STRATEGIC MANAGEMENT

Importance of External Environmental Analysis in Achieving Organizational Success

 

Introduction

Every organization needs to formulate a strategic plan that will direct its objectives, performance, processes and practices. Analyzing and studying both the internal and external environment is vital. This paper aims to determine the impact of the external environmental factors on organizational processes and production. The importance of the external environmental analysis is the focus of this paper. The internal environment is something that the organization can control. The external environment on the other hand is beyond the control of the organization. Environmental factors affect the over-all success of the organization. Those organizations that fail to answer the demands and pressures of the external environment do not succeed. Let us begin our discussion with the strategic planning process.

 

The Strategic Planning Process

1. Assessment of the Current Strategy – the first step in strategic planning is to assess the current strategy by examining the firm’s strategic planning process, namely, the mission, strategic objectives, and strategic plans. Planners describe the current strategy and the strategy of the recent past and assess how successful they have been. Problems with current and past strategy will suggest changes for future strategy ( 1997).

 

2. Internal Resource Analysis – The second step of the strategic management involves the identification and analysis of the strengths and weaknesses of major functional areas within the organization. The analysis provides strategic planners with an inventory of the organization skills and resources and its overall functional performance levels ( 1997).

 

3. Analysis of the External Environment – the external analysis begins with the analysis of the market and industry. Next stakeholders are analyzed – particularly competitors, but also buyers, suppliers, owners and shareholders, government and regulatory agencies, and unions and employee groups. The environmental analysis should also examine other forces in the environment such as macroeconomic conditions and technological factors. The external analysis provides planners with a number opportunities they could pursue and a number of threats they must counter (1997).

 

4. Development and Evaluation of Alternative Strategies – after conducting the current assessment, internal analysis, and external analysis, strategic planners are ready for the fourth step to develop and evaluate alternative strategies for the future. Development of new strategies can be aided by conducting a SWOT analysis. A good strategy should match the company’s strengths with opportunities in then environment while countering threats and weaknesses. Alternative strategies can be evaluated using the following criteria:

• The strategy should exploit or create an advantage over the competition
• The strategy and its components should have consistent goal and policies
• It should be capable of producing the intended results ( 1997).

 

External Analysis

            Every organization faces a different reality in the marketplace depending on its products, customers, technologies, government influences, and so on. To be successful, the organizations need to perform certain activities very well. The environment where the organization operates is an important factor in its success. The external environment is an important factor that affects a company’s goals, objectives, strategies and performance. It is also important in the setting of company missions and corporate culture ( and  2000). The success of the organization depends on how well it manages its internal resources and how well it understands its external environment. In order to have a clear understanding of the company’s strengths and weaknesses as well as threats and opportunities, it is imperative to conduct both an internal and external analysis. The internal analysis provides an objective understanding of the controllable factors in the organization’s internal environment, identifying those with the greatest long-term impact on the organization’s position. The objective of this analysis is to identify the organization’s major strengths and weaknesses with respect to its overall mission. The importance of the internal analysis depends on objectivity and completeness and identifies strengths and weaknesses of the organization as it attempts to implement strategic plans, goals and objectives, and its overall mission. The external analysis pinpoints major opportunities and threats posed by the environment. It analyzes those factors that is beyond the control of the organization but which affect its ability to achieve strategic objectives ( 1991). The environmental analysis is important as it makes the organization aware of what is happening inside and outside that might affect it. The internal and the external environments must be continually surveyed and monitored.

 

The External Environment

            External environmental analysis reveals the health of an organization, its values, political climate, its use of technology and resources, its competitive rank within the industry, its overall image, and the areas requiring improvement ( and  2000). An organization’s environment is composed of those institutions or forces that are outside the organization and potentially affect the organization’s performance. These typically include suppliers, customers, competitors, government regulatory agencies, public pressure groups, and the like ( 2002). Because of uncertainty, these environmental factors play an important role in determining the success of the organization. Organizations are now faced with very dynamic environments where government regulations rapidly changes, new competitors arise, raw material are difficult to acquire, and consumer preference continues to change and so on. Now let us look at these external factors that shape the organization’s strategies and objectives and affect the organization’s success.

Customers

The changes in consumer demography, lifestyle, cultural values and attitudes affect the business. Demographic and cultural factors make up society-wide influences and changes that can affect the marketing environment. Some of the concerns of organizations when it comes to consumer demography are: size of the population, growth rate, distribution by gender, location, family size and makeup, wealth distribution, and occupations. These factors change slowly over time and exert powerful effects on the volume and nature of demand for most products and services. Different regions of a country exhibit different purchasing behaviors that seem to reflect different cultural and traditional values. Culture is reflected in the prevalent core beliefs and values of people. These beliefs and values are declared in family and friendship relations, in social conventions and rites, in social institutions and in social order itself. There have been many changes in attitudes over the years that affected business practices and processes.

Competitors

            The external analysis begins with the analysis of the market and industry, particularly competitors that can procure or are producing the same type of products. With the key competitors identified in each market segment, managers must understand each rival’s goals, strategies, and probable course of action and strategies that might provoke retaliation. To gain market share without retaliation, managers must understand the rival’s weaknesses better than the rival itself. The external competitive environment must be scanned to pinpoint the development patterns of competitors in process and market development. The competitor analysis will identify the primary threats in the external environment ( 1997). The competitor analysis gives an organization a picture of its rivals’ positions in the market. Competitor analysis should be viewed from a variety of perspectives:

• Analyze competitors by how customers select a particular product or choose a company from which they purchase
• Observe how customers display their various behavioural purchase patterns
• Find out how competitors develop their strategies against you ( 2006)

Economy

            The economic cycle is consist of four stages – boom, recession, slump, and recovery. In every stage of the cycle, there are different business patterns. During economic boom, the consumers’ purchasing power is high. In times of recession, the consumers have low spending power. Consumers often change their buying behavior in times of recession. As the economy starts to recover, the consumers start to buy convenience products and higher priced goods and services ( 2000).

Industry

Industries like products have life cycles. As with products, industries progress through their life cycles and as they do so the nature of competition and consumer demand changes. Industries are categorized according to the stages in the life cycle they are in. The different market categories are:

• Emerging Industries – these industries are either newly formed or reformed industries that have been produced by advancements in technology, changes in cots relationships, new consumer needs, or other economic and sociological development that make a new product or service a potentially feasible business opportunity ( 2000).
• Maturing Industries – industries in this category are characterized by a slow growth. Growth can be delayed by innovations or other events that maintain continued growth and strategic breakthroughs may even lead mature industries to recover rapid growth ( 2000).
• Fragmented Industries – many firms compete in industries where no one firm has a significant market share and is able to impose strong influence over the industry. Small and medium-sized firms are often to be found in such industries. The essential feature of such industries is the absence of a market leader having the power to shape the industry ( 2000).

Government Policies

Governments are in the position to alter the business processes and practices. For example, to discourage demand for certain imported goods, governments impose tariffs on them. Firms wanting to import such goods then must find ways to getting round the problems that this creates. Political instability also has a significant effect on the business ( 2000).

 

 

 

Technology

Technology influences organization design in terms of job design and the creation of teams and departments, the delegation of authority and responsibility, and the need for formal integrating mechanisms. Technology refers to how an organization transfers the inputs into outputs. Every organization has at least one technology for converting financial, human and physical resources into products or services. Organizations must respond to technological change. The organization must be structured to accommodate the daily advances of new product development and improved production systems. The twenty-first century will continue to be characterized by dynamic technological development. To remain competitive, it is imperative for organizations, management, and other employees to be aware of this phenomenon. Rapid technological change causes organizations to re-examine and re-evaluate their structures as is evident by the number of downsizing and restructurings that have taken place over the past decade or so ( 2002).

 

Tools and Techniques in Environmental Analysis

Environmental Scanning

Environmental scanning is the process that seeks information about events and relationships in a firm’s environment, the knowledge of which help top management chart the firm’s future. Environmental scanning entails partitioning the external environment into sectors, namely, cultural, economic, political, technological, and so on. This helps establish a firm’s information needs within those sectors. Data are usually collected by monitoring and forecasting changes in important variables identified in each sector. That data are then transformed into consolidated information, which is integrated into the firm’s strategic planning process ( and  1995). Environmental scanning is used to gather information from the environment. These information are used to craft a strategic plan that will help an organization achieve and maintain a competitive advantage. In order to be successful, the organization must align its strategies and plans with the information gathered from the environmental scanning.

 

SWOT Analysis

SWOT (Strengths and Weaknesses, and Opportunities and Threats) is a basic analytical tool in management that has become popular in recent years. SWOT analysis is often used by strategic planners and top management in developing competitive strategies. It is typically used to decide corporate strategies and to make product or market level analyses ( 1994). SWOT is a widely used thinking framework for identifying Strengths, Weaknesses, Opportunities and Threats. It enables key factors to be visibly recorded as a high-level summary of a business. SWOT analysis is a summary that is simple but powerful. The technique is commonly used by consultants to document the key factors arising from the review of a particular project or business. The use of SWOT enables an assessment to be made of the overall internal state of a business and the direction in which it is heading, through looking at its Strengths and Weaknesses. It also enables a judgment to be made about aspects of the external business environment, which can affect the performance of the business, through looking at the Opportunities and Threats it faces in the wider world ( 1998). The SWOT analysis on its own is not a strategy. It is merely a tool that helps an organization in making informed decisions. The SWOT analysis is primarily used to identify and analyze the strengths and weaknesses of the organization, as well as the opportunities and threats exposed by the information collected of the external environment. The SWOT analysis is a simple yet useful tool in analyzing both the internal and external environments of the organization. SWOT analysis together with other tools such as PEST (Political, Economic, Social, and Technological) analysis can be used as a basis for the analysis of business and environmental factors.

 

PEST Analysis

A PEST analysis looks at the Political, Economic, Social and Technological drivers of a particular industry. PEST are external factors that must be analyzed and understood in order for an organization to succeed. The PEST analysis focuses on the external forces that affects the organization. It is most useful when used together with other tools such as the SWOT analysis.

o       Political Factors – may have direct or indirect impact on the organization’s operation. Decisions made by the government may have an effect on the business. The political arena has a big influence on how organizations operate, the purchasing power of the customers and other businesses.

o       Economic Factors – the organization is affected by economic factors. Economy also affects the purchasing power and behavior of the consumers.

o       Sociological Factors – include the demography, lifestyle, cultural aspects of the consumers. These factors have a big influence on the consumer needs and wants. Sociological factors also affect the size of potential markets.

o       Technological Factors – technological change plays an important role in shaping how organizations operate. Technological factors are important in gaining competitive advantage. Technological innovations can improve production efficiency, quality and speed. New technology is changing how organizations operate.

 

Porter’s Five Forces Analysis

Porter identified the five forces model of competitive strategy. He identified the five forces as:

• The threat of new entrants and the appearance of new competitors
• The degree of rivalry among existing competitors in the market
• The bargaining power of buyers
• The bargaining power of suppliers
• The threat of substitute products or services which could shrink the market

 

The strength of each of these forces varies from industry to industry, but

taken together they determine long-term profitability. They help shape the process firms can charge, the costs they must pay for resources and the level of investment that will be needed to compete. The threat of new entrants limits market share and profit; powerful buyers or suppliers, using their superior bargaining power, can drive down prices or push costs up, eroding margins and so on ( 2003). The five factors affect the strategy of the organization. It is important to analyze and study these five forces to be able to craft a successful strategy. To be successful, the organization must respond effectively to the pressures of these five forces.

 

McKinsey 7S Model

The McKinsey 7S model provides a framework, which is helpful to assess the readiness of the organization for change. The following are important factors that define the success of the organization:

• Strategy – this is the clear and communicated direction and goals for the organization supported by a coherent set of actions aimed at gaining a sustainable advantage over competition.
• Shared Values – the appropriate culture and beliefs that support the needs and environment of the business. The ideas of what is right and desirable.
• Skills – the capabilities possessed by the organization as a whole as distinct from those of individuals.
• Style – this reflects aspects of culture. It is linked to the management paradigm.
• Staff – the appropriate resources to meet the demands of the existing business and future strategy.
• Structure – the management and overall organizational structure tom match the future needs.
• Systems – these are the techniques, working procedures, computer systems, communication systems and other factors. They may be formal or informal customary practices. The processes through which things get done on a daily basis ( 1998).

The McKinsey 7S model is more focused on the internal aspects of the organization. However, when combined to other tools and techniques it provides a powerful basis for strategic planning.

 

Conclusion

The discussion revealed that the external environment in which the organization is very important. The external environment affects the company’s goals, strategies, processes and culture. It is important to study and analyze the external factors that affect the organization in order for it to succeed. The external analysis is important in organizational success because it gives a clear perspective of the health of an organization, its values, political climate, its use of technology and resources, its competitive rank within the industry, its overall image, and the areas requiring improvement.

References

 

http://researchkorner.blogspot.com/2013/11/strategic-management.html