Environmental Analysis

Ms.N.Jasintha
UOJ
• Learning outcomes
• On successful completion of this section, you should be able to:
• Explain PESTEL framework
• Construct alternative scenarios in order to address possible
environmental changes.
• Describe issues priority matrix
• Components of the External Environmental Analysis
The frameworks of environment are organized
in the below figure
• The macro environment is the highest-level layer. The PESTEL framework
can be used to identify how future trends in the Political, Economic, Social,
Technological, Environmental (‘green’) and Legal environments might
impinge on organizations.
• Industry, or sector, forms the next layer with this broad general environment.
This is made up of organizations producing the same products or services.
The five forces framework is particularly useful in understanding the
attractiveness of particular industries or sectors and potential threats from
outside the present set of competitors.
• Competitors and markets are the most immediate layer surrounding
organisations.
• Within most industries or sectors there will be many different
organisations with different characteristics and competing on different
bases, some closer to a particular organisation, some more remote.
• The concept of strategic groups can help identify close and more
remote competitors.
 Purpose of environmental analysis
• The purposes of environmental analysis include identification of threats
and opportunities, assessment of competition, identification of strengths
and weaknesses, and meeting stakeholder needs.
• However, nowadays, the business environment has become more
volatile for a number of reasons, including: technological changes,
continuing weakness in the global economy, increasing globalisation of
many markets and the development of high-growth, emerging
economies such as the ‘BRIC’.
• What is the purpose of an environmental analysis?
• Environmental analyses help businesses identify potential influences that
may provide either an opportunity or threat for them. This helps them
prepare for changes in their environment. Some benefits of using an
environmental analysis include:
• Forecasting the future
• Identifying threats and allowing them to develop a strategy for response
• Helping achieve business objectives
• Forming effective strategies and marketing programs for a business
• Improving organizational performance
• External Environmental Analysis
• External environment analysis is a detailed appraisal of its
external environment that shows an organisation’s overall
position. It is important to examine what is happening in the
outside organisation that could impact on its future strategies.
 Environmental analysis process
• 1. Identify environmental factors
• To conduct an environmental analysis, start by selecting environmental
factors to evaluate. This depends on your type of industry.
• For instance, if you work for a healthcare facility, you may want to consider
legal factors, such as health and safety regulations. When selecting factors,
choose ones that have the potential to impact how you do business.
• 2. Gather information
• Once you decide which factors to evaluate, collect information related to
your selected environmental factors. Here you may observe your factors
and do some research. There are two main types of information to collect:
verbal and written information.
• Individuals obtain verbal information through hearing, such as listening to
a radio broadcast, whereas they obtain written information by reading
sources, such as a newspaper or magazine.
• Using the above example, this would involve researching online and in
medical magazines to see if there were any changes to health and safety
regulations that may impact your health facility.
• 3. Evaluate your competitors
• To determine if there are any threats from your competitors, you may want
to collect information about them. You can do this using a technique called
spying, where you collect information in a nontraditional way.
• Using the same scenario, you may spy on a nearby health facility to learn
about their recent activities, such as a new branch opening.
• 4. Forecast the impact
• Forecasting allows you to predict how certain environmental factors may
impact your business. This allows you to anticipate potential threats or
opportunities. When forecasting, there are a variety of methods to use, such
as brainstorming and surveying.
• Continuing with the same example, the health facility may forecast that the
new branch opening at their competitor's facility may take away some of
their patients.
• 5. Assess your strategies
• Finally, assess your current and potential strategies to determine how the
projected environmental changes may affect your organization. This helps
you resolve potential challenges that may have resulted from the factors.
• For instance, the health facility may want to create a new strategy for how
they plan to address the decrease in clients due to their competitor's new
branch.
• The PESTEL framework
• PESTEL analyses the general macro-environment, identifying key drivers
of change and hence sources of risk.
• The PESTEL framework categorizes environmental influences into six
main types:
• Political factors: The role of the state e.g. as an owner,
customer or supplier of businesses. Other political factors
include government policies, taxation changes, foreign trade
regulations, political risk in foreign markets, changes in trade
blocks. Figure below is a matrix that helps identify both the
relative importance of the state as direct economic actor and
exposure to other political influences.
• Economic factors: This includes business cycles, interest rates, personal
disposable income, exchange rates, unemployment rates, differential
growth rates around the world.
• Social factors: It mainly covers changing cultures and demographics.
Examples are the ageing population in Western societies, income
distribution, lifestyle changes, consumerism, changes in culture and
fashion.
• Technological factors: It mainly covers new discoveries and technology
developments. Examples include developments on the internet, nano-
technology or the rise of new composite materials
• Environmental/Ecological factors: This refers to ‘green’
environmental issues, such as pollution waste and climate change.
Examples are environmental protection regulations, energy
problems, global warming, waste disposal and re-cycling.
• Legal factors: It mainly covers legislative and regulatory
constraints or changes. Examples are IPR, competition law, health
and safety law, employment law, liberalization of trade law.
 Forecasting
• PESTEL factors will feed into these forecasts, for example in tracking
economic cycles or mapping future technologies. However, accurate
forecasting is notoriously difficult.
• After all, in strategy, organizations are frequently trying to surprise
their competitors. Consequently, forecasting takes three fundamental
approaches based on varying degrees of certainty: single-point, range
and multiple-futures forecasting.
• Single-point forecasting is where organizations have such confidence
about the future that they will provide just one forecast number.
• For instance, an organization might predict that the population in a
market will grow by 5 per cent in the next two years.
• Range forecasting is where organizations have less certainty,
suggesting a range of possible outcomes.
• These different outcomes may be expressed with different degrees of
probability, with a central projection identified as the most probable
(the darkest shaded area in Figure and then a range of more remote
outcomes given decreasing degrees of likelihood (the more lightly
shaded areas).
• Alternative futures forecasting typically involves even less certainty,
focusing on a set of possible yet distinct futures.
• Instead of a continuously graduated range of likelihoods, alternative
futures are discontinuous: they happen or they do not, with radically
different outcomes
 Building scenarios

• When the business environment has high levels of uncertainty

arising from either complexity or rapid change (or both), Scenario
analyses are carried out to allow for different possibilities.
• Thus scenarios offer plausible alternative views of how the
business environment might develop in the future. Scenarios
typically build on PESTEL analyses and key drivers for change, but
do not offer a single forecast of how the environment will change.
• The point is not to predict, but to encourage managers to be alert to a range
of possible futures.
• Effective scenario-building can help build strategies that are robust in the
face of environmental change.
• While there are many ways to carry out scenario analyses, the following
five basic steps are often followed:
• While there are many ways to carry out scenario analyses, the
following five basic steps are often followed:
• Defining scenario scope.
• Identifying the key drivers for change
• Developing scenario ‘stories’
• Identifying impacts of alternative scenarios on organizations
• Establishing early warning systems
• Defining scenario scope.
• Scope refers to the subject of the scenario analysis and the time span.
For example, scenario analyses can be carried out for a whole industry
globally, or for particular geographical regions and markets.
• While businesses typically produce scenarios for industries or
markets, governments often conduct scenario analyses for countries,
regions or sectors or for just three to five years ahead.
• Identifying the key drivers for change
• Here PESTEL analysis can be used to uncover issues likely to
have a major impact upon the future of the industry, region or
market.
• In the fashion industry, key drivers range from demographics to
technology.
• Developing scenario ‘stories’
• Having selected opposing key drivers for change, it is
necessary to knit together plausible stories that incorporate both
key drivers and other factors into a coherent whole.
• Identifying impacts of alternative scenarios on organizations
• ‘Techno-chic’ might have a very negative impact for many traditional
fashion labels and retailers who could not keep up with hi-tech
clothing and distribution.
• On the other hand, ‘Community couture’ could see the strengthening
of local craft producers. It is important for an organization to carry out
robustness checks in the face of each plausible scenario and to develop
contingency plans in case they happen.
• Establishing early warning systems: Once the various scenarios are
drawn up, organizations should identify indicators that might give
early warning about the final direction of environmental change,
and at the same time set up systems to monitor these.