Business Policy and Strategy

Module II
Environmental Appraisal
Environmental Appraisal is the process of identifying opportunities and threats facing an
organization.
Importance of environmental appraisal
An environmental Appraisal is an extremely important tool in understanding and
decision making in all situation of the business. Success of the firm depends upon the
precise decision making ability. Study of environmental analyses enables the firm to
select the best option for the success and growth of the firm.
An environmental Appraisal in plays an essential role in business management by
providing possible opportunities or threats outside the company in its external
environment. The purpose of an environmental analysis is to help to develop a plan by
keeping decision-makers within an organization. The changes can be include
exchanging of executive parties, increasing guidelines to decrease pollution,
technological developments, and fluctuating demographics. An environment analysis
helps the industries to improve the outline of their environment to find more
opportunities or threats.
Environmental appraisal means to analyze all the factors of business environments.
Types of Business Environment
1. Internal
2. External
Factors affecting environmental appraisal
1. Strategist related factors: Since strategist plays central role in the formulation of
strategies, their characteristics such as age, education, experience, motivation level,
cognitive styles, ability to withstand the time pressure and strain, etc. have an impact on
the extent to which are able to withstand are able to appraise their organizations
environment and how well they are able to do it.
2. Age of the organization: the age of the organization may also determine the types
of the information that can be sought by it. The organizational growth over the period of
time requires different type of interaction with its environment. Generally older is the age
of the organization with the more experienced managers, the narrower will be the focus
on the environment information because with the experience, managers may be able to
distinguish what is relevant or irrelevant for the organizational.
3. Size and power of the organizational: large organizational have to interact
regularly with the various environmental forces and its environmental search will have to
be more intensive. Because of great risk exposure and frequency of taking on new
ventures, or diversifying its activities, these organizations have to provide high weight
age to trends in economic and competitive environments. They also have to respond to
various laws, which apply particularly to large organizations. In our country various laws
as industries (Development and Regulation) act and MTRP act are applicable to large
organizational.
4. Geographic dimension of the organization: greater is the area of organization
operation, more will be its informational requirements because the environmental
factors may differ from place to place. For example, the information requirements to
multinationals, or an organization involved in the international business is much more
than that of local organizational.
5. Type of business: If the organization has defined its business narrowly, it will focus
on the narrow aspect on the environment, thus a highly diversified company may
require diverse types of the information.
6. Influence of business organization: the more power on organization has in relation
to the environmental forces; the lower will be its need for appraisal of such forces. For
example, organization such as BHEL or ONGC, need not analyze the competitive
environment.
7. Managerial caliber: organizations employing highly qualified executives show
greater concern for environmental scanning
PEST analysis is a strategic business tool used by organizations to discover, evaluate,
organize, and track macro-economic factors which can impact on their business now
and in the future. The framework examines opportunities and threats due to Political,
Economic, Social, and Technological forces.
The basic PEST analysis includes four factors:
 Political factors relate to how the government intervenes in the economy.
Specifically, political factors have areas including tax policy, labour law, environmental
law, trade restrictions, tariffs, and political stability. Political factors may also include
goods and services which the government aims to provide or be provided (merit goods)
and those that the government does not want to be provided (demerit goods or merit
bads). Furthermore, governments have a high impact on the health, education,
and infrastructure of a nation.
 Economic factors include economic growth, exchange rates, inflation rate,
and interest rates. These factors greatly affect how businesses operate and make
decisions. For example, interest rates affect a firm's cost of capital and therefore to what
extent a business grows and expands. Exchange rates can affect the costs of exporting
goods and the supply and price of imported goods in an economy.
 Social factors include the cultural aspects and health consciousness, population
growth rate, age distribution, career attitudes and emphasis on safety. High trends in
social factors affect the demand for a company's products and how that company
operates. For example, the ageing population may imply a smaller and less-willing
workforce (thus increasing the cost of labour). Furthermore, companies may change
various management strategies to adapt to social trends caused from this (such as
recruiting older workers).
 Technological factors include technological aspects
like R&D activity, automation, technology incentives and the rate of technological
change. These can determine barriers to entry, minimum efficient production level and
influence the outsourcing decisions. Furthermore, technological shifts would affect
costs, quality, and lead to innovation