Analysing the business environment: broad approaches - Business Environment

Analysing Business Environment

Environmental analysis or scanning should be seen as part of the process of strategic management and a prerequisite to the formulation and implementation of organisational strategies. It involves the monitoring and evaluation of information from the firm’s internal and external environments and the dissemination of this information to key individuals within the enterprise for whom the internal strengths and weaknesses and external opportunities and threats are of critical significance in decision making. As implied above, accurate forecasting of changing elements in a firm’s environment not only reduces the danger that it will be taken by surprise by environment changes, but also may give the firm a competitive advantage within its industry, especially if its rivals are less proactive in this sphere.Much of the process of environmental scanning can, of course, be undertaken on an informal and individual basis and the information can be gleaned from a variety of sources, including suppliers, customers, consultants, financial institutions, pressure groups, local organisations (e.g. Chambers of Commerce) and government. Larger organisations, however, may feel the need to supplement this approach by a more formalized system of information gathering and analysis, involving the use of a range of techniques some of which are described below. In broad terms, these more deliberate approaches to environmental scanning tend to focus on the firm’s societal and task environments. As indicated in Chapter, PESTLEor PEST analysis looks at likely changes in political, economic, socio-cultural and technological factors and seeks to predict the extent to which change is likely to occur and its possible consequences for the organisation (e.g. as more women returned to work in the United States, Avon shifted its emphasis from selling its cosmetics at home to selling them at the office during the lunch break). In contrast, industry-based approaches focus on firms producing the same or similar products and on the key features of their competitive environment, including the relative power of buyers and suppliers and the actual or potential threats from rival organisations.In this context, Porter’s five-forces model of competition provides a useful framework for analysis. In essence Porter argues that an organisation’s environment is predominantly conditioned by the intensity of competition in the industry, or industries, within which it is operating and that this is a critical influence not only on the competitive rules of the game, but also on the strategies potentially available to the firm. This competition is determined by five basic competitive forces referred to above and it is the collective strength of these forces which determines the ultimate profit potential in the industry, measured in terms of long-run return on capital invested.

the strategic management process

While not denying that a range of short-term factors may influence a firm’s profitability(e.g. strikes, sudden increases in demand), Porter’s contention is that any meaningful structural analysis must be based on an identification of the underlying characteristics of an industry which are rooted in its economics and technology, and it is these which are critical to the strengths of each competitive force. Foremost among these characteristics would be entry barriers to new firms, the intensity of rivalry among existing competitors, the pressure from substitute products, the relative bargaining power of buyers and suppliers and the importance of government in influencing competition.


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