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Chapter 2 Environment Scanning and Importance of Business Environment

Chapter 2 Environment Scanning and Importance of Business Environment

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Chapter 2 Environment Scanning and Importance of Business Environment

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  1. 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.

  2. 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.

  3. 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.

  4. 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 providesuch information to decision maker.

  5. 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.

  6. 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.

  7. 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.

  8. 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.

  9. 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:

  10. 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.

  11. 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.

  12. d) Institutional publications: 1. Bombay Stock Exchange Directory 2. Publication of National Council for Applied Economic Research (NCAER) 3. Publication of centre for Monitoring Indian Economy (EMIE) 4. National Sample Survey organization Reports 5. Annual Company Reports 6. Publication of Trade and industry federations etc.

  13. e) Internationalpublication: 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 Reports 2. Human Development Reports 3. UNCTAD handbook of Statistic 4. World Trade Report 5. World Investment Report

  14. 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.

  15. 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.

  16. 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.

  17. 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.

  18. 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.

  19. 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.

  20. 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;

  21. 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.

  22. 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.

  23. 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.

  24. 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.

  25. 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:

  26. 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.

  27. 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.

  28. 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.

  29. 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.

  30. 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.

  31. 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.

  32. 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.

  33. 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:

  34. 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

  35. Y = a + bX, where Y = Dependent Variable X = Independent variable a = 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.

  36. 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.

  37. 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.

  38. 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:

  39. 1. Scenario under worst conditions 2. Scenario under best conditions 3. Scenario under most likely conditions For all these alternative scenarios, future course of action, strategy and contingency action plans are developed.

  40. 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 conditions 2. Under Optimistic or most favourable conditions 3. Most likely conditions

  41. 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.

  42. 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.

  43. 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 = Strengths W = Weakness O = Opportunities T = Threats

  44. 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.

  45. 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.

  46. 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:

  47. 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.

  48. 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.

  49. 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.

  50. Limitations of environmental Scanning /Analysis: Environmental analysis has certain limitations. These limitations are as follows 1.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.