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DefinitionEnvironmental analysis is defined as "the processby which strategists monitor the economic,
governmental/legal, market/competitive, supplier/technological, geographic, and social settings todetermine opportunities and threats to theirfirms.
"Environmental diagnosis consists of managerialdecisions made by analyzing the significance ofthe data (opportunities and threats) of theenvironmental analysis.
Environmental analysis is an essential prerequisitefor strategic management decision-making.
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Just as the life and success of an individual
depend on his innate capability, including
physiological factors, traits and skills, to cope with
the environment, the survival and success of abusiness firm depend on its innate strength
resources as its command, including physical
resources, financial resources, skill and
organization and its adaptability to the
environment.
Types of Business Enterprise
Every business enterprise, thus, consists of a setof internal factors and is confronted with a set of
external factors.
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The internal factors are generally regarded ascontro l lable factors because the company hascontrol over these factors; it can alter or modify
such factors as its personnel, physical facilities,organisation and functional means, such asmarketing mix, to suit the environment.
The external factors, on the other hand, are, by
and large, beyond the control of a company. Theexternal or environmental factors such as theeconomic factors, socio-cultural factors,government and legal factors, demographic
factors, socio-cultural factors, government andlegal factors, demographic factors, geo-physicalfactors etc., are, therefore, generally regarded asuncontrollable factors.
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Internal
Environment
Business
Decision
External
Environment
Types of Business Environment
Value System
Mission and Objectives
Management Structure and Nature
Internal Power Relationship
Human Resources
Company Image and Brand EquityOther Factors
Micro Environment
Suppliers
Customers
Competitors
Marketing
IntermediariesPublics
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INTERNAL ENVIRONMENT
The value system of the founders and those at thehelm of affairs has important bearing on thechoice of business, the mission and objectives ofthe organisation, business policies and practices.It is a widely acknowledged fact that the extent to
which the value system is shared by all in theorganisation is an important factor contributing tosuccess.
Value System
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Mission and Objectives
The business domain of the company, priorities,direction of development, business philosophy,business policy etc., are guided by the mission
and objectives of the company.
Management Structure and Nature
The organizational structure, the composition of theBoard of Directors, extent of professionalisation ofmanagement etc., are important factors influencingbusiness decisions.
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Internal Power Relationship
Factors like the amount of support the top
management enjoys from different levels of
employees, shareholders and Board of Directors
have important influence on the decisions and
their implementation .Human ResourcesThe characteristics of the human resources like skill,quality, morale, commitment, attitude etc., could
contribute to the strength and weakness of anorganisation. Some organizations find it difficult tocarry out restructuring or modernization because ofresistance by employees whereas they are smoothly
done in some others.
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Company Image and Brand Equity
The image of the company matters while raisingfinance, forming joint ventures or other alliances,soliciting marketing intermediaries, entering purchaseor sale contracts, launching new products etc. Brandequity is also relevant in several of these cases.
Other Factors
Physical Assets and Facilities
R & D and Technological Capabilities
Marketing Resources
Financial Factors
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EXTERNAL ENVIRONMENT
It is now unquestionably accepted that the prospects
of a business depend not only on its resources but
also on the environment. An analysis of Strengths,
Weaknesses, Opportunities and Threats (SWOT) isvery much essential for the business policy
formulation.
Micro Environment
Suppliers
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Customers
The choice of the customer segments should be made
by considering a number of factors including therelative profitability, dependability, stability ofdemand, growth prospects and the extent ofcompetition.
Competitors
This competition among these products may bedescribed as desire competition as the primary task
here is to influence the basic desire of the consumer.The competition among such alternatives whichsatisfy a particular category of desire is called generic
competition.
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In other words, there is a product form competi tion.
Finally the consumer encounters the brandcompet i t ioni.e., the competition between the different
brands of the same product form.
Marketing Intermediaries
The immediate environment of a company mayconsist of a number of marketing intermediaries whichare "firms that aid the company in promoting, sellingand distributing its goods to final buyers.
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Publics
A company may encounter certain publics in itsenvironment. "A public is any group that has anactual or potential interest in or impact on anorganisation's ability to achieve its interests".
Media publics, citizens action publics and localpublics are some examples.
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MACRO ENVIRONMENT
Economic conditions, economic policies and theeconomic system are the important externalfactors that constitute the economic
environment of a business.1. The economic conditions of a country - forexample, the nature of the economy, the stageof development of the economy, economic
resources, the level of income, the distributionof income and assets, etc. are among thevery important determinants, of businessstrategies
Economic Environment
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MACRO
ENVIRONMENT
MICRO
BUSINESS
ENVIRONMENT
DEMOGRAPHIC
FACTORS
NATURAL
FACTORS
MARKETING
INTERMEDIARIES
PUBLICS COMPETITORS
Internal
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2. The economic policy of the government, needlessto say, has a very great impact on business. Sometypes or categories of business are favorably
affected by government policy, some adverselyaffected, while it is neutral in respect of others.
The scope of private business depends, to a large
extent, on the economic system. At one end, thereare the free market economies or capitalisteconomies, and at the other end are the centrallyplanned economics or communist countries. Inbetween these two are the mixed economies.Within the mixed economic system itself, there arewide variations
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Countries like the United States, Japan, Australia,
Canada and member countries of the EEC are
regarded as market economies.
China, East Germany Soviet Union,
Czechoslovakia, Hungary, Poland, etc., had
centrally planned economies. However,recently several of these countries have
discarded communist system and have moved
towards the market economy.
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Political and Government Environment
Therefore a considerable part of the attention of a
the Chief Executive and his senior colleagueshas to be devoted to a continuous dialoguewith various government agencies to ensuregrowth and profitability within the framework
of controls and restraints.The differences in language sometimes pose a
serious problem, even necessitating a changein the brand name. Preett was, perhaps, a good
brand name in India; but it did not suit in theoverseas market;
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and hence it was appropriate to adopt 'Prestige' for
the overseas markets. Chevrolet's brand name
*Nova' in Spanish means "it doesn't go". InJapanese, General Motors' "Body by Fisher"
translates as corpse by Fisher". In Japanese,
again, 3M's slogan "sticks like crazy" translates as
"sticks foolishly". In some languages, Pepsi-Cola'sslogan "come alive" translates as "come out of the
grave.
The values and beliefs associated with colour vary
significantly between different cultures. Blue,considered feminine and warm in Holland, is
regarded as masculine and cold in Sweden.
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Green is a favorite color in the Muslim world; butin Malaysia, it is associated with illness. White
indicates death and mourning in China andKorea; but in some countries, it expresseshappiness and is the color of the weddingdress of the bride. Red is a popular color in thecommunist countries; but many Africancountries have a national distaste for red color.
There are also a number of demographic factors,such as the age and sex composition ofpopulation, family size, habitat, religion, etc.,which influence the business.
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Demographic Environment
While dealing with the social environment, we must
also consider the social environment of the
business which encompasses its social respon-
sibility and the alertness or vigilance of theconsumers and of society at large.
Demographic factors like the size, growth rate, age
composition, sex composition, etc. of the
population, family size, economic stratification of
the population, educational levels, language,
caste, religion etc. are all factors which are
relevant to business.
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Natural Environment
Geographical and ecological factors, such as natural
resource endowments, weather and climatic
conditions, topographical factors, locational
aspects in the global context, port facilities, etc.,
are all relevant to business.
Physical and Technological Environment
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International Environment
The international environment is very important from
the point of view of certain categories of business.It is particularly important for industries directly
depending on imports or exports and import-
competing industries. For example, a recession in
foreign markets, or the adoption of protectionistpolicies by foreign nations, may create difficulties
for industries depending on exports. On the other
hand, a boom in the export market or a relaxation
of the protectionist policies may help the export-oriented industries. A liberalization of imports may
help some industries which use imported items, but
may adversely affect import-competing industries.
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ENVIRONMENTAL CHANGEBusiness environment is dynamic. Many elements inthe environment undergo changes. Technological
changes are frequent. Tastes and the preferences ofthe people change. The competitive situation changes.Demographic factors, including population size,change.Altitudes and value systems undergo changes.Economic factors, like income, change continuously.
Government policies and regulations also change tocope with the changing environment.All these factorsindicate that a business policy should be dynamicenough to be successfully adaptable to the changingenvironment. The success of a business depends onits ability to foresee the environmental changes and tomodify its business strategies appropriately
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TECHNIQUESFOR ENVIRONMENTAL ANALYSIS
Verbal and written information
Search and scanning
Spying
Forecasting and formal studies
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STRATEGIC MANAGEMENT
An analysis of SWOT (i.e., strengths and weaknesses
of the company and the opportunities and threats inthe environment) plays a very important role in the
strategic management process or the formulation of
business policy. A look at the strategic management
process would make the importance of the external-internal factors nexus more clear.
Glueck defines strategy as a "unified, comprehensive
and integrated plan relating the strategic advantagesof the firm to the challenges of the environment. It is
designed to ensure that the basic objectives of the
enterprise are achieved
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Strategic management is defined as that set of
decisions and actions which leads to thedevelopment of an effective strategy or strategies
to help achieve corporate objectives.
Chandler describes strategic management as the
determination of the basic long-term goals and
objectives of an enterprise and the adoption of
courses of action and allocation of resourcesnecessary to carry out these goals.
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Strategic management or business policy is the
means to achieve the objectives. Strategicmanagement process involves ascertaining the
objectives, analysis of the environmental
opportunities and threats and appraising the
strengths and weaknesses of the firm to tap theopportunities or to combat the threats, formulating
strategies to achieve the objectives on the basis of
the SWOT analysis, choosing the most appropriate
strategy, implementation of the strategy andreformulation of the objectives or strategy, if
needed
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Formulation of
Objectives
SWOT
Analysis
Consideration of
Strategic
Alternatives
Choice of
StrategyImplementation Evaluation
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A strategy is, in fact, a means to achieve the endsor objectives. Objectives should not be static, theyshould be dynamic.
To formulate clear objectives, it is essential to getdefinite answers to certain questions, viz., "whatbusiness the company is in?" "What should thecompany's business be?" "What will the
company's business be?"Environmental analysis will help find answer to thequestion what should the company's businessbe?. If 'what should be the business' is different
from 'what is the business', there is certainly aneed for redefining the business, matching thecompany resources to the environment.
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Identification of the threats and opportunities in
the environment and the strengths and
weaknesses of the firm is the cornerstone of
business policy formulation; it is these factorswhich determine the. course/courses of action to
ensure the survival and/or growth of the firm.
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STRATEGIC ALTERNATIVESAND CHOICEOF STRATEGY
A company may be confronted with severalalternatives such as:
1. Should the company continue in the samebusiness or get out of it completely or partly?
2. If it should continue in the same business,should it grow by expanding the existing units,establishing new units or by acquiring otherunits in the industry.
3. If it should diversify, should it diversify intorelated area or unrelated areas?
4. Should it grow by vertical integration?
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A company which plans to market its products in
foreign markets may have the following
alternatives:
1. Manufacture the product completely in the homecountry and export it to the foreign market.
2. Establish manufacturing facility in a free area like
an export processing zone and make exports from
there.
3. Establish manufacturing facility in the foreign
country and undertake the complete
manufacturing of the product there.
4. Manufacture the components at home and
assemble the product in the foreign market.
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5. Contract some foreign firm for manufacturing
the product and do only the marketing of it.
6. Enter into licensing agreement with a firm in
the foreign market.
7. Establish a joint venture abroad for
manufacturing and marketing the product.
The choice of the strategy should invariably be
based on the evaluation of the various
alternatives.
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IMPLEMENTATION
A good strategy is not a sufficient condition forsuccess; its effective implementation is equallyimportant. Many good strategies fail to achievethe results because of poor implementation. Itis necessary to formulate a detailed plan toachieve the objectives by means of the chosenstrategy. The term implementation is used in abroad sense so that it encompasses also the
formulation of the plan to implement thestrategy.
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In a multi-unit business, formulation of different
levels of strategies is an essential and
important aspect of implementation. There are
three levels-of strategies applicable to such a
business.
Corporate Level Strategy :This is the master
strategy to achieve the overall corporate
objectives. The other levels of strategies are
designed to implement the corporate strategyand they are, therefore, formulated with
reference to the corporate strategy.
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SBU Level Strategy :It is the strategy to achieve
the specific objectives of the strategic
business unit (SBU) so as to help achieve the
overall corporate objectives. A SBU is an
operating division of a firm which serves a
distinct product/market segment or a well-defined set of customers or a geographic area.
The SBU is given the authority to make its own
strategic decisions within corporate guidelines
as long as it meets corporate objectives. TheSBU is also known as operating division.
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Func t ional Level Strategy :
The task of implementation involves mobilization
and deployment of resources, including
personnel, needed for implementation,
organizing and assigning tasks to the variouselements of the organization. For effective
implementation of the strategy it is essential to
formulate an implementation strategy.
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EVALUATION
Evaluation of strategy is that phase of the
strategic management process in which thetop managers determine whether their
strategic choice as implemented is meeting the
objectives of the enterprise
Failure to achieve the results may arise from any
one or more of the following:
1. Improper implementation of the strategy.
2. Environmental changes which were notanticipated while formulating the strategy.
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3. Inappropriate strategy.
Improper implementation of the strategy may bedue to
a) inappropriateness of the implementationstrategy.
b) inefficiency and/or lack of commitment of thepersonnel in charge of implementation.
c) wrong assignment of the tasks; or
d) inadequacy of resources.
Environmental changes such as increase in
competition, changes in consumer preferencesor altitudes, technological changes whichcould not be anticipated while formulating thestrategy etc. may come in the way of achieving
the results.
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CONCLUSION
The key to business success is the most effective
utilization of the company's resources(resources here mean not only the existing
resources but also the additional resources it
can mobilize and augment for any specific
task). This involves the evaluation of thecompany's strengths and weaknesses in the
light of the environmental threats and
opportunities and taking appropriate measures
to harness the opportunities or to combat the
threats and formulation of strategies
accordingly.
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Environmental analysis comprises scanning, monitoring, analyzing, and
forecasting the business situation.
Environmental analysis process is not static but a dynamic process. It may
differ depending on the situation. However, a general process with few
common steps can be identified as the process of environmental analysis
these are a) Monitoring or identifying environmental factors, b) Scanning andselecting the relevant factors and grouping them, c) Defining variables for
analysis, d) Using different methods, tools, and techniques for analysis, e)
Analyzing environmental factors and forecasting, f) Designing profiles, and g)
Strategic positioning and writing a report. Brief discussion is made on each of
the step of this environmental analysis process.