ENVIRONMENTAL ANALYSIS

Chapter 3

THE CONCEPT OF ORGANIZATIONAL ENVIRONMENT

Business and managers are now faced with highly dynamic and ever more complex operating environments- Robert Paton

Environment of an organization consists of its surroundings-anything that affects its operations, favorably or unfavorably.

Managers can not make appropriate and sound strategy simply on the basis of their guesses and instincts.

UNDERSTANDING ENVIRONMENTAL INFLUENCES

Business managers must understand the various facets of the impacts of environment.

Managers need to recognize that external environment has many aspects that can have significant impact on the operations of a firm.

Managers need to undertake analysis environment on a regular basis.

BENEFITS OF UNDERSTANDING ENVIRONMENTAL INFLUENCES

Knowledge of environment helps managers identify the direction to which they should proceed.

Without an understanding of environment, managers are like a bicycle without a handlebar.

Managers can isolate those factors, especially in the external environment, which are of specific interest to the organization.

BENEFITS OF UNDERSTANDING ENVIRONMENTAL INFLUENCES

Managers can take preparation to deal with predicted crisis in any of the factors of the environment.

Managers can develop crisis plan. Analysis of the environment helps to achieve

organization effectiveness.

TYPES OF ORGANIZATIONAL ENVIRONMENT

Organizational environment can be classified into two broad categories:

External environmentInternal environment

ANALYSIS OF EXTERNAL ENVIRONMENT: MEANING &

NATURE

External environment consists of an organization’s external factors that affect its business indirectly.

The organization has no or little control over these factors.

The external environmental factors reside outside the organization, which lead to opportunities or threats.

TYPES OF EXTERNAL ENVIRONMENT

THE GENERAL ENVIRONMENT

The general environment includes the distant factors in the external environment that are general or common in nature.

Its impact on the operations of the firm, its competitors and customers make its analysis imperative.

PESTLED MODEL

A list of the general environmental factors is given below:

Factor-wise PESTLED Environment-wise PESTLED

Political factors Political environment

Economic factors Economic environment

Socio-cultural factors Socio-cultural environment

Technological factors Technological environment

Legal factors Legal environment

Environmental (natural) factors

Environment (natural)

Demographic factors Demographic environment

POLITICAL ENVIRONMENT

The government of a country intervenes in the national economy through setting policies/rules for business.

We see many policies like- import policy, export policy, taxation policy, investment policy, drug policy, competition policy, consumer protection policy etc.

Political stability of a country affects the operations of a business substantially.

POLITICAL ENVIRONMENT

Political instability in Bangladesh, srilanka, Nepal, Pakistan Afghanistan, Argentina can affect the operations of the business.

Government agencies and pressure groups can exercise power to influence the operation of business.

POLITICAL ENVIRONMENT

Government agencies include-Different ministriesOffice of the controller of imports and exports

Board of investmentNational Board of Revenue etc

POLITICAL ENVIRONMENT

Pressures groups include- CAB(Consumers Association of

Bangladesh) Various chambers of commerce and

industry Employers association etc.

ECONOMIC ENVIRONMENT

A country’s economic well-being affects market attractiveness.

The economy of a country can be in a situation of boom or recession or depression or recovery or it may be in a state of fluctuation.

Purchasing power depends on-IncomePricesSavingsDebtAvailability of credit

SOCIO-CULTURAL ENVIRONMENT

Socio-cultural forces include-CultureLifestyle changesSocial mobilityAttitude toward technologyPeople’s values, opinions and beliefs

SOCIO-CULTURAL ENVIRONMENT

Socio-cultural factors differ across countries in terms of- Increasing life span of population Trend toward fewer children Movement of population from rural areas

to urban areas Increasing rate of female education Entry of women in the workforce etc.

TECHNOLOGICAL ENVIRONMENT

Technological dimensions include- Information technology The internet Biotechnology Global transfer of technology etc.

TECHNOLOGICAL ENVIRONMENT

None can deny the fact that the pace of changes in these technological dimensions is extremely fast.

Technology has major impacts on product development, manufacturing efficiencies and Potential competition

The effects of technological changes occur primarily through new products, processes and materials.

LEGAL ENVIRONMENT

The legal environment consists of laws and regularity framework in a country. Labor code Factories act Industrial Relations ordinance The Contract Act The Company Law

NATURAL ENVIRONMENT

The most pertinent issues in the natural environment that strategy makers should consider include- Availability of raw materials and other

inputs Changes in the cost of energy Levels of environmental pollution The changing role of government in

environmental protection

DEMOGRAPHIC ENVIRONMENT

The demographic environment is concerned with a country’s population. It is related to-

Population's sizeAge structureGeographic distributionEthnic mixIncome distributionEducational levelHousehold patternsInter-regional movements

HOW DO ORGANIZATIONS RESPOND TO EXTERNAL

ENVIRONMENT?

LobbyingInfluencing customersInfluencing suppliersBoundary spanningEnvironmental scanningStrategic responsesOrganizational combinations

INTERNAL ENVIRONMENT: MEANING AND ELEMENTS

The factors of internal environment are-Resources of the organizationOwners/stockholdersBoard of DirectorsOrganization's cultureOrganization’s image/goodwill

AREAS USUALLY COVERED BY INTERNAL ANALYSIS

The following major specific issues need to be covered in the analysis:

Financial positionProduct and service optionProduct and service qualityMarketing capabilityResearch and development capabilityOrganization structureHuman resourcesConditions of facilities and equipmentPast and present objectives and strategies

etc.

FRAMEWORK FOR INTERNAL ANALYSIS

Strengths Weaknesses

A distinctive competences? No clear vision?

Adequate financial resources? Poor strategic direction?

Excellent competitive skills? Obsolete machinery?

Positive image of the company?

Lack of managerial talent?

Access to economies of scale? Lack of competencies?

Proprietary technology? Poor track record in strategy implementation?

Cost advantages? Falling behind R & D?

Competitive advantage? Narrow product line?

Product innovation capabilities?

Weak market image?

Good leadership and management?

Competitive disadvantages?

Achieved market leadership? Poor marketing skills?

CONDUCTING INTERNAL ANALYSIS: WHO TO DO IT?

Usually the following practices are prevalent in different organizations:

Involvement of planning departmentUse of outside consultantsForming of team