TOPIC TWO
STRATEGIC MANAGEMENT OF ENVIRONMENT
Environment in strategic Management
Environment is defined as something external to an individual or organization.
Business environment consists of all the factors that affect a company’s operations, actions and outcomes. These are:
1. Micro environment is defined as the nearby environment, under which the firm operates.
2. Macro environment refers to the general environment, that can affect the working of all business enterprises. … PESTLE, i.e. Political, Economic, Socio cultural, Technological, Legal and Environmental.
Environmental Scan
Environmental scanning refers to possession and utilization of information about occasions, patterns, trends, and relationships within an organization‘s internal and external environment. It helps the managers to decide the future path of the organization. Scanning must identify the threats and opportunities existing in the environment. While strategy formulation, an organization must take
advantage of the opportunities and minimize the threats. A threat for one organization may be an opportunity for another.
The second component of environmental analysis is to develop information about the environment. Information has two primary strategic role – in objective setting and in strategy formulation. As managers scan the environment, they interpret environmental influence in the light of their own perceptions, expectations, and values.
Environmental scanning is the process of gathering information about events and their relationships within an organization’s internal and external environments. The basic purpose of environmental scanning is to help management determine the future direction of the organization. The most widely accepted method for categorizing different forms of scanning divides into the following three types:
1. Irregular scanning systems: These consist largely of ad hoc environmental studies.
2. Regular Scanning systems: These systems revolve around a regular review of the environment or significant environmental components. This review is often made annually.
3. Continuous scanning systems: These systems constantly monitor components of the organizational environment.
External and internal influences
External Micro forces
These forces are Suppliers of Inputs:
An important factor in the external environment of a firm is the suppliers of its inputs such as raw materials and components
Customers:
The people who buy and use a firm‘s product and services are an important part of external micro-environment.
Marketing Intermediaries:
In a firm‘s external environment marketing intermediaries play an essential role of selling and distributing its products to the final buyers.
Competitors:
Business firms compete with each other not only for sale of their products but also in other areas.
Publics:
Finally, publics are an important force in external micro environment. Public, according to Philip Kotler ―is any group that has an actual or potential interest in or impact on a company‘s ability to achieve its objective‖. Environmentalists, media groups, women associations, consumer protection groups, local groups, citizens associations are some important examples of publics which have an important bearing on environment of the firms.
External Macro Environment:
Apart from micro-environment, business firms face large external environmental forces. The external macro environment determines the opportunities for a firm to exploit for promoting its business and also presents threats to it in the sense
that it can put restrictions on the expansion of business activities. The macroenvironment has thus both positive and negative aspects.
Political and Legal Environment:
Businesses are closely related to the government. The political philosophy of the government wields a great influence over business policies. Parliament Acts are passed to control the business activities of the private sector. Besides, role of
foreign direct investment was restricted to only few spheres.
a) Economic Environment:
Economic environment includes the type of economic system that exists in the economy, the nature and structure of the economy, the phase of the business cycle (for example, the conditions of boom or recession), the fiscal, monetary and financial policies of the Government, foreign trade and foreign investment policies of the government. These economic policies of the government present both the opportunities as well as the threats (i.e. restrictions) for the business firms.
b) Social and Cultural Environment:
Members of a society wield important influence over business firms. People these days do not accept the activities of business firms without question
c) Technological Environment:
The nature of technology used for production of goods and services is an important factor responsible for the success of a business firm. Technology consists of the type of machines and processes available for use by a firm and the way of doing things. The improvement in technology raises total factor productivity of a firm and reduces unit cost of output
d) Demographic Environment:
Demographic environment includes the size and growth of population, life expectancy of the people, rural-urban distribution of population, the technological skills and educational levels of labour force.
SWOT Analysis
SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to evaluate a company’s competitive position and to develop strategic planning. SWOT analysis assesses internal and external factors, as well as current and future potential.
SWOT analysis is a strategic planning technique that provides assessment tools.
Identifying core strengths, weaknesses, opportunities, and threats leads to fact-based analysis, fresh perspectives, and new ideas.
SWOT analysis works best when diverse groups or voices within an organization are free to provide realistic data points rather than
prescribed messaging.
Strengths
Strengths describe what an organization excels at and what separates it from the competition: a strong brand, loyal customer base, a strong balance sheet, unique technology, and so on.
Weaknesses
Weaknesses stop an organization from performing at its optimum level. They are areas where the business needs to improve to remain competitive: a weak brand, higher-than-average turnover, high levels of debt, an inadequate supply chain, or lack of capital.
Opportunities
Opportunities refer to favorable external factors that could give an organization a competitive advantage. For example, if a country cuts tariffs, a car manufacturer can export its cars into a new market, increasing sales and market share.
Threats
Threats refer to factors that have the potential to harm an organization. For example, a drought is a threat to a wheat-producing company, as it may destroy or reduce the crop yield. Other common threats include things like rising costs for materials, increasing competition, tight labor supply and so on
SWOT Table
PESTEL Analysis
A PESTEL analysis or PESTLE analysis (formerly known as PEST analysis) is a framework or tool used to analyze and monitor the macro-environmental factors that may have a profound impact on an organization‘s performance.
This tool is especially useful when starting a new business or entering a foreign market. It is often used in collaboration with other analytical business tools such as the SWOT analysis and Porter‘s Five Forces to give a clear understanding of a situation and related internal and external factors. PESTEL is an acronym that stands for Political, Economic, Social, Technological, Environmental and Legal
factors.
Political Factors:
These factors are all about how and to what degree a government intervenes inthe economy or a certain industry. Basically all the influences that a government has on your business could be classified here. This can include government policy, political stability or instability, corruption, foreign trade policy, tax policy, labour law, environmental law and trade restrictions. Furthermore, the government may have a profound impact on a nation‘s education system, infrastructure and health regulations. These are all factors that need to be taken into account when assessing the attractiveness of a potential market.
Economic Factors:
Economic factors are determinants of a certain economy‘s performance.
Factors include economic growth, exchange rates, inflation rates, interest rates, disposable income of consumers and unemployment rates. These factors may have a direct or indirect long term impact on a company, since it affects the purchasing power of consumers and could possibly change demand/supply models in the economy. Consequently it also affects the way companies price
their products and services.
Social Factors:
This dimension of the general environment represents the demographic characteristics, norms, customs and values of the population within which the organization operates. This includes population trends such as the population growth rate, age distribution, income distribution, career attitudes, safety emphasis, health consciousness, lifestyle attitudes and cultural barriers. These factors are especially important for marketers when targeting certain customers.
In addition, it also says something about the local workforce and its willingness to work under certain conditions.
Technological Factors:
These factors pertain to innovations in technology that may affect th operations of the industry and the market favorably or unfavorably. This refers to technology incentives, the level of innovation, automation, research and development (R&D) activity, technological change and the amount of technological awareness that a market possesses. These factors may influence decisions to enter or not enter certain industries, to launch or not launch certain products or to outsource production activities abroad. By knowing what is going on technology-wise, you may be able to prevent your company from spending a lot of money on developing a technology that would become obsolete very
soon due to disruptive technological changes elsewhere.
Environmental Factors:
Environmental factors have come to the forefront only relatively recently. They have become important due to the increasing scarcity of raw materials, pollution targets and carbon footprint targets set by governments. These factors include ecological and environmental aspects such as weather, climate, environmental offsets and climate change which may especially affect industries such as tourism, farming, agriculture and insurance. Furthermore, growing awareness of the potential impacts of climate change is affecting how
companies operate and the products they offer. This has led to many companies getting more and more involved in practices such as organizational social responsibility (CSR) and sustainability.
Legal Factors:
Although these factors may have some overlap with the political factors, they include more specific laws such as discrimination laws, antitrust laws, employment laws, consumer protection laws, copyright and patent laws, and health and safety laws. It is clear that companies need to know what is and what is not legal in order to trade successfully and ethically. If an organization trades globally this becomes especially tricky since each country has its own set of rules and regulations. In addition, you want to be aware of any potential changes in legislation and the impact it may have on your business in the future.
Recommended is to have a legal advisor or attorney to help you with these kind of things.
