ENVIRONMENTAL ANALYSIS

 Environmental analysis and diagnosis gives strategists time to anticipate opportunities and to plan
operational responses.

 It also helps them to develop an early warning system to prevent threats or develop strategies, which can
neutralize / turn threats to a firm’s advantage.

 Without analysis & diagnosis- that are integral to EA- time pressures of the managerial job can lead to
inadequately thought-out responses to environmental changes.

 Future being uncertain not all future events can be anticipated and appropriate responses evolved.

 Thus, this process leaves only a few not anticipated events and therefore only they have to be dealt with
under time pressure [following the principle of management by exception].

Sources of Information for Environmental Analysis

1. Gathering of verbal information.

2. Designing a MIS/ SIS to get relevant information from customers, suppliers, competitors, internal
managers, sales force, etc.

3. Spying or espionage [via employees, professional agents, etc.]

4. Services of futurists or formal forecasting.

5. Employing market research firms to conduct studies relating to competitors or customers.

6. Published information from CMIE, NCAER, RBI, GOI publications, etc.

Analysis reveals so many facts & figures as well as results. Diagnosis consists in deciding on which set of
information or data to believe and which to ignore. Which set of data is important and which are not.

Exhibit: 1.Taxonomy of The Firm’s Environment

 Mega Environment

Relevant Environment

Micro Environment

Internal Environment

Exhibit: 2. Constituents of Mega Environment

RP-ETS

Regulat Political Economi Technologi Social

ory c cal

Mega Environment
 Exhibit: 3. Constituents of Micro Environment

SIT-DC

Suppliers Marketing Market Market Competi

Intermediari Types Deman tion
es d

The Micro Environment

IR-IRM

Financial Regulatory Industrial Availabilit

Institutions Environment Relations y of Skilled
Climate Manpower
 Exhibit: 4: The Threat Matrix
Probability of Occurrence

Immediate Distant
Major

Major Threat Moderate Threat

Priority Issues Emerging Issues

(Set up Project team) (Surveillance)
Potential Impact
On the
Company

Moderate Threat Minor Threat

Minor Issues Trivial Issues

(Delegate decision authority) (Periodic planning)
Minor

P----------------------E
M---------------------T

Exhibit: 5: The Opportunity Matrix

Probability of Occurrence

Immediate Distant

Major

Very Attractive Trend Moderately Attractive Trend

Priority Issues Emerging Issues

(Set up Project team) (Surveillance)

Potential Impact
On the
Company

Moderately Attractive Trend Least Attractive Trend

Minor Issues Trivial Issues

Minor (Delegate decision authority) (Periodic planning)
Exhibit: 5: The Impact Matrix [the ETOP or Environmental Threat and
Opportunities profile]

Trends Probability of Occurrence* Impact on Strategies

S1 S2 S3 S4
T1

T2

T3

T4

T5

* Probability of occurrence should be marked as HIGH, MODERATE or LOW

Scale to be used from + 2 to – 2 as given below:

+ 2 = Extremely Favourable Impact

+1 = Moderately Favourable Impact

0 = No Impact

- 1 = Moderately Unfavourable Impact

- 2 = Extremely Unfavourable Impact

Result of the Taxonomy of the Environment

 The taxonomy of the environment will enable corporate planners / strategists to assess the number of
threats / opportunities it may encounter. The relevant environment is the most important.
  The threat/ opportunity matrices reveal the entire gamut of threats and opportunities a firm has to
face and prioritise the same. Some may have a greater impact on the firm and others lesser impact.

 The impact matrix determines the probable impact of each trend on each of the strategies the firm is
pursuing.

 The probability factor will be a function of either the actual information from a reliable source or the
opinion of experts.

 Thus it is an exhaustive, continuous monitoring exercise and will depend on the time available and
resources of the firm. Extent of competition and government policy towards the industry will also
impact it.

 The idea is to counter threats, which are likely to happen with appropriate action.

Diagnosis of the Environment

Will depend on:

1. The strategists’ experience, aspirations & perceptual mode [Risk-averse, speculative, reflective,
dogmatic or maverick].

2. Time pressures & stress of the strategists’ job.

• Gresham’s law of planning operates [i.e. present pressing duties drive out long-term
considerations]

• Significance of the decision [if the decision is expected to have a major impact on the
company, management will grant the same top priority]

3. Power plays. Vested interests, power blocks, etc play a role. [Vijay Mallaya’s interest in airlines resulted
in King Fisher Airways and subsequent take over of Air Deccan]

4. Nature of the environment. How demanding is the situation.

 Cable net work operators are facing competition from DTH companies. They do not have a satisfactory
response to this phenomenon.

Finally, environmental analysis should lead to an environmental threat and opportunities profile [ETOP],
which has to be juxtaposed against the strengths and weakness of the company.

Company analysis

• It involves a thorough analysis of all the functional areas of a firm.

• Two techniques are normally utilized for this analysis:

i) Ratio Analysis (profitability ratios, liquidity ratios, leverage ratios and activity ratios)

ii) Key factor rating i.e. in each functional area, for the important factors which influences the strategy
being implemented, pertinent questions have to be raised and answers sought.

Marketing key factors may be:

♣ Breadth of product line;

♣ Market share of each product line;

♣ Effective sales and service force;

♣ Distribution reach & cost; and

♣ Brand management

Operations key factors may be;

♣ Raw material cost and availability;

♣ Inventory control system;

♣ Cost & technological competencies relative to industry standards;

♣ Product quality; and

♣ R&D, patents, trademarks and similar legal protection

Finance key factors may be:

♣ Ability to raise long-term and short-term capital;

♣ Cost of capital (relative to competitors);

 ♣ Working capital management;

♣ Efficient accounting system for cost, budget and profit planning;

♣ Extent of bad debts; and

Human resources management key factors may be:

♣ Employee compensation and reward linked to performance;

♣ Employee turnover and morale;

♣ Talent management;

♣ Personnel policies vis-à-vis industry practices; and

♣ Sound performance appraisal system

This analysis should result in a strategic advantage profile [SAP], profiling the strengths and weaknesses of
the company.
Exhibit: 6: The SAP or Strategic Advantage Profile

Strength / Weakness factor Level of factor* Impact on Strategies

S1 S2 S3 S4

Strengths
1

Weaknesses
1

* Level of factor should be marked as HIGH, MODERATE or LOW

Scale to be used from + 2 to – 2 as given below:

+ 2 = Extremely Favourable Impact

+1 = Moderately Favourable Impact

0 = No Impact

- 1 = Moderately Unfavourable Impact

- 2 = Extremely Unfavourable Impact

ETOP – SAP – SWOT

 To be able to conduct a SWOT analysis there has to be a comparison between the SAP and the
ETOP of the company.

 Strengths of the firm must be incorporated in its strategy to exploit environmental opportunities.
[Amul and Toyota]

 Weaknesses can be converted into strengths if it is cost effective. [Asian Paint & Timex]

 It is a good idea to avoid threats if possible. If inevitable, appropriate action to neutralise the threats
should be initiated. [Lobbying with government, negotiating with trade unions or acquiring
competitor]

 Converting threats to opportunities. [Bajaj Auto in technological alliance with Kawasaki as well as
investing in R&D; Ajanta clocks]

 Some factors may be neither positive nor negative, especially if the competing firms in the industry
also are bereft of / possess those traits.

 If the proportion and probability of the threat happening is very great a strategic alternative may have
to be abandoned.
 Generally, SWOT analysis reveals the various alternatives / options available to an organization.
This leads to the question of strategic choice.