An environmental analysis or scan examines the changes and forces that affect business either directly or indirectly through customers, suppliers, competitors and other stakeholders. It focuses on internal and external environments in order to understand the organization`s capabilities, customers and business environment. It basically involves identifying and studying environmental factors that will impact on the organization so as to develop effective responses which will secure or improve the organization`s position in the future.
THE PURPOSE OF ENVIRONMENTAL ANALYSIS
Environmental scanning has many advantages for the company which successfully executes a constant scanning strategy. Some of the benefits of environmental scanning include:
(i)Providing information for strategic planning:
Environmental scanning provides information, such as strengths or weaknesses of competitors and consumer behavior and enables companies to discern which resources are valuable to the market and also provides information which can be used as the basis of marketing strategies to leverage these resources and apply them most appropriately. This can strengthen a company`s own competitive position and weaken that of competition. Environmental scanning also provides information about the environment which can guide strategic direction. Porter notes that s successful strategy should result in “a favourable position in an industry…..a competitive advantage.”Sustainable competitive advantage is achieved by generating or possessing resources that are inimitable, valued by the customer and can be used effectively.
(ii)Detecting new opportunities:
A key purpose of environmental scanning is to detect new opportunities and forecast demand. This is necessary in increasing company`s portfolio.
(iii)Executive stimulation and development:
Executive level strategic planning should be based on data rather than whim. This is important as it not only projects a more professional image but also keeps the executive decision makers in tune with the market.Further,it provides educational and stimulation for decision makers, who are usually appointed to these positions due to their capacity to turn thought into action and ultimately profit.
(iv)Monitoring market trends and fashions:
Strategic success of failure depends on “even-quicker reactions to market trend, requirements and aspirations.”However, it could be argued that to “react” suggests that companies should act after the event, by which time, it may be too late. Environmental scanning increases sensitivity to customers changing needs and companies should be proactive in monitoring, predicting and responding to market trends. Even if the company is not able to be first to market with a new product or service, simply being aware of what is happening in the competitive environment enables them to plan ahead and build competitive strategies.
(v)Monitoring the dynamic business environment:
Due to the dynamic nature of the modern business environment, the importance of regular and continual scanning cannot be overemphasized. This is because even small changes in the environment such as legislative, cultural or technological changes, if not anticipated and acted upon, can be the difference between becoming the market leader and insolvency.
(vi)Identifying opportunities and threats:
Scanning enables an organization gain a competitive advantage and improve short and long term planning through SWOT,PESTEL and other forms of environmental analysis.
TYPES OF BUSINESS ENVIRONMENT
Basically, there are three distinct business environments which are:
1.Internal Environment: This is the environment which is within the organization and the organization has control over it..Its components are mission and vision of the organization, employees, managerial and leadership philosophies, organizational culture, organizational structure and policies of the organization.
2.External Environment: This includes the factors outside a business that influence its decisions. It is also called macro environment. Its components are well captured by the acronym PESTEL which include political,economic,social,technological,environmental/ecological and legal environments.
3.Operating Environment: This is environment which affects the operations of an organization and basically constitutes of customers,creditors,competitors,marketing intermediaries like middlemen and other public of a firm.
MODELS OF ENVIRONMENTAL ANALYSIS
Several models are used to understand the surrounding situation. These models include:
(iii)Porters five forces analysis
These are further explained below:
SWOT stands for strengths, weaknesses, opportunities and threats. To understand SWOT analysis, the four terms should clearly be distinguished
Strengths refer to positive internal conditions in the environment like competent staff, superior technology, strong customer and capital base. A media house may for instance count on its strengths as having the largest viewership and listenership in a given region
Weaknesses are negative internal conditions in the environment e.g. poor technology, low customer base and poor image.
Opportunities are positive external conditions in the environment. This is when PESTEL factors are in favour of a firm like favourable legislation, new markets are developing for the firm and increased demand of a firm`s product.
Threats are negative external conditions in the environment like stiff competition,unfavourable legislations, poor economic and political environments among other factors.
The SWOT Matrix
Quadrant I(S-O Strategies):This is where strengths match with opportunities. A firm can explore the available opportunities in the environment by use of appropriate strategies supported by its strengths.
Quadrant II(W-O Strategies):A firm has an advantage of opportunities but a disadvantage of weaknesses. An example is a country rich in oil but does not have the technology to exploit it.In such a scenario, the country can use its opportunities to overcome its weakness. It can for instance look for a firm with appropriate technology to exploit the oil and then share profits there from on a predetermined ratio.
Quadrant III(S-T Strategies):In this scenario, threats like competition affect strengths of a firm. A company which may be enjoying monopoly may for instance have entrants of new competitors which may affect its sales turnover. The firm in this case must identify ways to use its strengths to reduce its vulnerability to external threats like coming up with strategies to manage competition. An example is a company enjoying economies of scale and strong capital base. It will use fund sat its disposal to aggressively advertise and surpass competition.
Quadrant IV(W-T Strategies):The firm at this point must formulate a strategy that will enable it prevent the firm`s weaknesses from making it highly susceptible to external threats.
(b) PESTEL Analysis
PESTEL include political,economical,social,technological,environmental/ecological and legal environments. Each component is examined in PESTEL Analysis.
Political Environment: Examines political instability, trade restrictions, tariffs and sanctions. Investor confidence is highly dependent on perceived political stability of a country. Post election conflicts for instance keep investors away affecting a country`s economy. Trade sanctions would also mean a country`s level of exporting its produce is limited.
Economic Environment: It examines inflation rates, interest rates, exchange rates, income levels and distribution, taxation policies, credit policies, credit policies, economic stability or crisis including global economy and economic growth.
Social Environment: This consists of the value system, social-demographic characteristics and other basic characteristics of people comprising the society. Such characteristics include attitudes, desires and expectations, level of education,beliefs,religion,traditions,habits and customs of people in a society. The population structure, for example, would influence decisions on what products to produce by a business concern. Demographic patterns would also dictate the availability of workforce for a business entity. If a firm ignores society`s social concern, the society will impose legal restrictions. Many African societies and religions are for instance not receptive to family planning and condom use.
Technological Environment: This refers to inventions and techniques in areas of processes,machines,tools and information technology including technology. Technology is key to an organization`s transformation processes affecting processing speed as well as quality of the final output.
Ecological Environment: This refers to the protection of the ecosystem. This is currently becoming more critical as environmental awareness increases globally. It covers functions of garbage collection and management, sewerage and drainage systems and protection of wildlife which includes trees and animals in forests.
Legal Environment: This refers to various legislations that affect. They include labour laws of a country, taxation laws, constitution of the country and precedent cases on business.
(c)Porter`s five forces analysis
Michael porter( A Harvard Business School Researcher) developed the five forces model to examine an industry`s attractiveness. An industry may have the right size and growth but not attractive from a profitability point of view. The company must therefore examine several major structural factors that affect long term attractiveness.The five forces are:
• Rivalry posed by competitors/threats of new entrants
• Entry barriers
• Threats of substitute products
• Bargaining power of the buyers
• Bargaining power of the supplier
The five forces model is useful in understanding the industry context in which a firm operates. They are discussed here below:
(i)Rivalry posed by competitors/threats of new entrants
A market with strong rivalry is less attractive. Firms are always in competition for market share. The market share may in this case be customer base, profits or sales a given market can provide. The intensity of rivalry is influenced by certain industry characteristics which include the following:
Factors which increase rivalry among firms in the same industry
• A large number of firms in similar operations increase rivalry in an industry:Firms in overcoming this challenge always seek to diversify their portfolio to meet varied needs of the customers
• Limited market growth and size causes firms to fight for the available market share: Firms overcome this challenge by venturing into new markets. In this era of globalization, many firms are venturing into international markets. A case in point is Kenya where many banks and media houses have expanded their operations to other Eastern Africa countries like Rwanda,South Sudan,Uganda,Tanzania and Burundi
• High fixed and storage costs: These intensify rivalry since firms seek to make returns on the expenses incurred in addition to profits. To overcome this challenge, firms always seek to lower expenses incurred by cutting on unnecessary costs.
• Low switching costs increase rivalry among firms: Switching costs are also called switching barriers and refer to any impediment to a customer`s changing from one product to the other.
Strategies firms adopt in response to Rivalry
Igor Ansoff presented a matrix that focused on a firm`s strategy for growth. Rivalry presents a challenge to firms growth and thus adopting the matrix can offer a breakthrough to organization.
EXISTING PRODUCT NEW PRODUCT
EXISTING MARKET Market Penetration-Product Development
NEW MARKET Market Development -Diversification
The four growth strategies can be solutions to rivalry among firms. They are discussed here below:
Market Penetration: An organization seeks to have more consumption of its existing products in its existing markets through aggressive advertising and marketing. It is the least risky strategy among the four strategies. The aim is to increase the market share of the existing products.
Market Development: This involves taking existing products to new markets. This has been the trend in East Africa where many organizations have been extending their operations beyond their countries of operations to the wider region.
Product Development: This involves developing new products for the existing market.Mobie telephone companies have for instance established money transfer services within their existing markets as a new product.
Diversification: This involves development of new products to new markets. It is the most risky strategy and its quadrant is referred to as “Suicide cell.”It is an option when good returns are expected.
Among the four strategies, market penetration is least risky but once the market is saturated, other strategies must be sought. A market development strategy is appropriate if the firm`s core competences are related more to the specific product than to its experience with a specific market segment. A product development strategy may be appropriate if a firm`s strengths are related to its specific customers rather than to the specific product itself. In this situation, it can leverage its strengths by developing a new product targeted to its existing customers.
Market penetration is the least risky followed by market development, then product development whereas diversification is the most risky.
This refers to barriers and challenges which prevent new players who want to operate in the market from entry. An industry with entry barriers is less attractive and thus will discourage new entrants. Existing firms may deliberately create entry barriers to reduce entry of new firms so that they can be able to maintain a steady level of profits. It is expected that when an industry profits increase, additional firms will enter in the market to take advantage of the opportunities. This however does not usually happen because certain barriers including the existing firms establishing these walls to ensure profits are not driven down by firms at the entry point. Some of these barriers that prevent entry of new firms include:
• Government Regulations: New firms may face the hurdle of compliance matters with the government regulations and requirements including registration processes which are lengthy, technical and cumbersome. Governments in other industries grant monopolies limiting entry of new firms.
• Brand Loyalty: This refers to the loyalty customers may have on existing brands denying markets to new brands at the entry stage.
• Economies of Scale: Existing players may enjoy economies of scale thus are able to have enough funds to sponsor powerful adverts denying market penetration to players at the entry level.
• Lack of Capital Base: Firms at the entry level usually do not have enough capital to enable them match up with existing firms in terms of human resource, quality an ddiversification.Existing players have enough funds thus are able to produce highly differentiated products.
• High Switching costs to the customer: Switching costs refers to the value and benefits a customer would lose by deciding to use another product to meet the same needs he used to meet with a previous product. A good example is mobile telephone industry. A customer may find it difficult to move to another service provider at the entry level even when the prices of such a firm are low. This is because the inconveniences of changing the telephone number and missing out on other services like money transfer make the switching costs high. This is why entry and penetration of new players in the telephone industry has always been difficult
• Patents and proprietary rights: A patent is a set of exclusive rights granted by a government to an inventor for a certain amount of time. It is a legal document defining ownership of a particular area of new technology and gives inventors the right “to exclude others from making,using,offering for sale, or selling their invention.”Thus a patent effectively acts as a barrier to entry.
(iii)Threat of Substitutes
An industry is less attractive if actual or potential substitutes exist. Substitute products refer to different products having ability of satisfying customers needs similarly. They can therefore be used to replace one another.
With substitute goods, demand increases when the price of a similar good increases. In other words, an increase in the price of product A will cause its user to decide to switch to product B as a substitute due to its lower price and similar benefits. Substitute products are bound together, in that customers can trade one good for another if they see fit.Substitutes therefore place a limit on prices and on profits. The company has to monitor price trend s closely. If technology advances or competition increases in these substitute industries, prices and profits in the segment are likely to fall. The best defense is to watch out for competing products, their quality and dealer capacities in the marketplace.
(iv)Bargaining Power of the buyer
This refers to the ability of the consumer to bargain for either low price or high quality of the product. Certain factors determine the bargaining power of the buyer which include:
• Monopsony:This is a market in which there are many sellers and one buyer. In such a market, a buyer is a chooser among many suppliers and thus has more bargaining power.
• Low Switching Costs: This is when a customer can easily move to another product which will equally meet his needs(substitute).When a customer can decide to use a substitute without difficulties, he has a higher bargaining power over the supplier who is currently supplying him with products
• Backward Integration Threats: Backward integration refers to the situation where a company takes over the functions of the supplier. It is one of the forms of the vertical integration. The other form is forward integration where a company takes over the distribution functions. Backward integration threats increase the bargaining power of the buyer since the supplier will have fears of losing business
• Buyer purchases a significant proportion of the product: A consumer who purchases a large unit from a supplier will have a higher bargaining power for lower prices and higher quality than the one who buys in small units.
• Price Sensitive Customers: Customers are price sensitive when they highly react to any price change, for example, abandoning a product because the competitor has begun to charge a lower price for the same. Customer are highly price sensitive when products are less differentiated and thus they attach similar value to a product as to that of a competitor.
Factors which increase customer`s bargaining power
• Customers being more concentrated than sellers
• Switching costs are low
• Customers being well informed about the product
• High portion of sellers sale is made up of their purchases
• Their own product is affected
• Products have little differentiation
• High threat of backward integration
(v)Bargaining Power of Supplier
This is the power of the supplier to increase the price of a product
Certain factors which increase this power include the supplier`s products having no or few substitutes, high switching costs and especially when products of the supplier are unique and highly differentiated. A threat of forward integration is another aspect which increases power.
Factors that influence supplier`s power
• They can raise prices without affecting demand
• They can reduce quantity supplied
• They can co-operate formally or informally
• Few substitutes are available
• Their “product” is critical to end product
• They can impose switching costs on customers
• They have potential to integrate down stream
The 5Cs of situation analysis are customer, competitor, company, collaborators and climate/context. It enables businesses to gain more information on the internal, macro-environmental and micro-environmental factors within the environment. It is a very complete analysis of the internal and external aspects of the business. The internal aspects are the company and the collaborators while the external aspects are the customers, the competitors and the climate.
Company: It involves evaluation of the company`s objectives, strategies and capabilities. An evaluation of the strenghths,weaknesses,opportunities and threats of the company is done at this level. The analysis is done in an endeavor to fully understand the company. Other aspects analyzed are product line, image of the company in the market, technology and experience, culture and goals.
Collaborators: They include distributors, suppliers and alliances a company may decide to take with other organizations. Distributors make it easy to find products of a company in little shops,malls,supermarkets and restaurants. A company is always working in order to have effective working relationships with suppliers to ensure a continuity in supply of raw materials. Alliances are necessary because a lot of times, a company is involved in sponsorship of events.
Customers: This involves examining market size and growth, market segments, benefits that the consumer is seeking whether tangible or intangible, consumer information sources, buying processes and behaviors of the consumer i.e. whether is impulse or careful comparison, frequency of purchase, quantity purchased at a time and trends of the consumer i.e. how consumer needs and preferences change over time.
This enables the company to design discounts and promotional programmes to stimulate the customers purchase all year long, in order to make the customers buy. It also enables the company to position the product in a way that will be convenient to the customer.
A company is also able to design information campaigns and implement them through web sites, social networks, events and in the media to ensure it maximally reaches the customers.
Competitors: Successful business requires that a company has to satisfy consumers better than the competitor. They must adapt to the strategies that are being used by the competitors who are serving the same target markets. Competitors` analysis is essential so that a company can benchmark with other companies in the same industry. When a company analyses its competitors, it is able to borrow the best practices from the competitors. The analysis involves both internal and external factors. These factors include corporate objectives, size and power of the organization, resources available and procedures used by the organization, product diversification, market size and geographical coverage, number of market segments served, distribution channels, branding and market penetration. It also involves analysis of advertising strategies of the competitors. Information on competitors and their intelligence is sourced from different sources including commercial databases like newspapers and business magazines, trade publications, websites and promotional materials like handbills and bronchures,customers of the competitors, trade shows and exhibitions as well as competitors` employees
Climate/Context: This is basically PESTEL Analysis. It examines the macro environment thus focusing on political,economic,social,technological,ecological and legal environments. Political and regulatory environments focus on governmental policies and regulations that affect the market whereas the economic environment examines the business cycle, inflation rates, interest rates and other macro-economic issues. Social and cultural environment examines society`s trends and fashions. Technological environment on the other hand analyses new knowledge that makes possible new ways of satisfying needs and the impact of technology on the demand for existing products.
To sum up, it is important to learn about the internal and external factors that can affect the project or strategy during planning. By working through each of the above models of environmental analysis, it is possible to identify internal and external advantages and disadvantages which could benefit or hinder the outcome of a planned project thus making a difference to the success or failure of a project. By knowing this information, it can be possible to plan a successful project that is ready to work around certain problems effectively and to avoid failure. It is a good idea and excellent practice to work through the situation analysis with a team in the early stages of a project or strategy planning. Brainstorming is a great way of introducing all the relevant internal and external factors for each section of the analysis.
“If you don`t have a competitive advantage, don`t compete”-Jack Welch
“There are two ways to establish competitive advantage; do things better than others or do them differently”-Karl Albrecht
-Adopted from The KASNEB Newsline Journal