As we know, modern business environment is dynamic and keeps on changing with the time. So, it becomes very important to analyze the environment in order to identify each and every environmental factor that can influence the business. After identifying these factors and their impact, we frame plan and policies accordingly.
Environmental analysis is a systematic process of identifying and predicting the potential environment variables that can influence the functioning and profitability of a firm directly or indirectly. Environment analysis helps in finding out the strengths and weaknesses, opportunities and threats from internal and external business environment respectively. Under the environment analysis, various data, pertinent to a particular firm, is collected and used by the managers to determine the best strategies in order to capitalise the opportunities and earn higher return.
6.1. Approaches for Environmental Analysis:
There are different approaches which are adopted by the analysts for the purpose of environmental analysis. The two main approaches i.e. systematic approach and ad hoc approach, are as follows:
Systematic Approach: Under the systematic method, information for the purpose of environment scanning is collected in a systematic way. Information which directly affects the business activities, such as, government rules and regulations, market conditions, customers‟ taste and preference, etc., are collected on a continuous basis to monitor the environment changes and act accordingly.
Ad hoc Approach: Under this approach, different surveys and studies are conducted time to time by an organisation in order to deal with a specific issue. Such studies or surveys are conducted at the time of starting a new project, restructuring the plans and policies, etc.
Since both the approaches are followed in environment scanning to understand the relevant environment forces and formulate strategies, Ad hoc approach may be adopted as a reactive measure in the critical situation, While systematic approach is undertaken as a proactive measure to anticipate changes in the environment and react accordingly.
6.2. Objectives of Environment Analysis:
Environment analysis has following objectives:
1. To Identify Threats, Opportunities, Strengths & Weaknesses: The main objective of environment analysis is to identify the threats and opportunities that exist in the external business environment. It also helps a firm to identify its strengths and weaknesses that exist in the internal environment.
2. To Understand the Change in Environment: Environment analysis helps in understanding the current business environment and probable future changes, such as, change in legal environment, technology, demand, etc.
3. To Provide Inputs for Decision Making: under the process of environment analysis, information, related to different aspects of business environment, is collected. This information is used by the managers for the purpose of decision making. Different capital and investment decisions are taken on the basis of such information.
4. To Formulate Appropriate Strategy: After identifying all the present strengths and weaknesses, or opportunities and threats, by proper environment scanning, appropriate future plans and strategies are formulated. These plans and strategies are formulated with the objective to minimise the threat by using present strength or try to overcome weaknesses by capitalising the opportunities.
5. To Identify the International Events and their Impact on Business: Due to globalisation, the impact of international events on a business firm has increased. In this situation, environment analysis helps to identify and understand the global events and their influence on business.
6.3. Process of Environment Analysis:
Environment analysis is a continuous and expensive process which includes the following sequential steps
Scanning- It is the first step of environment analysis. Under this step, the analyst identifies all the environment variables or forces which can influence the profitability and functioning of the business. We figure out only relevant environment factors so that vague, ambiguous and irrelevant data can be avoided. Generally, it includes government policies, competitor‟s strategy, market conditions, etc., that can influence the business firm.
Monitoring- The next step of this process is to analyze the effect of all the identified relevant factors on the different aspects of business. After analyzing these factors, following outcomes emerge:
Forecasting- Forecasting is important for the identification of future threats and opportunities, and formulation of plans and strategies accordingly. Under this step, environment analyst predicts the future events and their impact, on the basis of data related to past and present. Forecasting covers all the aspects of business environment i.e. economic, political, and technological, etc.
Assessment- In the last step, all the factors, identified in previous steps, are assessed in terms of their impact on organisation‟s performance and profitability. The degree of impact varies from factor to factor. Some factors provide opportunity while other pose threat to the organisation.
6.4. Limitations of Environment Analysis:
Environment analysis process has following limitations:
1. Unexpected and Unanticipated Events: The future events and factors which may affect an organisation are unpredictable and uncertain. These events and factors cannot be predicted and quantified accurately.
2. Part of Strategy Formulation Process: The environment analysis is only a part of strategic formulation process which is based on various inputs. Hence, it does not guarantee the effectiveness of the organisation.
3. Inaccurate Data: The process of environment analysis is based on the data which is collected for the same purpose. But it may be possible that the data used for forecasting or predicting future event is inaccurate.
4. Involves Money and Cost: The process of environment analysis involves time and money. It is a lengthy process that includes following steps:
c. Forecasting, and
5. Based on Assumptions: The whole process of forecasting is based on certain assumptions which may or may not be true. There is basic assumption of forecasting that there is a pattern of happening of an event. This assumption may not be held true in all cases.