LESSON 1: Environment Analysis

A company is not alone in doing business. It is surrounded by and operates in a larger context. This context is
called the Macro Environment. It consists of all the forces that shape opportunities, but also pose threats to the company,
or the industry it represents.

ENVIRONMENTAL ANALYSIS

Environmental analysis is a strategic tool. It is a process to identify all the external and internal elements, which
can affect the organization’s performance. The analysis entails assessing the level of threat or opportunity the factors
might present. These evaluations are later translated into the decision-making process. The analysis helps align strategies
with the firm’s environment.

Our market is facing changes every day. Many new things develop over time and the whole scenario can alter in only a
few seconds. There are some factors that are beyond your control. But, you can control a lot of these things.
Businesses are greatly influenced by their environment. All the situational factors which determine day to day
circumstances impact firms. So, businesses must constantly analyze the trade environment and the market.
There are many strategic analysis tools that a firm can use, but some are more common. The most used detailed
analysis of the environment is the PESTLE analysis. This is a bird’s eye view of the business conduct. Managers and strategy
builders use this analysis to find where their market currently. It also helps foresee where the organization will be in the
future.

IMPORTANCE OF ENVIRONMENTAL ANALYSIS

Environmental analysis will help the firm to understand what is happening both inside and outside the
organization and to increase the probability that the organisational strategies developed will appropriately reflect the
organizational environment.

Environmental scanning is necessary because there are rapid changes taking place in the environment that has a great
impact on the working of the business firm. Analysis of business environment helps to identify strength weakness,
opportunities and threats. SWOT analysis is necessary for the survival and growth of every business enterprise.

The following is the need and importance of environmental scanning:

1. Identification of strength:
Strength of the business firm means capacity of the firm to gain advantage over its competitors. Analysis of internal
business environment helps to identify strength of the firm. After identifying the strength, the firm must try to consolidate
or maximise its strength by further improvement in its existing plans, policies and resources.

2. Identification of weakness:
Weakness of the firm means limitations of the firm. Monitoring internal environment helps to identify not only the
strength but also the weakness of the firm. A firm may be strong in certain areas but may be weak in some other areas.
For further growth and expansion, the weakness should be identified so as to correct them as soon as possible.

3. Identification of opportunities:
Environmental analyses helps to identify the opportunities in the market. The firm should make every possible effort to
grab the opportunities as and when they come.

4. Identification of threat:
Business is subject to threat from competitors and various factors. Environmental analyses help them to identify threat
from the external environment. Early identification of threat is always beneficial as it helps to diffuse off some threat.
5. Optimum use of resources:
Proper environmental assessment helps to make optimum utilisation of scare human, natural and capital resources.
Systematic analyses of business environment helps the firm to reduce wastage and make optimum use of available
resources, without understanding the internal and external environment resources cannot be used in an effective manner.

6. Survival and growth:

Systematic analyses of business environment help the firm to maximise their strength, minimise the weakness, grab the
opportunities and diffuse threats. This enables the firm to survive and grow in the competitive business world.

7. To plan long-term business strategy:

A business organisation has short term and long-term objectives. Proper analyses of environmental factors help the
business firm to frame plans and policies that could help in easy accomplishment of those organisational objectives.
Without undertaking environmental scanning, the firm cannot develop a strategy for business success.

8. Environmental scanning aids decision-making:

Decision-making is a process of selecting the best alternative from among various available alternatives. An environmental
analysis is an extremely important tool in understanding and decision- making in all situation of the business. Success of
the firm depends upon the precise decision making ability. Study of environmental analyses enables the firm to select the
best option for the success and growth of the firm.

LEVELS OF ENVIRONMENTAL ANALYSIS

I. Macro External Environment Analysis (General or Remote Level Environment)

These components offer opportunities and threat for the firm. Its components are Political, Economic,
Social, Technology, Legal, and Environment

II. Micro Internal Environment Analysis (Operating Level)

Its factors include Competition, Supplier, Customer, and Manpower.

III. Firm Level Internal Analysis

The factors of this level of environment include functional management such as Organization, Personnel,
Marketing, Production, and Financial Components.
TOOLS/TECNIQUES IN ENVIRONMENTAL ANALYSIS

Business analysis models are useful tools and techniques that can help you understand your organizational
environment and think more strategically about your business. Dozens of generic techniques are available, but some come
to the forefront more frequently than others do.

1. 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.

A SWOT analysis is designed to facilitate a realistic, fact-based, data-

driven look at the strengths and weaknesses of an organization, its
initiatives, or an industry. The organization needs to keep the
analysis accurate by avoiding pre-conceived beliefs or gray areas
and instead focusing on real-life contexts. Companies should use it
as a guide and not necessarily as a prescription.
Example of SWOT Analysis

In 2015, a Value Line SWOT analysis of The Coca-Cola Company noted strengths such as its globally famous brand name,
vast distribution network and opportunities in emerging markets. However, it also noted weaknesses and threats such as
foreign currency fluctuations, growing public interest in "healthy" beverages and competition from healthy beverage
providers.

Its SWOT analysis prompted Value Line to pose some tough questions about Coca-Cola's strategy, but also to note that
the company "will probably remain a top-tier beverage provider" that offered conservative investors "a reliable source of
income and a bit of capital gains exposure."

Five years later, the Value Line SWOT analysis proved effective as Coca-Cola remains the 6th strongest brand in the world
(as it was then). Coca-Cola's shares (traded under ticker symbol KO) have increased in value by over 60% during the five
years after the analysis was completed.
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. For example, a hedge fund may have developed a
proprietary trading strategy that returns market-beating results. It must then decide how to use those results to attract
new investors.

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 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 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.
Advantages of SWOT Analysis

A SWOT analysis is a great way to guide business-strategy meetings. It's powerful to have everyone in the room to discuss
the company's core strengths and weaknesses and then move from there to define the opportunities and threats, and
finally to brainstorming ideas. Oftentimes, the SWOT analysis you envision before the session changes throughout to
reflect factors you were unaware of and would never have captured if not for the group’s input.

A company can use a SWOT for overall business strategy sessions or for a specific segment such as marketing, production
or sales. This way, you can see how the overall strategy developed from the SWOT analysis will filter down to the segments
below before committing to it. You can also work in reverse with a segment-specific SWOT analysis that feeds into an
overall SWOT analysis.
2. PESTLE ANALYSIS

PESTLE analysis, which is sometimes referred to as PEST analysis, is a concept in marketing principles. Moreover,
this concept is used as a tool by companies to track the environment they’re operating in or are planning to launch a
new project/product/service, etc.

PESTLE is a mnemonic which in its expanded form denotes P for Political, E for Economic, S for Social, T for
Technological, L for Legal, and E for Environmental. It gives a bird’s eye view of the whole environment from many
different angles that one wants to check and keep a track of while contemplating a certain idea/plan.
A. Political factors in PESTLE Analysis

These factors determine the extent to which a government may influence the economy or a certain industry. For
example, a government may impose a new tax or duty due to which entire revenue generating structures of organizations
might change. Political factors include tax policies, Fiscal policy, trade tariffs, etc. that a government may levy around the
fiscal year and it may affect the business environment (economic environment) to a great extent.

B. Economic factors in PESTLE Analysis

These factors are determinants of an economy’s performance that directly impacts a company and have
resonating long term effects. For example, a rise in the inflation rate of any economy would affect the way companies
price their products and services. Adding to that, it would affect the purchasing power of a consumer and change
demand/supply models for that economy. Economic factors include inflation rate, interest rates, foreign exchange rates,
economic growth patterns, etc. It also accounts for the FDI (foreign direct investment) depending on certain specific
industries who’re undergoing this analysis.
C. Social factors in PESTLE Analysis
These factors scrutinize the social environment of the market, and gauge determinants like cultural trends,
demographics, population analytics, etc. An example of this can be buying trends for Western countries like the US where
there is high demand during the Holiday season.

D. Technological factors in PESTLE Analysis

These factors pertain to innovations in technology that may affect the operations of the industry and the market
favorably or unfavorably. This refers to automation, research and development, and the amount of technological
awareness that a market possesses.

E. Legal factors in PESTLE Analysis

These factors have both external and internal sides. There are certain laws that affect the business environment
in a certain country while there are certain policies that companies maintain for themselves. Legal analysis takes into
account both of these angles and then charts out the strategies in light of these legislations. For example, consumer laws,
safety standards, labor laws, etc.

F. Environmental factors in PESTLE Analysis

These factors include all those that influence or are determined by the surrounding environment. This aspect of the PESTLE
is crucial for certain industries particularly for example tourism, farming, agriculture, etc. Factors of a business
environmental analysis include but are not limited to climate, weather, geographical location, global changes in climate,
environmental offsets, etc.
To do a PESTLE analysis, you need to look at the six factors that make up PESTLE – Political, Economic,
Social, Technological, Legal, and Environmental. Then, you must analyse each factor independently. For example, what
Political factors might be influential to Google? There are a number of countries that want to try and restrict its power,
so there may be some restrictions coming. We also have technological – it updates its algorithm several times each year
to stay on top.
THINK

Brainstorm: Gather ideas around the six PESTLE factors – Political, Economic, Social, Technological, Legal and
Environmental. You can perform the initial brainstorming with the whole group or break out as smaller teams
and then combine the ideas to get an overview.

Online collaboration software tools like GroupMap have an advantage over traditional brainstorming tools
such as a whiteboard or post-it notes, as they significantly reduce the time and effort to combine independent
lists, and make organizing and prioritizing the information much quicker and easier.

Group: Once you have everybody’s ideas, group those that are similar and cull duplicates.
This step is more time consuming if the brainstorming was performed individually – or completed at
different times and locations. Using a software tool like GroupMap to group ideas can significantly reduce the
time and effort required in this step – and result in a better outcome.

Rate: Individually rate each of the ideas based on the level of impact you think they will have on your business.

Discuss any significant discrepancies in the ratings. Ask participants to explain their rationale and ideally, have
them re-rate that idea based on discussions. The more aligned you can get people’s thinking around each
factor, the better understanding everyone will have about challenges facing other parts of the organization,
and the more focused your strategic planning will be.

Share: The completed template gives a good overview of the status of the business. Distribute the PESTLE
Analysis to relevant stakeholders. Use the report to monitor progress and as a foundation for future
reviews.

Repeat the PESTLE analysis at regular intervals to stay on top of changes in the macro environment and keep
your strategies and plans up to date.

GroupMap automatically generates visually appealing reports and action plans in several formats for
distribution, saving time and effort after the analysis.