Environmental Analysis: Meaning, Types, Importance and Limitations


Meaning Of Environmental Analysis

Environmental analysis refers to process of identifying and examining all potential environment variables that can either directly or indirectly affect the performance and profitability of business organization. It is also termed as environmental scanning that is a strategic tool to find out all internal and external elements having capability of influencing the efficient and effective functioning of organization. Internal elements comprise of strengths and weakness of business enterprise, whereas external element represent the opportunities and threats outside the organization. The environmental analysis takes into consideration the trends and high-level factors such as interest rates, economy and manner how these are going to change firm’s business. Under it, the firm pertaining data is collected and utilized by management in order to determine the best strategies for capitalizing opportunities and generate large returns. 

In today’s time, the business environment is quite dynamic that keeps on changing frequently with time. Therefore, it becomes crucial to analyse environment for identifying each and every factor of business environment that can affect its operations. Once these factors got identified and their impact got understood, then it becomes easy to frame plan and policies accordingly. The internal insights from environmental analysis help businesses in assessing the employee’s performance, maintenance cost, customer satisfaction etc, so that required corrective actions can be taken timely. External metrics, on other hand, assists in responding to environment in positive manner and also aligning all policies as per the objectives of business organization.

Process of Environmental Analysis

The environmental analysis process comprises of following steps: – 

Identify environmental factors

The first step in environmental analysis involves identification of all such environmental factors or forces that influence the functioning of business entity. This identification is carried out at distinct levels such as company level, market level, country level and international level. Only relevant environmental factors are figured out under it, so that irrelevant, vague and ambiguous data can be avoided. Generally, the identification step includes competitor’s strategies, market factors, government policies etc. that affect the working of business entity.

Gather information

Once the factors to be examined are decided, then start gathering information concerned with selected environmental factors. Research needs to be carried out for collecting information that is of two types: verbal and written information. The verbal information is gathered via hearing such as listening to radio podcast, whereas written information is gathered by reading sources such as magazines, journal and newspaper. 

Evaluate your competitors

Here in this step, information is collected regarding competitors to find out if there are any threats from them or not. A technique called spying is utilized for gathering information in non-traditional way.  

Forecast the impact

Forecasting is an important step for identification of threats and opportunities in future and framing the plans and strategies accordingly. This step predicts about future events and their impacts on business entity on the basis of data gathered with regard to past and present events. Forecasting covers every aspect of business environment such as economic, technological, political etc. The methods used for forecasting include surveying and brainstorming.   

Assess your strategies

Finally in last step, each of environmental factor that is identified in previous steps are evaluated on the basis of their impact on organizational functioning and profitability. The degree of impact is variable from one factor to another. Some of the factors provide opportunity while other pose threat to business enterprise. Proper knowledge on impact of environmental factors assists in resolving the potential challenges that may arise from them. 

Types of Environmental Analysis

Environmental analysis is of different types based on the technique used for reviewing and evaluating information regarding internal and external environment. These techniques are as summarized below: – 

SWOT Analysis

SWOT refers to internal strengths and weaknesses of business enterprise as well as external threat and opportunities surrounding that business. The swot analysis assists managers in knowing the strategic situation of firm and determining whether it is a perfect fit in between internal resources, values and external environment. A good fit is one that maximizes the strengths and opportunities of entity and minimizes its weakness and threats. 

The primary role of SWOT analysis is to identify key internal as well as external forces that are crucial for attaining the desired goals and objectives. One of the effective utilization of SWOT analysis for good effect can be exploiting market opportunities through leveraging the firm’s strengths. 

TOWS Matrix

TOWS matrix is an environmental analysis technique used for strategic planning and facilitate marketers in identifying opportunities and threats and comparing them against internal strengths and weakness. It can be simply defined as variant of SWOT analysis paying more attention on opportunities and threat that are external to business organization and counting them with organization’s internal strengths and weakness. Therefore, TOWS and SWOT are simply acronym for distinct arrangements of words: strength, weakness, threat and opportunity. Both of them utilize same forces for carrying out analysis but are at sometimes used interchangeably without regard to order that strengths, weakness, threats and opportunities are evaluated. 

WOTS-UP Analysis

WOTS-UP analysis is also similar to above mentioned TOWS and SWOT analysis and are used interchangeably during business analysis for conveying the same thing. It serves as tool of planning for examining the strengths, weakness, threats and opportunities of organization. Its main motive is to do evaluation of both internal as well as external environment of business enterprise that helps in summarizing supportive and unsupportive factors by business. WOTS-UP analysis enable business in thinking strategic wise and utilizing their capabilities with full efficiency towards attaining better growth.    

BCG Matrix

BCG matrix was formed by Boston Consulting Group, a strategic management consulting enterprise, in order to examine the product’s performance. This matrix carries out comparison of distinct businesses in an organizational portfolio on the basis of market growth rate and relative market share. Relative market share means the ratio of business market share to market share of large rival existing in market. Whereas, market growth rate refers to market growth during previous year relative to economy growth as a whole. 

Importance of Environmental Analysis

The importance of environmental analysis can be well-understood from points given below: – 

Identify opportunities, threats, strengths and weakness

The primary benefit provided by environmental analysis is identification of both internal and external environment of business enterprise. Internal environment includes strength and weakness of firm, whereas external environment includes its opportunities and threats. Proper awareness on these forces that influence business both directly and indirectly, helps in framing right strategies for attaining desired goals in timely manner.  

Understanding the environmental changes

Environmental analysis help companies in developing the right understanding on present business environment and probable changes in future. These changes include change in legal environment, market demand, technology etc. Businesses, if not taking cognizance of changing market forces at right time, face difficulties in their market survival for long term.      

Provide inputs for decision making

The process of environmental analysis collects and provide information to organization regarding different aspects of business environment. This information is very crucial and from basis of decision making by managers. Various type of capital as well as investment decisions are taken on the basis of such information. 

Formulation of appropriate strategy

Environmental scanning assist in formulation of right strategies by companies for dealing with future events in appropriate manner. It analyses and examine all present strengths and weaknesses, or opportunities or threats and then accordingly the right future plans and policies are created. All plans and policies are formed with the motive of minimizing business threat via utilizing present strengths and to overcome business weakness via capitalizing the present opportunities.   

Identification of international events and their business impacts

The impact of international events on business organization has increased to a large scale due to globalization. In all such scenarios, analysis of environment assists in identification as well as understanding of global events and their impact on business. 

Limitations of Environmental Analysis

Various limitations of environmental analysis are: – 

Unexpected and Unanticipated events

The future forces and events that can influence organization are uncertain and unpredictable. Therefore, quantification and prediction of such factors can’t be done in accurate manner. 

Involves money and cost

Environmental analysis process involves a lot of cost and time. It is lengthy approach comprising of distinct steps such as scanning, monitoring, forecasting and assessment. The performing of all these steps by business in appropriate manner brings high expenses as well as consumes large time.  

Inaccurate data

The entire process of environmental analysis is based on data collected for same purpose. If in case, the data collected is inaccurate then whole activities of forecasting and predicting future events may go wrong.  

Based on assumptions

Process of forecasting in environmental analysis is based on distinct assumption that may or may not be true. There is a basic forecasting assumption that there is pattern of event happening. Such type of assumption may not hold true in all cases. 

Part of strategy formulation process

It is only a part of strategy formulation process that rely on distinct inputs. Therefore, it does not guarantee the organizational effectiveness.