consuming and Expensive- This is very time consuming and expensive to collect,
analyze and interpret the data for forecasting.
4. Uncritical Faith- Sometimes, due to incorrect data, decisions on the basis of these analysis
may be dangerous for the business.

8. Summary
 The environment of business is the set of all the forces and factors which are external
to and uncontrollable in nature but affect the functioning and growth of the
organizations.
 The environment is dynamic, unpredictable, relative, composite and challenging.
 Internal Environment includes those forces and factors that are controllable by an
organization.
 External Environment includes those forces and factors that are not controllable by an
organization. An organization has no control over these factors.
 Micro environment consists those factors which are close to the business and exerts a
direct influence on the capacity to work of an organization.
 Macro environment consists those factors that offer opportunities and pose threats to
the organizations.
 The components of macro environment includes economic, social & cultural, political,
legal, technological, natural and international environment.
 Environmental scanning is a systematic process through which organizations monitor
and understand their external and internal environment so as to identify opportunities
and threats that affects their business.
 Systematic approach, Ad hoc approach and processed form approach are the three
approaches of environmental scanning.
 SWOT is acronym for Strengths, weaknesses, opportunities and threats.
 A company can identifies its strengths and weaknesses by analyzing the internal
environment (also known as corporate appraisal) and opportunities and threats by
analyzing the external environment.
 ETOP is the acronym for environmental threat and opportunity profile. It determines
the relevant environmental factors and their impact on the organization.

COMMERCE PAPER NO. 12: Strategic Management

MODULE NO.10: Environmental Scanning- Micro Environment