External Environment Analysis

Definition
Environment of an Organisation is Aggregate of all conditions, events and influences that surround and effect it. Internal Environment External Environment

Characteristics
Environment is Complex Environment is Dynamic Environment is Multi-Faceted Environment has a far Reaching Impact

Types of Environment
Internal Environment refers to all factors within an Organisation that impact strengths or cause weaknesses of a Strategic nature. Strengths : Good reputation among customers, resources, assets, people, experience, knowledge. Weaknesses : Gaps in capabilities, Financial Constraints, Low morale, Overdependence on a particular strength.

Cont
External Environment includes all factors outside the Organisation that provide opportunities or pose threats to the Organisation. Opportunities : Economic boom, favourable
demographic shifts, arrival of new technology, lessening of regulations, favourable global influences. Threats : Economic downturn, Demographic Shifts, new competitors, unexpected shifts in consumer tastes, new regulations, unfavourable political scenario.

External Environment Classification.

Classification of General Environment into
Sectors helps an Organisation to cope up with complexity, comprehend the different influences operating and relating the environmental changes to its strategic management process. We can classify them based on size of Organisation, level and scope of activities, geographical spread of markets, nature of product, type of technology used etc.

General vs Relevant Environment

Factors like International, National, Local Economy plus Social changes, demographic variables, Political systems, Technology, Energy sources, Raw materials and all other wider perception of the Environment could be designated as General Environment. However a firm wants to be more specific about the Relevant Environment (may be just a part of General Environment) that is of high strategic relevance to the Organisation.

Environmental Sectors : Classification.

Economic. International. Market. Political. Regulatory. Socio-Cultural. Supplier. Technological.

Economic Environment
Consists of Macro-level factors related to means of Production and Distribution of wealth that have an impact on business of Organisation.
Economic stage of the Country. Economic Structure adopted (Capitalist, Socialist, Mixed). Economic Policies (Industrial, Monetary, Fiscal) Economic Planning (5 year plans, budgets) Economic Indices (Per Capita Income, GDP, Growth of GDP, Disposable Personal Income, Imports, Exports) Infrastructural factors (Financial Institutions, Banks, Transport and communication facilities)

 International Environment consists of all those factors that operate at transnational, cross cultural and across-the-border level, having an impact on business of an Organisation.
Globalisation, its process, content and direction. Global Economic forces, Organisations, Blocks. Global trade and commerce, financial system. Geo political situation, alliances and strategic interest of nations. Global demographic patterns and shifts. Global Human Resource. Global Information system, communication networks. Global Technology, Quality Standards and Legal Systems. Global markets and Competitiveness.

International Environment.

Market Environment
Consists of Factors related to Groups and other Organisations that Compete with and have an impact on Organisations Markets and Business.
Customer or Client factors like needs, preferences, perceptions,
attitudes, values, bargaining power and buying behaviour.

1. 2. 3.

Product factors such as demand, image, features, utility, function,

design, life cycle, price, promotion, distribution, availability of substitutes.

Marketing factors such as levels and quality of customer service,

distribution channels, logistics, costs, delivery systems, financial intermediaries.

4.

Competitor factors like different types of competitors, entry and exit of

major competitors, nature of competition, strategic position of major competitors.

Whole scenario might depend on Industry Structure (Monopoly, Pure Competition etc).

Political Environment
Consists of factors related to management of public affairs its impact on the Organisation. 1. Political system and its features like nature of
political system, ideological forces, political parties and centres of power.

2. Political stability. 3. Political processes like operation of the party

system, elections.

4. Political Philosophy, Governments role in business,

policies and interventions in Economic and Business Development.

Regulatory Environment
Consists of factors related to planning, promotion and regulation of Economic Activities by the Government that have an impact on business of an Organisation.
Constitutional framework, directive principles, fundamental rights and division of legislative powers between Central and State Governments. Policies related to Licensing, Monopolies, Foreign Investment and Financing of Industries. Policies related to Distribution, Pricing and their Control. Policies related to Imports and Exports. Policies related to Public Sector, SSI, Sick Industries, development of backward areas, environmental pollution and consumer protection.

1.

2. 3. 4. 5.

Socio Cultural Environment

Consists of factors related to human relationships within the society, development, forms and functions of such a relationship, shared behaviour of groups having an impact on an Organisation.
Demographic Characteristics (Population, Density, Age Composition, Migration, Income Distribution etc). Socio-Cultural Concerns like Environmental pollution, corruption, consumerism, use of mass media and role of business in society. Socio-Cultural attitudes and values like expectation of society from business, social customs, rituals and practices. Role and position of men, women, children and aged in family and society. Educational levels, awareness of rights, work ethics of members of society, attitude towards disadvantaged groups.

1. 2.

3.

4.
5.

Supplier Environment
Consists of factors related to cost, reliability and availability of factors of production that have an impact on business of Organisation.
Cost and availability of supply of raw material. Cost and availability of supply of finance. Cost and availability of energy used in production. Cost, availability and dependability of Human Resources. Cost, availability and existence of sources and means for supply of plants and machinery, spare parts and after sale services. Infrastructural support and ease of availability of other factors of production, bargaining power of suppliers and existence of substitutes.

1. 2. 3. 4. 5.

6.

Technological Environment
Consists of those factors related to knowledge applied and material/machines used in production of Goods and Services that have an impact on business of Organisation.
Sources of Technology like Company or External Sources, cost of technology acquisition, collaboration in transfer of Tech. Technological developments, stages of development, change and rate of change of Technology and R&D. Impact of Technology on human beings, environmental effects of Technology. Communication and Infrastructural Technology in Management.

Environment Scanning.
Process by which Organisations monitor their relevant Environment to identify opportunities and threats affecting
their business for purpose of Strategic Decisions.

Factors to be considered for Scanning : Events : Important and Specific occurences taking place in
Environment.

Trends : General tendencies or the courses of action along

which events take place.

Issues : Current concerns that arise in response to Events

and Trends.

Expectations : Demands made by interested groups

against their Issues.

Approaches to Environmental Scanning.

Systematic Approach. Ad Hoc Approach. Processed-form Approach.

Sources of Information.
Documentary or Secondary Sources
(Newspapers, Magazines, Journals).

Mass Media (Internet, TV, Radio). Internal Sources (Company records, internal
reports, databases, staff).

External Agencies (Suppliers, traders, Govt.

agencies, customers).

Formal Studies (Employees, Consultants, Market

Research Agencies).

Spying.

Example
Identify the focal issue, objectives of exercise, timeframe. Environmental analysis for issues and trends in current environment. Identify the key variables like demographics, resources. Identify critical uncertainties. Cluster variables into a manageable set. Ranking of variables as per relative importance. Selecting of scenario logics. Assessing of scenarios by critical examination of logic. Assessing of implications of scenarios for strategic planning.

Pitfalls in Environmental Scanning.

Miss out on Trends and Issues in General Environment that actually matter. Paralysis by Analysis. May lead to prevention of timely action. Scanning results may be used by Strategists to favour their own viewpoint or interests. Environmental scanning may get too far from realities of Organisation.

Appraising Environment.
Factors affecting Environmental Appraisal.

1. Strategists-related factors. 2. Organisation-related factors. 3. Environment-related factors.

Identifying Environmental Factors (Criticality is a factor). Structuring Environmental Appraisal.

SWOT Analysis

SWOT Analysis.
Carried out by Organisations to understand their Internal and External Environments. Strengths and Weakness are Internal Factors. Opportunities and Threats are External factors.
Best Strategy of an Organisation would be to capitalise on Opportunities through the use of Strengths and neutralises the Threats by minimising the impact of Weakness to achieve pre-determined Goals.

Application of SWOT.

1. 2. 3. 4.

Setting the Objectives of Organisation. Identifying its Strengths, Weaknesses, Opportunities and Threats.
How do we Maximise Strengths. How do we Minimise Weaknesses. How do we Capitalise on Opportunities. How do we Protect from Threats.

Recommend Strategies that shall optimise the above 4 points.

A Typical SWOT Matrix.