Chapter 2 Environment Scanning and Importance

of Business Environment

Environmental analysis is careful study of various factors influencing the business. It is the process by which organization monitor their relevant environment to identify opportunities and threats affecting their business.

Environment analysis helps to identify opportunities and to plan to take appropriate action to avail these opportunities. It also helps in developing an early warning system to prevent threats or to develop strategies which can turn a threat to the firm’s advantages. Environment analysis is the study of technological factor, political factors, global factor etc. By carefully analyzing the environment, the businessmen come to know the opportunities provided and threat posed by environment. Keeping in view, its strengths and weakness, it can avail benefits of available opportunities and face threats.

Objectives of Environment Scanning/ Analysis:1. To Understand Current and probable Change In environment: it is importance that one must be aware of existing environment and changes in various factors of environment like-changes in economic environment, technological environment, political environment, global environment, etc.

TO PROVIDE INPUT FOR DECISION-MAKING: DECISION-MAKING MEANS TO SELECT AN ALTERNATE AMONG THE VARIOUS AVAILABLE ALTERNATES. IN THIS PROCESS, WE NEED INFORMATION FOR ANALYZING VARIOUS ALTERNATES, SO THAT THE BEST ALTERNATE IS SELECTED. ENVIRONMENTAL ANALYSIS PROVIDE SUCH INFORMATION TO DECISION MAKER.

To Formulates Appropriate Strategy: Environmental analysis helps in developing strategies and long policies of the firm, by analysing opportunities and threats to the business. For example development of timely action plans to deal with technological advancement: and formulation of effective counter-measures to face competitor’s moves.

To ensure Optimum Utilisation of Resources: The key of business success lies in the most effective utilization of the company’s resources. All these involves the evaluation of company’s strengths and weakness in the light of the environmental threats and opportunities and taking appropriate measures to avail the opportunities or to face the threats.

Other Objectives: 1. To identify the threats and opportunities

of environment.2. To identify the strengths and weakness

of the business.3. To diversify the business in new areas

and to keep the business dynamic. 4. To forsee the impact of various helps the organization of business environment.

Thus, environmental analysis helps the organization to identify, understand and adapt to external issue; to anticipate the consequences of the environmental factors and to develop well thought out plans and polices.

Process of environment scanning/Analysis: The process of environment analysis includes various steps like monitoring various sources OF relevant information related to environment factors affecting our business, searching and scanning the required information, making necessary forecasts on the basis of information so collected. Later these information and forecasts are assessed and evaluated to understand various environment changes and their impact on business. Various steps in the process of environment analysis are discussed below:

1. Monitoring: It means to understand the various environment factors which affect the business and to identify published or unpublished sources of information which affects our business. These sources can be: A) Newspapers: Economic Times, Financial Express, Business standard, Times of India, Hindustan Times, etc.

b) Magazines and Journals: Business India, Business World, Economic and Political Weekly, Harward Business Review, India Today. The Sunday Observer, Yojana, Southern Economist, etc.c) Government Publication: Census of India reports, Five Years plan reports, periodical reports like economic survey, annual survey of Industries, annual reports of ministries, RBI bulletins, Books of publication Division, etc.

d) Institutional publications: 1. Bombay Stock Exchange Directory2. Publication of National Council for Applied

Economic Research (NCAER)3. Publication of centre for Monitoring Indian

Economy (EMIE)4. National Sample Survey organization Reports5. Annual Company Reports6. Publication of Trade and industry federations

etc.

e) International publication: International institutions like World Bank, International monetary fund, World trade organization. United Nations Conference on trade and Development (UNCTAD), United Nations organization (UNO) etc., conduct surveys and publish their reports. Some of the publications are: 1. World Development Reports2. Human Development Reports3. UNCTAD handbook of Statistic4. World Trade Report 5. World Investment Report

2. Searching and Scanning: Even when the sources of required information's exist, these may not be readily available. Search and scanning are therefore needed to manage the timely availability of required information. A number of organizations have ‘Clipping Service’ which constantly scan newspaper, periodicals, etc. and prepare clipping containing information required by different departments or executives of organization. Many organizations have management information system for systematic gathering, processing, storing and providing information.

Spying although, regarded unethical by many, is not very uncommon is business. This has been used to a considerable extent to obtain secret information regarding defenses and space research. Some private agencies also provide information on competitor’s plans and activities which are essential for strategic planning.

3. Forecasting: Monitoring and scanning provide a picture of what has already taken place and what is happening. Strategic decision-making, however, requires a future orientation. So, forecasting is an essential element in environment analysis. Forecasting is concerned with estimation of direction and intensity of changes in environment factors. Forecasts of important components of business environment like economic environment, social environment, technical environment and political environment help in formulating plans and strategies.

For example, forecasting the general economic conditions, per capita income, and growth rate of population, expenditure pattern of population; technical advancement, etc. play a vital role in business decision-making and strategy formulation.

Evaluation and Assessment: Monitoring, scanning and forecasting are not ends in themselves. They simply provide information regarding current business environment and future business environment. But in assessment, we identify and evaluate as to how these environmental changes will affect our business so that appropriate counter strategies can be made well in time. Assessment provides us answer to the key issues presented by the environment and their impact on business.

In brief, in monitoring, sources of information are identified. In scanning, required data and information is collected from identified sources. In forecasting, changes in future are identified. In assessment, affect of these changes on business is assessed.

Techniques of Business environment scanning: Techniques of environmental scanning refer to methods of monitoring various sources of relevant information, searching the required information and making forecasts on the basis of information so collected. Various methods/techniques of environmental scanning are discussed below;

Monitoring the published or unpublished sources of information: In monitoring various sources of published or unpublished sources of information are identified which affect our business. Experts/Top executives identify the relevant sources of information like relevant newspapers, magazines, government publications, institutional publications, international publications, etc. While identifying the published sources of information, reliability of sources of information, assumptions made and methods used for data collection by published sources are taken care of.

If the information of published sources is not reliable or assumption/methods used by published source do not match with our requirements, then the whole purpose of environmental scanning will go waste. In such situation, first hand information, i.e. primary data is collected. Primary information is often used along with secondary sources of information. While collecting primary data, trained investigators are used who design questionnaire, conduct survey of the potential market area and collect the relevant information. Many a time, verbal information like news from electronic media, panel discussion on T.V. debates, workshops, seminars, conferences, etc. are used along with above stated data.

Searching the required information: After identifying the sources of information, the required information is searched from published sources and it is supported with primary and verbal information. A number of organizations have clipping services which constantly scan newspapers; periodicals etc. and prepare clipping containing information required by different departments or executives of organization. Many organanisation have management information system for systematic gathering, processing, storing and providing information.

Spying, considerable extent unethical by many is not very uncommon in business. This has been used to a considerable extent to obtain secret information regarding defence and space research. Some private agencies also provide information on competitors plan and activities which are essential for strategic planning.

Forecasting: Monitoring and searching of the required information provide a picture of what has already happened and what is happening strategic decision making and policy making. However, require a future orientation. So forecasting is essential and most important for environmental scanning. Forecasting of various components of business environment helps in formulating plans and strategies. Different quantities and qualities forecasting techniques are used for environment forecasting. The main methods of environmental forecasting are as follows:

1. Executive Opinion method: It is also known executive judgement method/jury method. In this method, business environmental forecasting is based on opinion and views of top executives. These top executives are working at high ranks in different departments such as marketing, production, research, finance, etc. A panel/jury/committee is formed consisting of these top executive. Each member of jury gives an estimate of future events for a particular time period based on available information, judgement and experience. Their individual opinions are analysed and discussed in the panel meeting. At the end, collective decision is taken regarding business forecasts for a specific time period.

2. Expert opinion method: In this method, business forecast is based on the opinion of outside experts. Opinions of outside experts or specialists form the basis of this method. These experts have best knowledge about the market conditions, tastes and preferences of target customers, level of competition, government’s policies, political conditions etc. in this method also; panel of outside experts is made.

The experts give their opinions. Their opinions are analyzed, discussed and then collective decision is taken regarding business forecast. This method is almost similar to Executive Opinion method. The only difference is that in Executive opinion method, executives of business unit itself discuss their opinions and reach at final estimate, while in expert’s opinion method, services of outside experts are hired and estimate is based on opinion of these outside experts.

3. Delphi Method: Delphi method of forecasting is an extension of experts’ opinion method. This method is used to consolidate the different expert opinions so as to reach a common estimate. This method involves no panel formation. In this method, consensus of different experts is reached without direct interaction among them. In this method, opinion of first expert is provided to second expert and second expert is asked to form his opinion on the basis of his knowledge and considering opinion of the first expert.

Then final opinion of second expert is handed over to third expert and then the third expert is asked to give his opinion considering the previous opinion and his own knowledge. This procedure goes on, depending upon number of experts hired by the business unit. The last expert forms the final opinion about sales forecasts. In this method, no collective meeting of experts is arranged.

4. ECONOMIC INDICATORS ANALYSIS METHOD: In this method, forecasting is based on certain indicators affecting business unit. After through analysis of these economic indicators, forecasting is done. For example, a) If government has announced liberal loan policy for farmers, then tractor manufacturing units will forecast their sales at higher levels. B) If government makes the use of helmet compulsory for both driver and pillion rider, then helmet manufacturing units will estimate their sales at higher level.

5. Past Projection Method: The assumption of this method is that past events will have their impact on future. In his method, results of immediate previous years or average of past few years are taken as base. Estimates made using this method are more reliable and are free from guesswork. But if there are major changes in components of business environment, then forecasts of this method may not prove useful.

6. Statistic Methods: Beside the survey and opinion-base methods, certain statistic methods are also used in environmental forecasting. These methods are more scientific and estimates made through these methods are more reliable. In statistic methods, an element of subjectivity is minimum. Following are commonly used statistical methods:

Trend Projections: This method is based on time series analysis. In this method, a trend equation and a trend line is framed keeping in view the past behavior (trend) of data. On this basis forecast of future period is made.Trend Equation in time series analysis is based on least square method. The basic formula is

Y = a + bX, where Y = Dependent VariableX = Independent variablea = value of dependent variable on the basis of given change in

Dependent.b = Rate of change is dependent

variable on the basic of given change in dependent

variable.

b) Regression Analysis: In this method, simple and multiple regression equations are used to estimate the value of dependent variable on the basiS of given value of independent variable /variables.

There are various methods for environmental forecasting. All the methods have their own merits and demerits. The selection of right kind of method depends upon purpose of forecasting, availability of relevant data, available time, available finance, convince etc. Some business units use more than one method for forecasting so as to get reliable estimates.

7. Scenario Development Method: Scenario development method is a popular method of forecasting when it is possible to make precise forecast of future. It is used for scanning complex environmental events. While analyzing socio-cultural and political environment, this method is much used. In this method, different alternative scenarios are developed. Generally, three possible alternative scenarios are developed:

1. Scenario under worst conditions2. Scenario under best conditions 3. Scenario under most likely conditionsFor all these alternative scenarios, future course of action, strategy and contingency action plans are developed.

These contingency action plans help the business managers to face the future uncertain events with more confidence and diligence. Even our planning commission makes three types of GDP growth estimates:1. Under pessimistic/worst conditions2. Under Optimistic or most favourable conditions3. Most likely conditions

8. Brainstorming method: Brainstorming is a technique used to generate new, innovative and unique ideas and forecasts. In this method, group member are encouraged to generate ideas, discuss them and make forecasts. In this method, a problem is assigned to a group. The group members are asked to generate innovative ideas using their creative thinking, so that various possible alternative ideas are generated. At the stage of idea generation, these ideas are not evaluated so that members feel free to generate more and more ideas. At later stage, these ideas are critically evaluated.

Business Barometer method: This method is used for forecasting economic environment. Index numbers are used as business barometer for measuring economic trends. The index numbers help to analysis long-term trends, seasonal fluctuations and cyclical movements in the economy. Index numbers measure the growth rate and the direction in which economy is moving.

Other Techniques: 1. SWOT Analysis: SWOT analysis is an analysis undertaken by business firms to understand their external and internal environment. The terms SWOT consist of four words.S = StrengthsW = WeaknessO = OpportunitiesT = Threats

SWOT analysis is applied to formulated effective organizational strategies. Through SWOT analysis, the business firm can match the strength (S) and weakness (W) existing within an organization ( in internal environment) with the opportunities (O) and threats (t) existing in the external environment. It enables a business firm to use its strengths to exploit the opportunities provided by the environment. On the other hand, threats of environment are reduced by lowering its weakness to the minimum level.

2. ETOP Analysis: ETOP analysis stands for environmental threat and opportunity analysis. In ETOP analysis, impact of each environmental factor on business unit is analysed. The favourable change in any components of business environment brings opportunities for business units while unfavouable changes in any component of business environment poses threat for business unit. Understanding the opportunities and threats helps the business managers in designing the appropriate strategy so as to get maximum gain from the opportunity and to save the business unit from negative consequences of threat.

Factor Affecting Environmental Scanning: No two business units will scan the different components of environment in the same manner. Various factor affect environmental scanning. Main factor are:

1. Personal Ability of Strategist: The persons who are involved in environmental scanning may be different with regard to their ability, experience, judgement, interpretation skills, educational level, age, socio-cultural values, etc. Different persons analyse the same situation in different manner. Some persons are pessimistic. One person may perceive a change in environment as opportunity, while other person may perceive it as threat. In this way, the results of environmental appraisal are significantly affected by the personal ability of strategist.

2. Internal Environmental or organizational factors: Internal environment of different business units is different. For a business unit that possesses huge financial resources, skilled human resources, large market size, good brand image, corporate image etc. A change in environment may offer opportunity, while the environmental change may pose threat to another business unit which is facing financial crunch, labour problem like strike. In this way various internal environmental factors affect environmental scanning.

3. External Environment Factors: If external environment of a business unit is very complex, and different external environmental factors are interdependent, then scanning of such environment requires in-depth analysis. It necessitates the use of various quantitative tools to get reliable result from environmental scanning. On the other hand, if external environment of any business unit is simple and less dynamic then scanning of such environment is comparatively easier.

Limitations of environmental Scanning /Analysis: Environmental analysis has certain limitations. These limitations are as follows1. Unexpected Events: Environmental analysis is concerned with monitoring current business environment and forecasting the future environment of the business. Future is always uncertain as any unexpected change may take place in any of the factor affecting business. Because of these unexpected changes, the results of environmental analysis may prove wrong.

Environmental analysis is not the only factor in strategy formulation: Strategy formulation is based on various inputs, while environmental analysis is only one of these inputs. Hence it is not sufficient guarantor of organizational effectiveness.3. Inaccurate Data: The result of environmental analysis will be reliable only when the data used in forecasting is correct. But it is quite possible that data used in forecasting is inaccurate. It may reduce the effectiveness of environmental analysis.

4. Too much dependence on information collected through Environmental Analysis: Success lies in adventure. Environmental analysis often makes decision taker too cautious in his approach. He is likely to miss some innovative and new ideas which although appear to be risky, but may prove beneficial for the business.

Responsibility for Environment Analysis: Environmental analysis is the work of top-level officials. The responsibility of environmental analysis cannot be assigned to lower officials. Some organizations maintain separate department of management information system. This department provides information to the managers as and when required. The work of environmental analysis can be assigned as this department provides information for decision-making and strategy formulation.

The work of environmental analysis can also be assigned to the committee consisting of top officials of various departments like department of finance, purchase, marketing, R&D etc. The best alternative is to have a separate department for environmental analysis to be headed by a competent official. This would entail additional expenditure, but the business will gain in terms of effective decision-making, effective counter strategies to face competitions and timely action plans for facing sudden changes in various component of external environment.

SWOT As A Technique of Environment Analysis: SWOT analysis is an analysis undertaken by business firms to understand their external and internal environment. The term SWOT consists of four words.S = StrengthsW = WeaknessO = OpportunitiesT = Threats

SWOT analysis is applied to formulate effective organizational strategies. Through SWOT analysis, the business firm can match the strengths (S) and weakness within an organization (in internal environment) with the opportunities (O) and threats (T) existing in the external environment. It enables a business firm to use its strengths to exploit the opportunities provided by the environment. On the other hand, threats of environment are reduced by lowering its weakness to the minimum level.

Strengths and Weakness of an organization are related to internal environment. Strengths and weakness can be in the form of :Technological CapabilitiesHuman resourcesProduction FacilitiesFinancial ResourcesMarketing Capabilities

A company can be strong or weak in respect of technology, finance, human resources, marketing capabilities and production facilities. The task is to make best use of its strengths and to reduce the weakness to the minimum level.

Opportunities and threats are related to external environment. The environment might present many opportunities but the company might not have the strengths to avail these opportunities; while some other companies may be strong enough to avail the opportunities provided by environment. Similarly the environment might pose a threat in the form of growing

competitions and the company may or not have the strength to meet the threat or to avail the opportunities.

The strength of reliance Industries in raising finance from the public is established. So this industry is very strong in capital intensive sector, because of its strength in raising finance from the public from national and international markets. The strength of Japanese companies are very strong in those industries which need high skills like electronic, computers, telecommunication etc. For many companies, the primary strength is in the brand image, company reputation and marketing. The strength of Hindustan unilever is in brand image and it has diversified in many areas because of its popular brands.

2. Weakness: The weakness of a firm refers to limitations of a business firm. It results in significant disadvantage for a firm in comparison to its competitors. For example, overdependence of a firm on a single product line, outdated technology, lack of financial resources, lack of good quality products, etc. can be weaknesses of a business unit. It can result in losses in times of crisis. The weakness of proctor and gamble is overdependence on a single product line- Vicks. If at any time, this product line faces competition, the revenues of proctor and gamble will be badly affected. Similarly, overdependence of Colgate is on single product line- toothpaste and tooth powder. This company has not diversified in other consumer goods. It is its weakness.

3. Opportunities: The availability of opportunities is a favourable condition in the organization’s environment. If a company has enough strength to avail the opportunities. It can generate extra profits. For example, government has made it mandatory for two-wheeler’s driver to wear helmet while driving the vehicle. This has created opportunities for helmet industry. Similarly, reduction in custom duty and excise duty by government on telecommunication products and electronic products has lead to increase in the demand for these products.

It is opportunity for manufactures of telecom products and electronic products. India has emerged as a global manufacturing base because of talented human resource and cheap labour. MNCs like Toyota, ford, Hyundai, Suzuki, etc. are taking benefit of this opportunity by setting their manufacturing base in India.

4. Threat: It is unfavourable conditions in the organization’s environment. It creates a risk for the organization. Threat can be in the form of growing competition, change in fashion, unfavourable changes in government policy, raw material shortages etc. For example, maruti-Suzuki’s swift and wagon R cars are facing threat in the form of increased competition from Hyundai’s i-10, i-20, Ford figo, volkswagen polo, Toyota Etios, Chevrolet beat, Tata’s Indica etc. Similarly entry of Reliance and Tata in telecommunication sector has posed threat to existing companies. Honda Activa Scooter has captured the market share of kinetic scooter. Liberal import of chines toys is posing threat to Indian toy industry.

After the identification of environmental threats and opportunities and the organsational strengths and weakness, the management should consider various strategic alternatives and choose the most appropriate strategy. Thus, environmental analysis is an important step towards corporate planning and business policy formulation. Corporate managers analysis the strength, weakness, opportunities and threat that exist for their business. It gives time to anticipate opportunities and to take appropriate action to avail these opportunities. It also helps in developing strategies for preventing the threats to the business.

Significance/need of the study of Business environment: It is essential for a business enterprise to keep itself aware of surrounding environment because the success of business depends to a great extent on its awareness about surrounding environment. The information about changes taking place in the environment enables business enterprises to adjust itself accordingly. A business enterprise can expend itself as and when favourable changes take place in the environment. If the environment is getting hostile, the business enterprise, individually or along with other business enterprises, can make efforts to make environment hospitable according to the requirement of business. The benefits of environmental study may be specified as follows:

1. TO FRAME POLICIES: The business enterprise should make it policies keeping in view the demands of environment. It should change its policies and strategies with the changes in environment. The success of business enterprises depends upon quick adaptability to environmental changes.

2. To ensure optimum utilization of resources: The study of business environment is important for optimum utilization of resources available to any business unit. These resources can be financial resources, human resources, and physical resources. Without through understanding of internal and external environment, resources can not be used in optimum manner

3. To Analysis competitors’ strategies and formulate counter measures: By environmental study, we come to know about the strategies of competitors and we can formulate effective counter-plans to face them. These counter plans will help the business enterprise in protecting and increasing its market share.

4. To keep Business dynamic and Innovative: Awareness of environmental changes makes the business managers more alert and dynamic. They can expand their business as and when any favourable change is taking place in the market; and if any unfavourable change is taking place in the market, then they can prepare themselves for facing these unfavourable changes with well planned strategies.

5. To provide input for decision-making: Decision–making means to select an alternative among the various available alternative. In this process, we need information for analyzing various alternates, so that the best alternate is selected. Study of business environment and its various components provides such information to decision-maker.

. 6 To find out the strengths of business: The strength of a business organization refers to the capacity by which an organization can gain advantage over its competitors. Environmental analysis helps the business organization to find out its strengths. After finding strengths, we can make our policies and strategies to expend our business and to take advantages over competitors.

7. To identify Weakness of Business: The weakness of a firm refers to limitation of a business firm. It results in significant disadvantages for a firm in comparison to its competitors. Environment analysis helps us to find out weakness of our business. For future growth and expansion of the business, decision-makers should make plans to overcome weaknesses.

8. To find out the opportunities Available to business: The availability of opportunities is a favourable condition in the organisation’s environment. If the company has enough strength to avail the opportunities, it can generate extra profits. Environmental analysis helps us to know the business opportunities so that we can formulate timely action plans to take full advantages.

9. To identify threats posed to business: Threat is unfavourable condition in the organization’s environment. It creates a risk for the organizations. By environmental study, we can identify the risk to the business. This risk can be because of technological changes, political changes, economic changes, increase in competitions, change in fashion, unfavourable changes in government policy, raw material shortages etc. After analyzing these risks, the business enterprises can make plans to manage such risks.

10. To know the internal Environment: The business manager should be familiar with internal environment of the business. Change in internal environment may affect the business in a positive or negative manner. For example, strike by worker is a change in internal environment, with negative effect on business. So study of internal environment helps to monitor such changes and make timely adjustment with these changes.

11. To understand market Conditions: The business has to sell its products in the market. Various components of market viz. consumers, competitors, supplier etc. affect the success of business. To understand the market conditions viz. change in demand and supply of goods, change in fashion, tastes level of competition, boom or depression etc., study of business environment is done.

12. To adjust with technological Advancement: A business enterprise should make time action plans to adjust with technological advancement. The firm which quickly adopts latest technical will have competitative advantages over others. If in any corner of the world, any technological improvement regarding our products has been made, then we should try to grasp it, to take competitive edge over river. Thus, adapting latest technological development helps the business to improve its efficiency.

13. To understand international events and their impact on business: Because of increasing globalisation, the impact of international events on the business is increasing. To understand global events and their Impact on business, study of international environment is must.

14. To understand economic policies of government and their impact on business: Various polices of government viz, export-import policy, taxation policy, industrial policy, monetary policy, foreign investment policy have deep impact on the business. Changes in theses policies may pose threat to business or create favourable opportunities for business. Change in theses policies should be closely monitored so that timely action can be taken and effective business plans can be made.

15. To understand political situation and its effect on business: Political situation within the country and in other countries affect business. Ideology of ruling party, political stability, political pressure, political relations of our government with other countries etc. affect our business. Study of political environment will help the business to understand the effect of political situation on business.

16. To foresee the impact of Socio-Cultural Factor: With the knowledge of socio-cultural factor like caste, religion, cultural, value system, education, family size, family structure, urbanization, etc. business enterprise can make timely changes in its policies, so as to adjust its products with the change in socio-cultural factors.

Conclusion: In general, by environment study, one can know the opportunities and threats which a business may face in future. If there is any favourable opportunity, we can quickly respond to it and can take competitive advantage. If there is any threat, we can counter it with well thought out strategies and can save the enterprise from such threat.