STAGES OF ENVIRONMENTAL ANALYSIS

The process of environmental analysis may be divided into the following four stages:!
1. Scanning the environment to detect warning signals.
2. Monitoring specific environmental trends.
3. Forecasting the direction of future environmental changes.
4. Assessing current and future environmental changes for their organisational implications.
(Sometimes, the term environmental scanning and monitoring is used very broadly to
encompass the environmental analysis.)

Scanning
Scanning is the process of analysing the environment for the identification of the factors
which impact on or have implications for the business. Such factors may include those which
have appeared suddenly or evolved over time. ldentification of emerging/ensuing trends is a
critical purpose of the environmental scanning. In this, "prospective mode scanning focuses on
identifying precursors or indicators of potential environmental changes and issues. Environmental
scanning is thus aimed at alerting the organisation to potentially significant external impingement
before it has fully formed or crystallised. Successful environmental scanning draws attention to
possible changes and events well before occurrence, allowing time for suitable strategic action."2
Monitoring
Monitoring entails perspective follow-up and a more in-depth analysis of the relevant
environmental trends identified at the scanning stage. The effort here is more focused and systematic
than in scanning. Scanning is essentially exploratory in nature and, therefore, it often involves a
very wide examination of the environment. As the relevant factors have already been identified,
monitoring lends itself for a focused and systematic approach. "The purpose of monitoring is to
assemble sufficient data to discern whether certain patterns are emerging." However, "they are
likely to be a complex of discrete trends. For example, an emergent lifestyle pattern may include
changes in entertainment, education, consumption, work habits and domicile-location preferences.
the initial stages of monitoring, the patterns are likely to be hazy because they are the outputs
of scanning: the analyst has only a vague notion of what to look for."
The outputs of monitoring are threefold: a specific description of environmental patterns
to be forecast; identification of trends for further monitoring and identification of patterns requiring
further scanning.

Forecasting
Anticipating the future is essential for identifying the future threats and opportunities and for
formulating strategic plans. "Forecasting is concerned with the development of plausible directions

Environmentol Analysis and Forecasting 63

of directions, scope, speed, and intensity of environmental change, to lay out the evolutionary
path of anticipatory change."s loconbe
The characteristics of the variables or their trends may undergo changes. Further, new
variables may emerge as critical or the relevance of certain variables may decline. It is, therefore,
necessary to monitor such changes. Sometimes, the changes may be very significant so as to call
for a reforecasting.

Assessment
The purpose of environmental analysis is to assess the impact of the environmental factors
on the organisation's business or their implications for the organisation. Assessment, thus, involves
drawing up implications/possible impacts. "In assessment, the frame of reference moves from
understanding the environment of the focus of scanning, monitoring and forecasting - to
identifying what that understanding of environment means for the organisation."6
 Environmental Analysis and Forecasting 65

There are many instances of industrial espionage also. This is used mostly to gather competitive
information.
The fourth approach to environmental analysis is formal forecasting. This is described in the
following section.

STEPS IN ENVIRONMENTAL FORECASTING

The important steps in environmental forecasting are the following.

ldentification of Relevant Environmental Variables
torecastn
The first most important step in environmental forecasting is identification of the environmental
variables critical to the firm. All environmental variables do not have the same relevance to all
the industries or firms. A variable that is relevant to one industry may not be relevant for another. project
earch
environmentai
Again, important developments in some market may not have any implications for some other
markets. For example, the high level of penetration of micrOwave ovens in some of the developed
countries like USA is a critical variable as far as food processing industry in that market is resaerecuting
concerned; but it is not relevant in markets where the microwave ovens have not penetrated - in
steps
if microwaveable packaging increases the cost of the product it could be a negative factor such
markets. Similarly, a factor relevant in one technological environment may not be relevant in a The
different environment. Diesel price is a critical factor for railways which use that energy source
but not for those which depend on electricity (assuming that there is no competition between
those depending on these two different energy sources).
Some demographic trends have implications for certain business. A falling birth rate is a
threat several businesses for example, for companies like Johnson & Johnson, which depends
heavily on the baby segment of the market). The increase in the longevity and the resultant
increase in the number of aged generates good demand for several goods and services.
To envision the future environment, it is essential to identify the critical environmental
variables and to predict their future trends. Omission of any critical variable will affect the
assessment of the future environment and strategies based on that premise. Similarly, inclusion
of variables which are not adequately relevant could have misleading effects.
Pearce and Robinson point out that the list of key variables that will have make or break
consequences for the firm can be kept to manageable size by limiting key variables in the
following ways."
1. Include all variables that would have a significant impact although their probability of
occurrence is low. Delete others with little impact and low probability.
2. Disregard major disasters, such as nuclear war.
3. Aggregate when possible into gross variables (e.g., a bank loan is based more on the
dependability of a company's cash flow than on the flow's component sources).
4. lIf the value of one variable is based on the value of the other, separate the dependent
variable for future planning. 1
Collection of Information
The key environmental variables having been determined, the next important step is the
collection of the needed information. This involves identification of the sources of information,
determination of the types of information to be collected, selection of methods of data collection
and collection of the information.
66 Business Environment
usefulness
the forecasting
he
on Selection of Forecasting Technique
lot
and a
dependability
The The choice of forecasting technique depends on such considerations as the nature of the
depend
f forecast decision, the amount and accuracy of available information, the accuracy required, the
used time available, the importance of the forecast, the cost, and the competence and interpersonal
forecasttechnigue
relationships of the managers and forecaster involved.12
the One issue often debated is the quantitative techniques versus qualitative techniques. The fact
of is that each has its own merits and limitations. Some people have a mistaken notion that quantitative
techniques are highly dependable and qualitative techniques are often too subjective that they
are not reliable. The dependability of the quantitative techniques is affected by the accuracy/
reliability of the data used. It is pointed out that the diference in the predictions using each type
of approach is often minimal. Additionally, subjective or judgement approaches may often be the
only practical method of forecasting political, legal, social, and technological trends in the
remote external environment. The same is true of several trends in the task environment, especially
customer and competitive considerations.13
Monitoring
The characteristics of the variables or their trends may undergo changes. Further, new
variables may emerge as critical or the relevance of certain variables may decline. It is, therefore,
necessary to monitor such changes. Sometimes the changes may be very significant so as to call
for a reforecasting.

TYPES OFFORECASTING
Forecasts of the important business environments, viz., economic environment, social
environment, political environment etc. would be useful in formulating plans and strategies.
Economic Forecast
forecasts
economic
torecasts The fact that economic environment is a very critical determinant of business prospects
underscores the importance of economic forecasts.
company Important economic factors often considered include general economic conditions, GDP
macroecond growth rate, per capita income, distribution of income, structural changes in GDP, investment
The
and andetc.
output trends in different sectors and subsectors/industries, price trends, trade and BoP trends
indstry
There are indeed a number of sources of short, medium and long-term forecasts. International
organisations like World Bank, IME, UNCTAD, UN, WTO etc. and regional organisations like
Asian Development Bank have periodic and occasional publications which provide, inter alia,
economic forecasts.
It becomes more useful when disaggregated details of the estimates/forecasts are available.
When reliable forecasts are not available from the secondary source, a firm has to make its
own forecasts.

Reliable forecasts give very useful picture of the future scenario helpful to planning and
strategy. For example, details of power development would indicate the scope of investment in
the power sector itself and the prospects of related industries like generators, transformers, cables,
switch gears, other electrical goods and materials used by power projects etc. Plans of rural
electrification will give some indication of the additional demand for pump sets and certain
categories of consumer durables and non-durables.
 Environmental Analysis and Forecasting 67

Short-term economic forecasts are very useful for demand and sales forecasting and marketing
strategy formulation.
Both quantitative methods such as econometric methods, and time series models and
qualitative techniques like judgement models can be used for economic forecasts.
Social Forecasts
There are a number of social factors which have profound impact on business. It is, therefore,
very essential to forecast the possible changes in the relevant social variables. Important factors
include population growth/decline, age structure of population, ethnic composition of population,
occupational pattern, rural-urban distribution of population, migration, factors related to family,
lifestyle, income levels, expenditure pattern, social attitudes etc.
As in the case of economic factors, there is a wealth of published and unpublished data of
forecasts of social trends available. International organisations like the UN and its organs, World
Bank etc., academic organisations and government organisations do considerable work in these
areas. For example, a considerable amount of data is available regarding future trends in birth significant
strategy.
business
and death rates and population size, age structure, ethnic composition etc. of different nations.
Certain aspects of this are dealt with in the chapters Societal Environment and Demographic
Envionment. Social
trends
have
Quantitative techniques like time series analysis and econometric methods and qualitative r
methods like Delphi method or a combination of both quantitative and qualitative techniques
may be used for social forecasts. One of the most popular methods is scenario building which
involves drawing up alternative future scenarios, based on different assumptions or predictions of
developments.
Political Forecasts
Political forecast has an important part in envisioning properly the future scenario of business.
There are even chances of a country undergoing a drastic shift in the political system (Example:
USSR and Eastern Europe in the late 1980s). Changes in the relative power of political parties,
changes in the internal power structure of political parties (including changes in leadership and
its implications), political alliances and political ideologies etc. may have implications for business.
Some political factors may be embedded in social factors. commercial
policy,
industrial
cover
Some political changes are sudden and unpredictable. There are, however, several changes also
which are reasonably predictable. For example, the sweeping political and economic changes in policy
the erstwhile USSR and Eastern Europe and the general liberalisation trend in many other countries forecasts
could be regarded as an indicator that liberalisation would set in India too. The liberalisation fiscal
ushered in 1991 indicated that there would be privatisation (which even at the end of 1990s has and
not assumed a serious intent and real earnest in India) and other liberalisation. The discussions Politicalpolcy
on decentralisation and government pronouncement on this enabled the prediction of administrative
decentralisation in several States in India. With the decentralisation, decision-making process in
the government has changed and this has important implications for business.
There are several factors which have international or global overtones. Sanctions, formal or
informal, which have serious consequences for business are not very rare. Increasing world
interdependence makes it imperative for firms of all sizes to consider the international political
implications of their strategies.
Companies, research organisations and consultants have developed a variety of approaches
to international forecasts of which political factors are an important component. Harner's Business
Environmental Risk Index, for instance, monitors a number of economic and political variables
68 Business Environment
many countries. The World Economic Forum brings out annually a Clobal Competitiveness
Report based on eight set of factors including government, openness and institutions (see the
chapter on Global Competitiveness for more details).
Technological Forecast
ndpossibier°°e
Innovation and other technological developments can drastically alter the business
environment. Technological forecasts, therefore, assumes great significance.
Technological forecast encompass not only technological innovations but also the pace and
extent of diffusion and penetration of technologies and their implications. For example, what will
echnoogo be the pace and extent of penetration of PCs and the internet and their implications for business?
How far can and will the existing and new technologies be applied in diverse areas and what
are their implications?
It may be noted that one of the eight components of the world competitiveness index used
in the World Competitiveness Report is technology which measures computer usage, the spread
of new technologies, the ability of the country to absorb new technologies and the level and
quality of Research and Development.
The Technology Information, Forecasting and Assessment Council (TIFAC established in
1988 has done considerable work to draw up a Technology Vision 2020 for India. It is among
the tasks of TIFAC to look ahead at the technologies emerging worldwide and pick those technology
trajectories which are relevant for India and should be promoted.
Brainstorming and Delphi methods are popular in technology forecasting.
SWOT Analysis
Every organisation is part of an industry. Almost all organisations face competition either directly or
indirectly. Thus, the industry and competition are vital considerations in making a strategic choice. The
industry provides the context in which an organisation operates while competitors vie for the same set of
customers by offering more or less identical products. It is quite obvious that any strategic choice made by

302 Strategic Management

an organisation cannot be made unless the industry and competition have been analysed. Apart from the
external forces that are present in industry and competitor analyses, it is useful to look inward and perform
a SWOT analysis.
SWOT is the acronym for strengths, weaknesses, opportunities, and threats. Evolved during the 1960s at the
Stanford Research Institute, SWOT analysis is a very popular strategic planning technique having applications
in many areas including management. Organisations perfomm SWOT analysis to understand their internal and
external environments. Through such an analysis, the strength and weaknesses existing within an organisation
can be matched with the opportunities and threats operating in the environment so that an effective strategy
can be formulated. An effective organisational strategy, therefore, is one that capitalises on the opportunities
through the use of strengths and neutralises the threats by minimising the impact of weaknesses to achieve
pre-determined objectives.
Asimple application of SWOT analysis technique involves these steps:
1. Setting the objectives of the organisation or its unit
2. Identifying strengths, weaknesses, opportunities, and threats
3. Asking four questions
(a) How do we maximise our strengths?
(b) How do we minimise our weaknesses?
(c) How do we capitalise on the opportunities in our external environment?
(d) How do we protect ourselves from threats in our external environment?
4. Recommending strategies that will optimise the answers from the four questions.
The SWOT analysis is usually done with the help of a template in the form a four-cell matrix, each cell
of the matrix representing the strengths, weaknesses, opportunities, and threats. The analysis for preparing
the SWOT matrix could be done by a group of managers in a workshop session. The session could use the
brainstorming technique for generating ideas about the SwOT factors. A typical SWOT analysis matrix for
a hypothetical organisation is shown in Exhibit 9.6.

Exhibit 9.6 ATypical SWOT Matrix

STRENGTHS WEAKNESSES
-Favourable location - Uncertain cash flow
-Excellent distribution network - Weak management information system
-ISO 9000 quality certification -Absence of strong USP for major product lines
-Established R&D Centre - Low worker commitment

-Good management reputation

OPPORTUNITIES THREATS
-Favourable location -Unfavourable political environment
-Low technology options available -Obstacles in licensing new business
-Possibility of niche target market -Uncertain competitors' intentions
-Availabitty of reliable business partners-Lack of sustainable financial backing

The SWOT analysis can be used to build a TOWS matrix as shown in Exhibit 9.7 to generate strategie
alternative based on combinations of strengths, weaknesses, opportunities, and threats.
 Strategic Analysis and Choice 303

Exhibit 9.7 Generating Strategic Alternatives Through TOWS Matrix

Internal factors
Strengths (S) Weakness (W)
External factors

So strategies that will utilise WO strategies that will

Opportunities (0) strength while capitalising on minimise weaknesses while
opportunities capitalising on opportunities

ST strategies that will utilise WT strategies that will

Threats () strengths while neutralising minimise weaknesses while
threats neutralising thrcats

The SWOT analysis has several benefits, among the major being:
" Simple to use
" Low cost
" Flexible and can be adapted to varying situations
" Leads to clarification of issues
" Development of goal-oriented alternatives
" Useful as a starting point for strategic analysis
The following could be the pitfalls of using SWOT analysis indiscriminately:
" Simplicity of use may turn to be simplistic by trivialising the reality that may be more complex than
represented in SWOT matrices
" May result in just compiling lists rather than think about what is really important for achieving objec
tives
" Usually reflect an evaluator's position and viewpoint that can be misinterpreted to justify a previously
decided course of action rather than used as a means to open new possibilities.
" May encourage organisations to take a lazy course of action of looking for strengths that match oppor
tunities rather than developing new strengths that could match the emerging opportunities
" There's some probability that strengths may be confused with opportunities or weaknesses with threats
The process of strategy formulation starts with, and critically depends on, the appraisal of the internal
and external environment of an organisation.
The environmental as well as organisational appraisal (Chapters 4 and 5) dealt with the opportunities,
threats, strengths, and weaknesses relevant for an organisation. The two profiles ETOP (Environmental
Threats and Opportunities Profile) and SAP (Strategic Advantages Profile) that we have prepared should
now be brought together and analysed so that feasible strategic alternatives can emerge.
304 Strategic Management

Exhibit 9.8 Consolidated SWOT Profile for a Bicycle Company

ETOP Sector impact SAP Impact factor
Economic

Market Finance
International Marketing
Political Operations
Regulatory Personnel

Social Informnation mnanagenent

Supplier General management
Technology
Up arrows indicate favourable impact; down arrows indicate unfavourable inmpact, while horizontal arrows indicate
a neutral impact.
Sources ETOP is based on Exhibit 4.12 while SAP is drawn from Exhibit 5.13.

Exhibit 9.8 consolidates the ETOP (Exhibit 4.12) and SAP (Exhibit 5, 13) which had been prepared for
a hypothetical sports cycle manufacturing company. SWOT analysis can be applied in order to generate
feasible strategic alternatives. Based on information contained in Exhibit 9.8, it can be said that expansion
strategies seem to be more likely. The socioeconomic factors are supportive while market opportunities
exist in both the domestic and international markets.Based on a fortuitous match between the technological
and supplier environment on the one hand, and operations-related internal factors on the other, the firm is
most likely to be a high quality producer. The company's inherent strength in operations and quality-related
matters can stand the firm in good stead in its local marketing and exports efforts. General management can
take proactive steps in order to sustain marketing efforts. Information systems seem to be under-utilised.
E-commerce opportunities could well be explored if the website is redesigned to be more interactive and
there are logistics system changes to back-up supply lines. Good personnel may prove to be of value in
various activities that the firm undertakes. Finance is the major problem area and cannot be neglected at any
cost. It is quite possible that major investments have been made in the recent past in the plant, equipment,
and facilities and the pay-off may be expected in the long run. In such a case, the financial problems can be
assumed to be of transient nature. Should this be true, the firm can hope to overcome its negative financial
features provided it adopts prudent financial policies in the near future. Expansion strategies, albeit through
a cautious approach, seem to offer a feasible approach to strategy formulation. Of course, expansion itself
could take place through various means. For instance, internal expansion could be possible if the firm is in a
position to garner additional financial resources. If this is difficult, then external expansion may be the way
out. Export markets offer an attractive option where currently Chinese products face a relative disadvantage
in terms of qualityperceptions. This company can leverage its internal strength in quality and make sustained
efforts at exploring new export markets besides the African markets it presently caters to. Depending on
whether other units are available for acquisition, the firm could contemplate a takeover. But this would again
require immediate resources. Expansion strategies could be preceded by a short period of stability also if the
financial position can improve in the meantime.
The analysis attempted in the previous paragraph can be continued till the strategists are able to shortlist
feasible strategic alternatives. Of course, the line of thought adopted by others may be different from that
followed by us. But it can be safely assumed that since the SWOT profiles are the same, different analysts are