Environmental Analysis

This comprises the industries and sectors, competitors and markets where the organization competes for resources and consumers (it is sometimes referred to as the ‘competitive’ environment). All organizations need to be aware of the factors and conditions that impact on their particular industry or sector. For example, the boundaries between separate industries may change, resulting in convergence, such as is the case with the computing, telecoms and entertainment industries. Key to making sense of the near environment is an awareness and understanding of the competitive forces that exist. Porter’s Five Forces model was devised to help organizations to do exactly this by assessing:

• The threat of entry of new rivals
• The bargaining power of buyers
• The bargaining power of suppliers
• The threat of substitute products

Despite being devised in the 1980s, Porter’s Five Forces is still a favored method of industry analysis today. As well as analyzing its industry, an organization will wish to carry out market segmentation in order to understand customers and satisfy their needs better than the competition.

Many organizations segment consumer markets differently from industrial markets.

Consumer markets tend to be segmented along differing customer characteristics such as:

• Geographic: e.g. country, region, neighborhood.
• Demographic: e.g. age, gender, occupation, race, religion.
• Psychographic: e.g. interests, values, opinions.
• Behavioral: e.g. brand loyalty, readiness to buy, user status (first-time buyer, regular buyer, etc.).

Industrial markets tend to be segmented by:

• Location: e.g. distance from vendor.
• Company type: e.g. size, product or service offered.
• Behavioral characteristics: e.g. buyer status, purchasing methods.

By segmenting its industry and markets, an organization can gain a better understanding of its customers and potential customers, and therefore tailor its products and services to match customer needs as closely as possible.

The Far Environment

The six main pressures and influences on organizations in the ‘far’ external environment are represented by the acronym PESTLE which represents the following external forces:

• Political: the existing and potential influences that government places on organizations, via government agencies, pressure groups, etc.
• Economic: the impact that the national and international economy has on all types of organizations. For example, when bank interest rates are low, people have more disposable income to spend on a range of goods and services; but when interest rates are high, consumer spending will reduce.
• Social: changes in society have a considerable impact on how organizations set strategies. When analyzing the external environment, organizations should consider demography, i.e. the impact that the size and structure of the population has on customer demand and on the workforce, e.g. an aging population. Social culture will also affect the demand for goods and services, e.g. increasing environmental awareness has created a demand for eco-friendly products.
• Technological: advances in technology probably have the most profound effect on organizational strategy. The arrival of the internet, for instance, has transformed the way that organizations sell their products, and how they communicate with customers and employees across the globe.
• Legal: organizations need to be aware of existing and upcoming local, national and international legislation that affects their business, including employment law, competition law, and health and safety regulations.
• Environmental: factors such as environmental protection laws and regulations, and social attitudes to energy consumption and waste disposal can all affect organizations and the way they do business.

A PESTLE analysis is a popular technique that can be used to examine the many different external factors affecting an organization, in order to help organizations systematically identify any threats. Once an organization has identified the main characteristics of the external environment in which it operates, it should look for ways to minimize any possible threats and exploit new opportunities.

Spotting The Opportunities

Johnson and Scholes point out that if organizations consistently compete with market rivals that have the same or similar products or services, then everyone will find the market tough and unattractive. This can be countered if an organization can spot a strategic gap in the market.

Strategic gap: ‘An opportunity in the competitive environment that is not being fully exploited by competitors.’ [1]

Johnson and Scholes suggest the following areas in which organizations may find such opportunities: [2]

• Opportunities in substitute industries: e.g. a software company substitutes paper encyclopedias for online versions.
• Opportunities in other strategic groups: [3] e.g. privatization of the rail network in the U.K. means that bus operators can apply for rail franchises.
• Opportunities for complementary products: e.g. people go to the gym to stay in shape and look good, so some private gyms also have beauty salons on site.
• Opportunities in new market segments: e.g. Starbucks has turned coffee into an experience, not just a drink, by providing customers with the opportunity to customize their beverage, and enjoy it in a relaxing atmosphere.
• Opportunities over time. Where an organization anticipates a change in the competitive environment, it can gain first-mover advantages, e.g. eBay anticipated that the internet could revolutionize the ‘small ads’ business, which it has turned into a multi-million dollar enterprise.

SWOT Analysis

The combination of outputs from the analysis of both the internal and external environment is a SWOT analysis, which helps organizations analyze their overall Strengths, Weaknesses, Opportunities, and Threats. These are often set out in table form as shown below. The example shown is for a small pharmaceutical company.

This approach, however, does not put the strengths, weaknesses, opportunities, and threats in context. In particular, it does not relate them to one another, or illustrate how a particular strength will allow an organization to exploit an opportunity or counter a threat. Nor does it highlight whether acknowledged weaknesses might leave the organization vulnerable to a threat or unable to exploit an opportunity.

To develop strategies that take into account the SWOT profile, therefore, it is a good idea to carry out a matching process, by constructing a TOWS matrix as shown below.

Strengths

Weaknesses

Opportunities

S-O Strategies

W-O Strategies

Threats

S-T Strategies

W-T Strategies

• S-O Strategies represent opportunities that are a good fit with the organization’s strengths.
• S-T Strategies indicate ways for the organization to use its strengths to counter external threats.
• W-O Strategies help the organization to overcome its weaknesses to pursue opportunities.
• W-T Strategies help the organization to prevent its weaknesses from rendering it vulnerable to external threats.[4]

In addition, an organization should consider its SWOT profile in terms of how it compares to those of its competitors.

The Importance of Scenario Planning

Given the rapid pace of political, environmental and technological change in today’s society, strategic decisions can be increasingly difficult to make. Scenario planning can be a very useful way to analyze the environment in this regard.

‘Scenario planning is a discipline for rediscovering the original entrepreneurial power of creative foresight in contexts of accelerated change, greater complexity, and genuine uncertainty.’ [5]

It differs from conventional market research or financial forecasting techniques by depicting alternative ‘futures’ instead of projecting forward current trends. [6] This enables organizations to model a series of potential futures and to modify their future plans according to the most feasible scenarios. Scenarios are not predictions, then, but plausible, well-illustrated hypotheses of various ‘what if’ possibilities.

Conclusion

In order for organizations to make informed and appropriate strategic choices, they must first develop a clear understanding of both their internal and external environment.

Internal analysis of the organization involves a thorough examination of the firm’s strengths and weaknesses.

External analysis looks at the opportunities and threats posed by competitors in the organization’s industry and markets, and by existing and potential opportunities and threats that exist in wider society.

The results of internal and external analysis can be brought together and summarized in a SWOT analysis, which can then be used to inform future strategic development.