ELEMENTS OF STRATEGIC MANAGEMENT, TY BBA (Marketing), VNSGU

CHAPTER 2

INTRODUCTION TO STRATEGIC ENVIRONMENT

Topics under study:

1. Concept of Environment
2. Nature / Features Of Environment
3. Role / Importance / Impact of Environment
4. Concept of Environmental Analysis
5. Role of Environmental Analysis
6. ETOP
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DEFINITION & MEANING - BUSINESS ENVIRONMENT

Definition: “Business environment consists of all those factors that affect a company's operations, and
includes customers, competitors, stakeholders, suppliers, industry trends, government, social, economic
factors and technology”.
Meaning: Environment of a business means the external factors that influence the business decisions.
They can be economic, social, political or technological factors. These factors are not under the control
of any single organisation.

NATURE / FEATURES OF ENVIRONMENT

Following are some of the important features of business environment;

1. Totality of external factors: Business environment is the sum total of all factors which are external
to business firms. Hence all those factors affect the organisation together at the same time.
2. Specific and general factors: Business environment includes both specific and general factors.
Specific forces (such as investors, customers, competitors and suppliers) affect individual
organisation directly and immediately in their day-to-day working. General forces (such as social,
political, legal and technological conditions) have impact on all business enterprises and thus may
affect an individual firm only indirectly.
3. Dynamic: Business environment is dynamic. It means it keeps on changing. Change can be like
technological improvement, change in consumer liking or entry of new competition in the market.

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4. Uncertainty: Business environment is uncertain as it is very difficult to predict future happenings. It

is difficult to know future changes when environment changes are taking place. For example
Information Technology or fashion industries.
5. Relativity: Business environment is a relative concept because it is different from country to country
and even region to region. Political conditions in the USA differ from the political conditions in
China or Pakistan. Similarly, demand for Sarees may be high in India but no demand in France.

ROLE OR IMPORTANCE OF BUSINESS ENVIRONMENT

An analysis of business environment helps to identify strengths, weaknesses, opportunities & threats.
Analysis is very important for the survival and growth of the business enterprise. The importance of
business environment is briefly explained below;

(1) Identification of Strength: The analysis of the internal environment helps to identify strength of the
firm. For example, if the company has good HR policies regarding promotion, transfer, training, etc then
it indicates strength of the firm in HR policies. This strength can be identified through the job
satisfaction and performance of the employees. After identifying the strengths, the firm must try to
improve in its strengths by further improvement in its existing plans & policies.

(2) Identification of Weakness: The analysis of the internal environment indicates not only strengths
but also the weakness of the firm. A firm may be strong in certain areas; where as it may be weak in
some other areas. The firm should identify sue weakness so as to correct them as early as possible.

(3) Identification of Opportunities: An analysis of the external environment helps the business firm to
identify the opportunities in the market. The business firm should make every possible effort to grab the
opportunities as and when they come.

(4) Identification of Threats: Business may be subject to threats from competitors and others.
Therefore environmental analysis helps to identify threats from the environment identification of threats
at an earlier date is always beneficial to the firm as it helps to defuse the same.

(5) Exploitation of Business Opportunities: Environment opens new opportunities for the expansion
of business activities. Study of environment is necessary in order to discover and exploit such
opportunities fully.

(6) Keeping Business Enterprise Alert: Environment study is needed as it keeps the business unit alert
in its activities. In the absence of environmental changes, the business activities will be dull and lifeless.
The problems & prospects of business can be understood properly through the study of business
environment. This enables an enterprise to face the problems with confidence and get the maximum
benefits of business opportunities available.

(7) Keeping Business Flexible and Dynamic: Study of business environment is needed for keeping
business flexible and dynamic as per the changes in the environmental forces. This will help in the
development of the organisation.

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(8) Understanding Future Problems and Prospects: The study of business environment enables to
understand future problems and prospects of business in advance. This enables business organizations to
face the problems boldly and also take the benefit of favorable situation.

(9) Making Business Socially Acceptable: Environment study enables businessmen to expand the
business and also make it acceptable to different social groups. Business organizations can make
positive contribution for maintaining ecological balance by studying social environment.

(10) Optimum Utilization of Resources: The study of business environment is needed as it ensures
optimum use of resources available. For this, the study of economic and technological environment is
useful. Such study enables organization to take full benefit of government policies, concessions
provided, and technological developments and so on.

(11) Survival and Growth: Business environment inform about suitable changes to be affected in
business policies. This helps the business organizations to grow & prosper.

(12) Maintaining adaptability to changes: Business environment guides the business organization
about socio-economic changes & the organization must accordingly adapt these changes. This enables
the business organization to survive for a longer period.

CONCEPT OF ENVIRONMENTAL ANALYSIS

Environmental Analysis is the study of the organizational environment to pinpoint environmental factors
that can significantly influence organizational operations. MANAGERS commonly perform
environmental analyses to help them understand what is happening inside and outside their
organizations and to increase the probability that the organizational strategies they develop will
appropriately reflect the organizational environment. For purposes of environmental analysis, the
environment of an organization is generally divided into 3 distinct levels:
1. General Environment
2. Operating Environment
3. Internal Environment
Managers must be well aware of these 3 organizational environmental levels, understand how each level
affects organizational performance and then formulate organizational strategies in response to this
understanding.
THE GENERAL ENVIRONMENT: The components normally considered part of the general
environment are:
 Economic  Political
 Social: Including Demographics and  Legal
Social Values  Technological
THE OPERATING ENVIRONMENT: The operating Environment includes various components like:
 Customer  Supplier
 Competition  International Issues.
 Labour

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ROLE OF ENVIRONMENTAL ANALYSIS

Environmental analysis is necessary because there are rapid changes taking place in the environment
that has a great impact on the working of the business firm. Analysis of business environment helps to
identify strength weakness, opportunities and threats. SWOT analysis is necessary for the survival and
growth of every business enterprise. The following is the need and importance of environmental
scanning:

1. Identification of strength: Strength of the business firm means capacity of the firm to gain
advantage over its competitors. Analysis of internal business environment helps to identify strength of
the firm. After identifying the strength, the firm must try to consolidate or maximise its strength by
further improvement in its existing plans, policies and resources.

2. Identification of weakness: Weakness of the firm means limitations of the firm. Monitoring internal
environment helps to identify not only the strength but also the weakness of the firm. A firm may be
strong in certain areas but may be weak in some other areas. For further growth and expansion, the
weakness should be identified so as to correct them as soon as possible.

3. Identification of opportunities: Environmental analyses help to identify the opportunities in the

market. The firm should make every possible effort to grab the opportunities as and when they come.

4. Identification of threat: Business is subject to threat from competitors and various factors.
Environmental analyses help them to identify threat from the external environment. Early identification
of threat is always beneficial as it helps to diffuse off some threat.

5. Optimum use of resources: Proper environmental assessment helps to make optimum utilisation of
scare human, natural and capital resources. Systematic analyses of business environment helps the firm
to reduce wastage and make optimum use of available resources, without understanding the internal and
external environment resources cannot be used in an effective manner.

6. Survival and growth: Systematic analyses of business environment help the firm to maximise their
strength, minimise the weakness, grab the opportunities and diffuse threats. This enables the firm to
survive and grow in the competitive business world.

7. To plan long-term business strategy: A business organisation has short term and long-term
objectives. Proper analyses of environmental factors help the business firm to frame plans and policies
that could help in easy accomplishment of those organisational objectives. Without undertaking
environmental scanning, the firm cannot develop a strategy for business success.

8. Environmental scanning aids decision-making: Decision-making is a process of selecting the best

alternative from among various available alternatives. An environmental analysis is an extremely
important tool in understanding and decision making in all situation of the business. Success of the firm
depends upon the precise decision making ability. Study of environmental analyses enables the firm to
select the best option for the success and growth of the firm

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ENVIRONMENTAL THREAT AND OPPORTUNITY PROFILE

(ETOP)

ETOP, also known as Environmental Impact Matrix is a summarized chart of the environmental factors
and their impact on the organisation.

The preparation of ETOP involves dividing the environment into different sectors and analyzing
the impact of each sector into sub factors and then the impact of each sector of the organisation.
A detailed ETOP requires subdividing each environment sector into sub factors and then the impact of
each sub factors on the organisation and is described in the form of a statement.

A summary of ETOP shows only the major factors. When the environmental analysis is undertaken
on formal and systematic way it is important that the results are structured. ETOP is the most useful
way of structuring the results of environmental analysis. It can be prepared by the following way:

STEP 1: ENVIRONMENTAL FACTORS

Since ETOP is the presentation of environmental analysis in a structured way, its process follows that of
environmental analysis. Thus, the starting point is the identification of different components of relevant
environment. Each major component is divided into sub components. For example, economic
environment may be divided into rate of economic growth, rate of inflation, monetary policy, and fiscal
policy and so on or competitive environment may be divided into threats of entry and exit, competitive
position of competitors etc.

STEP 2: ASSESSING IMPORTANCE OF ENVIRONMENTAL FACTORS

At this stage, importance of environmental factors is assessed. The degree of importance can be shown
in qualitative terms like high, medium or low, or it can be quantified like 3, 2 and 1. It may be
mentioned that all environmental variables will not have same degree of importance.

STEP 3: ASSESSIING IMPACT FACTOR

An environmental factor may either present threats or provide opportunities depending upon the nature
of environmental factors and their behaviour. Positive impact of a factor is opportunity and negative
impact is threat.

STEP 4: COMBINING IMPORTANCE AND IMPACT FACTORS

Combination of importance and impact of various environmental factors can give a clear picture of the
industry sector. ETOP can be presented in to two forms:
 MATRIX FORM
 DESCRIPTIVE FORM

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ETOP – Matrix form: In matrix form, importance and impact of various environmental factors are
presented in tabular form as shown below;

Environmental Degree of importance Degree of impact

Factors High Med. Low High Med. Low
3 2 1 3 2 1
Economic (various
components)

Political-legal
(various components)

Technological
(various components)

Socio-cultural
(various components)

Competitive (various
components)

ETOP – Descriptive form: In descriptive form, impact of various factors are described in terms of
being positive or negative as shown below;

Environmental factors Impact Impact

(+) Opportunity (-) Threat

Economic (various
components)

Political-legal (various
components)

Technological (various
factors)

Socio cultural (various

components)

Competitive (various
components)

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