Basics of environmental scanning as part of the strategic planning process

Environmental scanning is a process that systematically surveys and interprets relevant data to
identify external opportunities and threats that could influence future decisions. It is closely
related to a S.W.O.T. analysis and should be used as part of the strategic planning process.

Components of external scanning that could be considered include:

● Trends: What trends are occurring in the marketplace or industry that could affect the
organization either positively or negatively?
● Competition: What is your competition doing that provides them an advantage? Where
can you exploit your competition's weaknesses?
● Technology: What developments in technology may impact your business in the future?
Are there new technologies that can make your organization more efficient?
● Customers: How is your customer base changing? What is impacting your ability to
provide top-notch customer service?
● Economy: What is happening in the economy that could affect future business?
● Labor supply: What is the labor market like in the geographies where you operate?
How can you ensure ready access to high-demand workers?
● Political/legislative arena: What impact will election outcomes have on your business?
Is there impending legislation that will affect your operations?

Each organization must identify what external factors are most impactful to make the
environmental scan a useful tool.

The next step is to conduct an internal scan of the organization. Review the company's
vision, mission and strategic plan. Examine the organization's strengths and weaknesses.
Consider where the company is now and where it plans to be in five or 10 years. Interview or
survey leaders of the company.

Once an organization has gathered information about the external world, its competitors and
itself, it should then develop strategies to respond to impacts when the need arises.

When conducting an environmental scan, a variety of methods should be used to collect data,
including reviewing publications, conducting focus groups, interviewing leaders inside and
outside the organization, and administering surveys.
Environmental scanning is an important component of strategic planning as it provides
information on factors that will affect the organization in the future. The information gathered will
allow leadership to proactively respond to external impacts.

The Local and International Business Environment of the Firm

Cultural intelligence is an individual’s ability to favorably receive and adjust to an unfamiliar

way of doing things. This will enable them to develop their ability to accept and adapt to different
cultures, both local and international, that may affect the organization to which they belong.
Monochronic cultures refer to cultures wherein people tend to do one thing at a time; also, these
cultures emphasize punctuality and sticking to set rules. Polychronic cultures, on the other
hand, are more flexible as regards time; accomplishing many different things at once is also
common for these cultures. It may be very frustrating for one who is influenced by a
monochronic culture to be dealing with one who is influenced by a polychronic culture if he or
she does not possess cultural intelligence.

Geert Hofstede, also cited by Schermerhorn (2008), showed how selected countries ranked on
the five cultural dimensions he studied:

Power Distance — the degree to which a society accepts or rejects the unequal distribution of
power among people in organizations and the institutions of society.

For example: India and the Philippines have high power distance, while the US and Australia
have low power distance. The use of the terms “sir” and “madam” to refer to the boss/superior
by subordinate employees in the Philippines shows respect for authority figures, or high power
distance. In the US, subordinates just use the name or nickname of the boss when addressing
him or her, indicating low power distance.

Uncertainty Avoidance – the degree to which society is uncomfortable with risk, change, and
situational uncertainty.

Managers in the US are risk-takers. Introducing new products in the market is easier for them to
do as compared with those from Japan and France.
Individualism-Collectivism – the degree to which a society emphasizes individual
accomplishments versus collective accomplishments.

Individualistic cultures like those of the US and Australia are characterized as “I” and “me”
cultures where employees prefer to work alone without help from others. Mexico, Thailand, and
the Philippines exhibit collectivism or preference for group or teamwork.

Masculinity-Femininity – the degree to which a society values assertiveness and feelings of

material success versus concern for relationships.

The Japanese and Mexicans do not hesitate to push or express what they want, unmindful of
hurting others’ feelings, thus showing masculinity. Filipinos, Thais, and Swedes would rather
keep quiet and accept defeat if what they want is not acceptable to others; they, therefore,
exhibit femininity.

Time Orientation – the degree to which a society emphasizes short-term thinking versus
greater concern for the future or long-term thinking.

The Americans, who are risk-takers, prefer short-term thinking. On the other hand, Filipinos and
the Japanese, who are not risk-takers, are long-term thinkers.

The local culture of a particular country also influences the management practices of firms. An
example is the mañana habit which is part of local Filipino culture and practiced by some
Filipino workers. It is counterproductive since it encourages the postponement of performing
tasks that can be done immediately to another day. Managing and disciplining workers who
practice this habit would be easier for managers if they are able to identify the workers who
adhere to such negative work habits and prevent them from doing it. This, however, is easier
said than done because it is difficult to explain a country’s unique cultural characteristics.

Managing in a Worldwide Environment: Cultural, Politico Legal, and Economic

Environments

The call for businesses to go global is hard to resist as this is the trend prevailing in the 21″
century. The economic and social benefits that come with globalization are said to be among the
positive outcomes. Globalization advocates, however, fail to realize the very serious challenges
faced by managers in adjusting to the cultural differences among different countries where they
intend to do business. The cultures of different countries are rooted in their history, religion,
traditions, beliefs, and deep-seated values, and because of these, managing globally can be
very complicated. Besides the cultural environment, the politico-legal and economic
environments must also be considered. The politico-legal environment refers to the laws and
political climate of different countries. Some countries have stable laws and good political
climate while others have the oppo-site—unstable laws and risky political climate. Awareness of
the economic issues of countries where organizations intend to establish business is also very
important. For instance, do they have a free market or a planned economy? Answering this
question is the first step because the country’s economic system has the potential to influence
the organization’s decision-making. Other economic matters that must be considered are the
inflation rates, the gross national product/gross domestic product, the currency exchange rates,
taxation system, and others.

4 Phases of Business Cycles

The economic cycle, also known as a business cycle, refers to fluctuations of the economy
between periods of expansion (growth) and contraction (recession). Factors such as gross
domestic product (GDP), interest rates, total employment, and consumer spending can help to
determine the current stage of the economic cycle.

Understanding the economic cycle can help investors and businesses determine when to make
investments and when to pull their money out, as it has a direct impact on stocks and bonds as
well as profits and corporate earnings.

Expansion

During expansion, the economy experiences relatively rapid growth, interest rates tend to be
low, and production increases. The economic indicators associated with growth—such as
employment and wages, corporate profits and output, aggregate demand, and the supply of
goods and services—tend to show sustained uptrends through the expansionary stage. The
flow of money through the economy remains healthy, the cost of money is cheap because
interest rates are low. However, the increase in the money supply may cause inflation to pick up
during the economic growth phase.

Peak

The economy reaches the peak of a cycle when growth hits its maximum rate. At this economic
high-water mark, prices and economic indicators may stabilize for a short period before
reversing to the downside. Peak growth typically creates some imbalances in the economy that
need to be corrected. As a result businesses may start to reevaluate their budgets and spending
when they believe that the economic cycle has reached its peak.

Contraction

A correction occurs through a period of contraction when growth slows, employment falls, and
prices stagnate. As demand begins to fall, businesses may not immediately adjust production
levels, leading to oversaturated markets with surplus supply and exacerbating the downward
movement in prices. During this stage, the economic indicators that were on an upward
trajectory during the expansion phase begin to deteriorate. If the contraction continues, the
recessionary environment may spiral into a depression.

Trough

The trough of the cycle is reached when the economy hits a low point, with supply and demand
scraping the bottom before growth eventually begins to recover. The low point in the cycle
represents a painful moment for the economy, with a widespread negative impact from
stagnating spending and income. However, like the peak, the low point of the cycle provides an
opportunity for individuals and businesses to reconfigure their finances in anticipation of a
recovery. Some analysts refer to the recovery as a fifth stage in the cycle.

Current Stage of the Economic Cycle

There was speculation throughout 2022 about whether the U.S. and other world economies
have entered recession territory. The attempts to pinpoint whether the economy has officially
entered a contraction stage have emerged amid a confluence of conditions that are unfavorable
for economic growth. Surging inflation, elevated commodity prices, and monetary tightening
from central banks have all raised questions about exactly where we stand in the business
cycle.6

According to Fidelity Investments, as of the fourth quarter of 2022, the U.S. economy has not
yet reached the contraction stage of the economic cycle. Instead, it remains in the late cycle of
the expansion stage, with the risk of recession increasing but not yet at extreme levels.
Meanwhile, the European economy appears to have entered a recession, while the Chinese
economy remains in a contraction despite the government's policies designed to jumpstart
growth.6

What Are the Stages of an Economic Cycle?

An economic cycle, which is also referred to as a business cycle, has four stages: expansion,
peak, contraction, and trough. The average economic cycle in the U.S. has lasted roughly five
and a half years since 1950, although these cycles can vary in length.5 Factors used to indicate
the stages in the economic cycle include gross domestic product, consumer spending, interest
rates, and inflation. The National Bureau of Economic Research (NBER) is a leading source for
indicating the length of a cycle.

What Happens in Each Phase of the Economic Cycle?

In the expansionary phase, the economy experiences growth over two or more consecutive
quarters. Interest rates are typically lower, employment rates rise, and consumer confidence
strengthens. The peak phase occurs when the economy reaches its maximum productive
output, signaling the end of the expansion. After that point, employment numbers and housing
starts begin to decline, leading to a contractionary phase. The lowest point on the business
cycle is a trough, which is characterized by higher unemployment, lower availability of credit,
and falling prices.

What Causes an Economic Cycle?

The causes of an economic cycle are widely debated among different economic schools of
thought. Monetarists, for example, link the economic cycle to the credit cycle. Here, interest
rates, which intimately affect the price of debt, influence consumer spending and economic
activity. On the other hand, a Keynesian approach suggests that the economic cycle is caused
by changes in volatility or investment demand, which in turn affect spending and employment.

The Bottom Line

The economic cycle, or business cycle, refers to the cyclical pattern experienced by the
economy. The economy remains in an expansion phase until it reaches its peak, reversing to
the downside and entering a contraction, before it reaches a trough and begins to expand once
again. Indicators such as GDP, interest rates, employment levels, and consumer spending can
help shed light on where the economic cycle currently stands. Although there are different
economic theories to explain what drives the economic cycle, the conditions associated with
each stage can have a significant impact on business and investment decisions.