Why is environmental analysis necessary

Environmental scanning provides a broader perspective to corporate planners in formulating plans and policies while reports on market research and economic forecasts are helpful in a limited way. On the basis of an enquiry into the relationship between environmental analysis and success of firms in U.S.A , it was observed that there was a high degree of correlation between the two variables. The archetype of successful firms were those in which the management devoted considerable time in environmental analysis and used suitable techniques for the purpose

Relevant environment
While each enterprise may perceive the relevant environment in the light of its own interest and set of circumstances which affect its functioning distinction may be made between three orders of environment indicators and hostilities with neighboring countries, etc. 1. Indicators which affect all enterprise at the national level: These indicators may be easy to identify but difficult to measure, e.g., attitude of political parties towards private enterprises as reflected in election manifestos , foreign economic relations, encounters, cold war and hostilities with neighboring countries. 2. Indicators relating to particular industry sectors, e.g, for garment industry in India-the import export policy of the Government, import restrictions in the United states and other developed countries, reservation of small scale industries for the small scale sector, and the like. These indicators may be relatively easier to measure through may not be so easy to identity.

3. Indicators relating to individual enterprises, e.g., for a company manufacturing agricultural pumpsets for irrigation the progress of rural electrification ; for a transport company-planned investment in the expansion of railway tracts and haulage capacity, road construction, costs of fuel and user needs for additional freight capacity.

Approaches to the environmental scanning process Different approaches have been suggested , which are briefly outlined below: 1. PEST analysis: Johnson and Scholes have suggested that it may be useful as a starting point to enquire what environmental influence have been important in the past and the extent to which there are changes occurring which may make any of these more or less significant in the future for the organization and its competitors.

This approach is referred to as PEST analysis indicating the importance of political, economic , social and technological influences on organizations, and providing clues to the questions: 1. What environmental factors are affecting the organization? 2. Which of those are the most important at the present time, and will be important in the next few years?

The possible factors identifiable in the respective categories are listed as illustrative of western countries

Political/legal : monopolies legislation ;environmental protection laws; taxation policy; foreign trade regulations; employment law; government stbility. Economic : business cycles;GNP trends; interest rates; money supply; inflation; unemployment ; disposable income; energy availability and cost. Socio cultural: population demographics ; income distribution; social mobility; life style changes; attitude to work and leisure; consumerism; levels of education. Technological: government spending on research; industry focus on technological effort; new discoveries/ developments; spend of technology transfer; rates of obsolescence.

Structural analysis of competitive environment A structural approach to examining the competitive environment of an organization has been suggested by Michael Porter. Porter identified five basic forces which, according to him, determine the intensity and state of competition in an industry, and the collective impact which determine the long run profit potential in the industry. The basic forces are 1. Degree of competitive rivalry among competitors. 2. Threat of entry posed by potential entrants. 3. Threat of actual or potential substitutes. 4. Bargaining power of suppliers. 5. Bargaining power of customers.

Information inputs
Information scanning requires information inputs which can be derived from different sources : 1. Verbal information from such sources as the audio visual media (radio and television); conversation among employees, managers , supervisors and subordinates, customers , distributors of the companys products (wholesalers, dealers, retailers); suppliers; competitors and their employees; financial executives in banks; stock brokers; consultants ; government employees.

2. Written and documentary information from newspapers , trade journals, industry newsletters, annual reports, documented clipping services. 3. Information made available through the management information system which is specially designed to serve the needs of strategic planners. 4. Forecasting and reports based on forecasts regarding changes in economic , social and financial conditions available from governmental agencies and other specialized consultancy service organizations .

A number of publications in India provide valuable information and forecasts relating to environmental conditions : Economic survey published annually by the Ministry of Finance, economic division, Govt. of India Five year plans and mid term survey reports on planned development published by the Planning Commission. Decennial Census reports, Govt. of India . Reserve bank of India Bulletins (monthly) and annual reports on Currency and Finance. Business intelligence and Data published by the Centre of Monitoring Indian Economy.

 Indian trade journal (weekly) published by the Directorate General of Commercial Intelligence and Statistics, Kolkata Economic trends (fortnightly) published by the Federation of Indian Chambers of Commerce and Industry, New Delhi. Yojana (fortnightly) published by the Planning commission. Economic Times (Mumbai, New Delhi), Financial Express (New Delhi) and Business Standard Capital (Kolkata)-dailies. Business India (Mumbai), Business World Capital (Kolkata)fortnightly; Commerce (Mumbai)-weekly. Bombay Stock Exchange directory ; Foreign trade (monthly) published by the Indian Institute of Foreign Trade, New Delhi.

The following publications relating to international business provide economic, trade and financial data
1. United nations publications : World Economic Survey (Annual); Statistical yearbook (Annual); International Financial Statistics (Monthly); Economic Survey of Asia and the Far East (Annual); Economic Survey of Latin America (Annual); Commodity Trade Statistics (Quarterly and Annual); Yearbook of International Trade Statistics: Economic Bulletins for Europe, Latin America and Africa (Bi Annuals). 2. Annual Report on Exchange Restrictions published by the International Monetary Fund. 3. Fortnightly , monthly and quarterly Bulletins/Newsletters/Journals published by the Export Promotion Councils of different products.

4. Monthly statistics of the Foreign Trade of India in two volumes published by the Department of Commercial Intelligence and Statistics. 5. Indian export service Bulletin (weekly) published by the Trade fair Authority of India. 6. Overseas Business Reports published by the United States Department of Commerce.

On the basis of a survey of 64 medium and large Indian companies in 1983.it was found that the executives had their order of preferences regarding sources of information as follows:

Guidelines to industries published by the Union Ministry of Industries Govt. of India. Data from industry sources (Association, Forums, etc.) Market survey by consultants or under own arrangement Projection of past performance into future. Foreign magazines and publications and foreign market intelligence. Competitors activities.

Use of scenario
Scenario may be used for the interpretation of a fluid , rapidly changing business environment with an uncertain future. Scenario may be regarded as stories about the future. Typical scenarios include qualitative and quantitative description of the more important social , political, economic, demographic, technological and other condition. Describe the basic trends , assumptions, conditions and dynamics of the factors relating to the future period that the scenario covers.

Political condition
The impact of political instability , unrest and threats to law and order. The sources of political risks may be 1. competing political ideologies, 2. vested interest in local business groups, 3. electoral majority of the party in power 4. internal dissensions within the ruling party 5. insurgencies in border areas 6. international power alignments and alliances 7. foreign economic policies of government abroad 8. strength of the parliamentary opposition parties

Legal/Regulatory conditions and Government Policies

Some of the policy measures adopted are as follows: Abolition of industrial licensing for all projects except for a short list of industries. Automatic clearance of capital goods imports for projects where foreign exchange availability is ensured through foreign exchange availability is ensured through foreign equity. Approval of direct foreign investment up to 51% foreign equity in high priority industries as also for trading companies primarily engaged in export activities. Removal of the threshold limits of assets in respect of MRTP companies and dominant undertakings, thus eliminating the requirement of prior

Technological conditions
1. 2. 3.

4.

Bright has suggested the following guidelines for effective appraisal of significant technological advances Searching the environment for signals that may be forerunners of significant technological change. Identifying the possible consequences (assuming that these signals are not false and the trends that they suggest persist). Choosing the parameters ,policies, events, and decisions that should be observed and followed to verify the true speed and direction of technology and the effects of employing it. Presenting the data from the foregoing steps in a timely and appropriate manner for managements use in decisions about the organizations reaction.

Business conditions
Two other aspects of business environment which need to be monitored for strategic planning are the market conditions and the availability of raw materials and components required for manufacturing activities.

Diagnosis :Assessment of opportunities and threats

Environmental analysis cannot be complete without diagnosis of the results of analysis. This actually involves assessment of the opportunities and threats identified in the process of analysis. The three aspects of the diagnostic exercise which need to be kept in view, 1. The role and characteristics of the planners 2. The planners job 3. Nature of the environment

How well the diagnosis is carried , however depends also on the characteristics of the planners. The more important determining factors in that respect are : The age and experience of the executives. The motivation and aspiration level which are governed by: a. The felt need of achievement, affiliation and power b. The rewards for performance linked with long run results rather than short term attainments. Perceptual factors, i.e., pre disposition towards the uncertainty of future conditions which include a. Risk oriented and willingness to take risks. b. Ability to reflect rather than acting on impulse. c. Dogmatism or closed belief d. Ability to deal with abstract concepts and ideas. Psychological moods reflecting optimism and pessimism. Psychological preparedness to accept change.

ETOP: A technique of Diagnosis

.Assessment of the environmental information and determining the relative significance of threats and opportunities require a systematic evaluation of the information developed in the course of environmental analysis For this purpose , preparation of a profile of environmental threat and opportunity (ETOP) is considered to be a useful device.

Designing long term plans to optimise opportunities

1. I. II. III. IV. V. VI. 2. 3. 4. I. Selection of issues: includes competitive domestic trends global competition, export potential, customer or user preferences, technological trends, diversification opportunities, etc. Selection of data Impact study Flexibility of plans: it may be designed in various ways: Framing the plans in general terms so as to give a direction but leaving some discretion in implementation. II. Reviewing plans frequently. III. Keeping options open IV. Allowing plans to be used as rules so that expectations may be justified.

Components of the Managerial Environment