ICAI Notes- Environmental Analysis and Scanning | Business and Commercial Knowledge (Old Scheme) - CA Foundation PDF Download

WHY ENVIRONMENTAL ANALYSIS?

When the company does not react to the demands of the environment by changing its strategy, the result is declining performance of the company in the market
Utility of Environmental Analysis

From environmental analysis strategists get time to anticipate opportunities and to plan to take optional responses to these opportunities. It also helps strategists to develop an early warning system to prevent threats or to develop strategies which can turn a threat to the firm's advantage.
It is clear that because of the difficulty to assessing the future, not all future events can be anticipated. To the extent that some or most are anticipated by this analysis and diagnosis, managerial decisions are likely to be better. The managers can concentrate on these few instead of having to deal with all the environmental

influences.
Purpose of Environmental Analysis

In general, environmental analysis has three basic goals as follows:

• First, the analysis should provide an understanding of current and potential changes taking place in the environment. It is important that one must be aware of the existing environment. At the same time one must have a long term perspective about the future too.
• Second, environmental analysis should provide inputs for strategic decision making. Mere collection of data is not enough. The information collected must be useful for and used in strategic decision making.
• Third, environment analysis should facilitate and foster strategic thinking in organizations-typically a rich source of ideas and understanding of the context within which a firm operates. It should challenge the current wisdom by bringing fresh viewpoints into the organization.

ENVIRONMENTAL SCANNING

Organizational environment consists of both external and internal factors. Environment must be scanned so as to determine development and forecasts of factors that will influence organizational success.

Environmental scanning can be defined as the process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business for the purpose of taking strategic decisions. It is the process of gathering information regarding company’s environment, analysing it and forecasting the impact of all predictable environmental changes. 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 factors which need to be considered for environmental scanning are events, trends, issues and expectations of the different interest groups. These factors are explained below:

• Events are important and specific occurrences taking place in different environmental sectors. Events are certain happening in the internal or external organisational environment which can be observed and tracked.
• Trends are the general tendencies or the courses of action along which events take place. Trends are grouping of similar or related events that tend to move in a given direction, increasing or decreasing in strength of frequency of observation; usually suggests a pattern of change in a particular area.
• Issues are the current concerns that arise in response to events and trends. Identifying an emerging issue is more difficult. Emerging issues start with a value shift, or a change in how an issue is viewed.