Business Environment Analysis

Background

Environmental analysis is a systematic process that starts from identification of

environmental factors, assessing their nature and impact, auditing them to find
their impact to the business, and making various profiles for positioning. A
common process of environmental analysis or scanning is discussed in the
following section.

Environmental Analysis Process

A business manager should be able to analyze the environment to grasp

opportunities or face the threats. Organizations need to build strength and
repair their weakness available in the business environment. Therefore, this
process consists not only a single steps but a process of various steps.

Environmental analysis comprises scanning, monitoring, analyzing, and

forecasting the business situation. Scanning is to get the relevant information
from the information overload. It is to focus on the most relevant information.
Monitoring is to check the nature of the environmental factors. Analyzing
requires data collection and use of different required tools and techniques.
Forecasting is to find the future possibilities based on the past results and
present scenario.

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 and
selecting 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.

Identifying environmental factors

First of all a strategist should identify all the relevant factors that might affect
his or her business. In this process, one should first know what the internal
areas of the business are. This includes all the systems, internal structure,
strategies followed, and culture of the organization. All these areas can be
covered into the five functional areas in classical approach. Similarly, a
business daily interacts with the close environmental components outside the
business such as customer, competitor, and supplier. It might cover all other
stakeholders such as trade union, media, and pressure group. Furthermore,
general such business environment factors as political-legal, economic, socio-
cultural, and technological factors are to be identified
Scanning and selecting relevant and key factors

Out of all the business environmental factors, a strategist should focus only on
the relevant factors for further analysis. All the factors are not equally
important and affecting to the business. In this context, a strategist has to scan
the environmental trend to select only the most affecting environmental factors
from the information overload. This step paves the way of environment
analysis and forecasting.

Defining Variables for Analysis

Selected environmental factors are to be further specified into the variables. A

concept can be interpreted into different variables. For example, political
situation can be measured using few variables such as instability, reliability,
and long-term effect. Economic environment might cover many variables such
as Per Capita, GDP, and Economic policies that can be further classified into
many other variables. Variables are the basis of measurement in
environmental analysis process. Variables can be compared, grouped,
correlated, and predicted to find the clearer picture of the broader concept. It
is, therefore, necessary to define the variables first in any kind of analysis
including the environmental analysis.

Using Different Methods, Techniques, and Tools

Different types of methods, tools, and techniques are used for analysis. Some
of the major methods of analysis can be Scenario Building, Benchmarking,
and Network methods. Scenario presents overall picture of its total system
with affecting factors. Benchmarking is to find the best standard in an industry
and to compare the one’s strengths and weakness with the standard. Network
method is to assess organizational systems and its outside environment to find
the strength and weakness, opportunity and threats of an organization.
...
Some of the techniques of primary information collection can be Delphi,
Brainstorming, Survey, and Historical enquiry. Delphi technique collects
independent information from the experts without mixing them. Brainstorming
is information collection technique being open minded without criticizing
others. Survey is to design questions and to ask them to the participants
whereas the historical enquiry is a kind of case analysis of past period.

Analysis tools can be statistical such general descriptive tools as mean,

median, mode, frequency. Tools can be inferential as ANOVA, correlation,
regression, factor, cluster, and multiple regression analysis. There are many
tools of analyzing functional areas. Finance and accounting use mostly
profitability, leverage, fund flow and other similar accounting and financial tools
for analysis. Human resources use employee turnover, training, satisfaction
and many others as the basis of evaluating strength and weakness.
Production area is assessed using quality control, productivity, breakdown,
and many others. Similarly, marketing effectiveness is judged from the sales
 volume and market coverage. Research and development is perceived
successful if it can really develop the strength in an organization.

Forecasting Environmental Factors

Collecting relevant information from the selected areas and to identify the
variables in such areas are the basics of analysis. Analyzing the past
information to predict the future is the main objective of this step. As discussed
earlier, use of different methods, techniques, and tools comes under the
analysis process. It is, therefore, a comprehensive process that analyzes
collected information using different tools and techniques.

Designing Profiles

After analyzing the environmental factors they are recorded into the profiles.
Such profiles record each component or variables into left side and their
positive, negative, or neutral indicators including their statement in the right
side. Internal areas are recorded in Strategic Advantages Profile (SAP) and
external areas are recorded in Environmental Threat and Opportunity Profile
(ETOP). Strength, Weakness, Opportunity, and Threat (SWOT) profile can be
designed combining both of these two profiles into one.

There are varieties of reporting formats or profiles used for external and
internal business environment analysis. Environmental Threat and Opportunity
Profile (ETOP) is commonly used to report the external environmental situation
whereas Strategic Advantages Profile (SAP) to report the internal
environmental situation1. Both of these profiles can be merged into Strength-
Weakness-Opportunity-Threat (SWOT) profile.2 (See: annex...). David used
External Factor Evaluation (EFE) Matrix to present weighted score of external
environmental factors. Similarly, he used Internal Factor Evaluation (IFE)
Matrix to make the reporting of internal environmental audit. (See: annex-...).
Whellen & Hunger used External Factors Analysis Summary (EFAS) and
Internal Factors Analysis Summary (IFAS) that are presented in annex- ....

Environmental threats and opportunities profile (ETOP) is a commonly used

profile related to external business environment. Strategic advantages profile
(SAP) is related to internal business environment. Nowadays, strength &
weakness and opportunities & threats (SWOT) profile has become very
popular. Present writing pursued the approach of reporting external and
internal business environment using the same approach.
...
Preparing ETOP

Environmental threat and opportunity profile is referred as ETOP profile. It

identifies the relevant environmental factors. Such factors might be general
environmental factors and task environment factors. Thereafter, it is necessary
to identify their nature. Some factors are positive to the organization whereas

1
see Jauch, Gupta, and Glueck, 2003
2
see Jauch, Gupta, and Glueck, 2003; Johnson & Scholas, 2003
 others are negative. Therefore, it is necessary to find out their impact to the
organization. Positive, neutral, and negative sign in ETOP denotes the
relevant impact of environmental factors.

Preparing SAP

Strategic advantage profile is known as SAP. It shows strength and weakness

of an organization. Preparation of SAP is very similar process to the ETOP.
There are generally five functional areas in most of the organizations. These
areas are Production or Operation, Finance or Accounting, Marketing or
Distribution, Human Resource & Corporate Planning, and Research &
Development. These functional areas are listed to identify their relative
strength and weakness in SAP. Very similar to the ETOP, positive, neutral,
and negative signs are denoted and brief description is written in SAP profile.
Each functional area is very broad having many components inside.

All these above described profiles provide a clear picture to understand the
strategic position of an organization.

Strategic Position and Report Writing

After analysis of business environment a strategist knows the actual situation

and can make some future forecasting based on the environmental analysis.
After preparing the profiles strategists prepare formal report that describes the
business environment. The report might present issues and best strengths of
business environment in a systematic process. One can draw future strategies
based on the strategic analysis followed.

In conclusion, a strategist or a manager first identifies the relevant

environmental factors then analyzes using different tools and techniques to
find out the actual situation. This overall process is sometimes known as
SWOT analysis, environmental scanning, environmental analysis, or
monitoring-forecasting. This process is very important for a manager to make
his or her organization success by choosing the best available alternative
strategy.

Some Approaches of Specific Environmental Scanning

In this section, a brief discussion is made on the potential approaches, tools,

and techniques that are commonly used to analyze the sector wise business
environment. The sectors of business environment are external business
environment, industry level business environment, and internal business
environment.