Environmental Analysis Meaning, Features and Process

Table of Contents:-

  • Meaning of Environmental Analysis
  • Definition of Environmental Analysis
  • Features of Environmental Analysis
  • Process of Environmental Analysis

Meaning of Environmental Analysis

Multiple factors affect the organisation and its operations. These factors can influence the organisation in both positive as well as negative ways. Identifying the issues and challenges existing in the external environment is very important for an organisation. To identify the factors in the external environment, an appraisal process of the industry’s environment is necessary. Environmental analysis facilitates the managers with the ability to study the competitive structure and competitive position of the organisation along with the position of its competitors.

By analysing the external environment, the existing opportunities and threats can be identified. It is the responsibility of the managers to avoid threats and to reap the benefits from the opportunities in the market. The environmental analysis also helps managers in analysing the effects of globalization on the level of competition within a particular industry.

Definition of Environmental Analysis

According to Wm. F. Ghierk, “Environmental analysis is the process by which strategists monitor the economic, governmental/legal, market/competitive, supplier/technological, geographic and social setting to determine opportunities and threats to their firms”.

According to Abell, “Environmental appraisal is the identification, measurement, and assessment of environmental impacts”.

It is known that the business environment never remains stable but keeps changing rapidly. As businesses grow and expand, the changes in the external environment compel organisations to make efficient strategies to deal with contingency situations. The environmental analysis also allows an organisation to study the steps taken by competitors in the market. By appraising the external environment businesses can improve their internal capabilities and strengths for adapting to the changes in the external environment.

Features of Environmental Analysis

The salient features of environment analysis are as follows:

1) Continuous Activity: Environmental analysis carries a detailed study of the environment regularly to keep a check on the changing market trends. Therefore, it is a constant process which evaluates the overall trends of an organisation.

2) Exploratory Process: The process of environmental analysis is exploratory by nature. It seeks to discover the scope of potential future happenings. This helps the firm figure out its future choices by recognising outcomes, determining probabilities and drawing conclusions

3) Holistic Exercise: It is a complete process of environmental analysis rather than just a part. It is a broader picture of the environment i.e. looking at the economy as a whole instead of focusing on customers.

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Process of Environmental Analysis

The process of environment analysis includes the following steps:

1) Understand the Nature of the Environment

Before starting the environmental analysis, the strategists must understand the nature, i.e., the volatility of the external environment. The volatility here implies the changes in the environment. To understand the nature of the environment, strategic leaders need to answer the following questions:

  • i) Is the environment stable or dynamic?
  • ii) In which ways does the environment change?
  • iii) Are the changes identifiable?

Answering these questions would help in deciding the future course of action.

2) Analyse the Past Influences of Environmental Factors

Once, the nature of the external environment is identified, the next step is to identify the factors that have influenced the performance of the organisation in the past. Analysing these factors will help in planning and formulating strategies to handle plans.

3) Identify Critical Competitive Forces

The next step is to identify the key competitive forces existing within the enterprise with the help of structural analysis. This step helps to analyse the organisation’s current position, the bargaining power of customers and suppliers, the new entrants in the industry, and the existing competitors of the organization.

4) Analyse the Strategic Position

In this step, the managers analyse the strategic position of the organisation about its competitors in terms of resources, customers, etc. To identify and analyse the strategic position of an organisation, the following ways should be adopted:

  1. Growth/share analysis
  2. Attractiveness analysis
  3. Strategic group analysis
  4. Study of market segments and market power, and
  5. Competitor analysis

5) Identify the Opportunities and Threats

Identify the opportunities and threats prevailing in the environment. Formulate efficient strategies to reap the advantages from the opportunities so that the threats can be neutralised. The selection of strategy and effective utilisation of selected resources in an effective manner is crucial for this stage.

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