Environment Analysis Techniques
SWOT analysis, PEST analysis, scenario planning, porter’s five forces model, etc are major techniques of environmental analysis.
1. SWOT analysis
SWOT analysis is a study undertaken by an organization to identify its internal strengths and weaknesses as well as its external opportunities and threats. It is an extremely useful method of environmental analysis.
Strength is the internal capacity or ability of an organization. The organization can get victory over its competitors by using this strength. Manufacturing capacity, skilled workforce, good market share, strong financing, superior reputation, lowest-cost resources, unique selling proposition, etc. are the strengths of an organization. The organization should be able to reap strategic benefits by using such strengths.
Weakness is the internal limitation of an organization. It leads an organization to the situation in which the organization cannot compete with competitors. So, weaknesses of the organization should be identified properly and minimized them immediately. Outdated facilities, inadequate research and development (R&D), obsolete technologies, weak management, past planning failure, etc. are the weaknesses of an organization. Any business organization should immediately minimize such weaknesses to get strategic benefits.
Opportunity is the favourable situation which happens from external environment. Various opportunities may come in the organization. An organization should fully utilize such opportunities to weaken its competitors. Possible new markets, strong economy, weak market rivals, emerging technology, growth of existing market, etc. are the opportunities of an organization. An organization should reap strategic benefits through utilization of such opportunities.
Threat is the unfavourable situation which happens from external environment, An organization should face threats for getting victory in competition. Emergence and addition of new competitors in markets, shortage of resources, changing market tastes, new regulations, substitute products, cash-flow problems, changing technology, changes in social patterns, population profiles, lifestyle changes, etc. are the threats of a business organization.
2. PEST analysis
PEST analysis is an analysis of external environment that affects all firms. PEST is an acronym for the political-legal, economic, socio-culture, and technological factors of the external environment. These factors are beyond the control of management. PEST analysis is also useful in environmental analysis.
a. Political-legal environment:
Political-legal environment is another important component of general environment. It does not remain under the control of organization. Thus, decisions should be taken after deep study and analysis of this component.
- Political environment directly and indirectly impact the business organization. It consists of political philosophy, political system, political institution, and pressure groups.
- Legal environment directly and indirectly impact the business organization. It consists of laws, courts, and law administrators.
b. Economic environment:
The economic environment is an important component of the general environment. Economic policies, economic systems, economic conditions, and globalization are main components of the economic environment. These components do not remain under the control of business organizations.
- Economic policy is a component of economic environment. It consists of Monitory Policy, Fiscal Policy, Industrial Policy, Privatization Policy, etc. They provide guidelines for performance and decision-making.
- The economic system is another component of the economic environment. It can be Free Market Economy System, Centrally Planned Economy System, and Mixed Economy System.
- Economic condition is another component of economy environment. It consists of stages of economic development, income distribution, Business Cycle, Employment, and Inflation. It provides a glance at the economic condition of the organization.
- Globalization refers to the activities of a large number of business enterprises that are carried out in many different locations across national boundaries. It increases trade across national boundaries. WTO, IMF, EU, SAARC, BIMSTEC, OPEC, etc. international and regional organizations are playing a vital role in the growth of globalization.
c. Socio-cultural environment:
Socio-cultural environment is one of the most important components of the general environment. It includes social and cultural components.
- Social components, directly and indirectly, impact the business organization. It consists of demography, reference groups, lifestyle, social class, and pressure groups.
- Cultural components, directly and indirectly, impact the business organization. It consists of religion, language, attitudes, and beliefs.
d. Technological environment:
Another important component of the general environment is the technological environment- The technological environment consists of those forces that affect the technology and which can create new products, new markets, and new marketing opportunities. It consists of the level of technology, pace of technology, researches and development budget and technology transfer.
- The level of technology directly impacts the business organization. Level of technology can be handloom or machine or automatic machine or computerization or robotization.
- Pace of technology also impacts the business organization. It should consider the pace of technological changes and technological obsolescence.
- Researches and Development is the base of innovation of new technology. There should be sufficient budget for Research and Development program.
- Technology transfer is process of transferring skills, knowledge, technologies, methods, machinery, and equipment from the developed country to the least developed country.
3. Scenario Planning
Scenario analysis is a process of analyzing possible future events by considering alternative possible outcomes. It is simple as well as popular method of environmental scanning. It involve aspects of systems thinking, specifically the recognition that factors may combine in complex ways to create sometime surprising futures. It can be analyzed to take proper steps to overcome the possible events and problems.
4. Porter’s Five Forces Model
Michael Porter has developed the most commonly cited generic strategy framework known as Porter”s Competitive Strategies. He has argued that a company’s strengths ultimately fall in cost advantages and differentiation. He also suggested that company can secure a sustainable competitive advantage by adopting one of three generic strategies- cost leadership, differentiation, and focus.
a. Cost leadership strategy:
According to porter, cost leadership is about minimizing the cost to the organization of delivering products and services. A cost leadership business can create a competitive advantage by (i) increasing profits by reducing costs, while charging industry-average prices and (ii) increasing market share through charging lower prices, while still making reasonable profits on each sale because you’ve reduced costs.27 Company provides quality products and services at lower price than competitors. Competition minimization, increase in market share, less chance of new entrants, high efficiency, low risk of substitution are the benefits of cost leadership strategy. Examples the successful use of a cost leadership strategy are Procter & Gamble, Easy Group, Ryan Air, McDonald, Wal-Mart, etc.
b. Differentiation strategy:
According to Porter, differentiation strategy involves making your products or services different from your competitors. A differentiation strategy appropriate where the target customer segment is not price-sensitive, the market competitive or saturated, customers have very specific needs which are possibly under. served, and the company has unique resources and capabilities which enable it to satisfy these needs in ways that are difficult to imitate. This strategy is not suitable for small companies28. It is more appropriate for big companies. Examples of the successful use of differentiation strategy are Hero, Honda, Asian Paints, Nike Athletic Shoes, BMW Group Automobiles, Perstorp Bio-Products, Apple Computer, Mercedes-Benz automobiles, Renault-Nissan Alliance29. This strategy requires intellectual property, unique technical expertise, talented personnel, innovative processes, and sufficient R&D budget. Competitive rivalry, brand loyalty, high price, barriers to new entrants, low possibility substitutes, etc. are some benefits of differentiation strategy.
c. Focus strategy:
According to Porter, companies use focus strategies to concentrate particular market segment or group of market segments. This strategy makes particular market segment less attractive to competitors. Companies serve customers in their market segment uniquely well; they tend to build strong brand loyalty amongst their customers30. Companies add something extra in product in this strategy. Examples of the successful of a focus strategy are Southwest Airlines, United Airlines, American Airlines, Charities, etc.
d. Cost focus:
A company seeks a cost advantage in its target segment in cost focus strategy.
Prices of products and services are lower than competitors.
e. Differentiation focus:
A company seeks differentiation in its target segment differentiation focus strategy. Quality, size, design, test, service, brand, technology, etc. product are different from competitors.