Module III: Environmental Appraisal

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Learning Objectives

1. Environment – Meaning and Characteristics

2. Elements/Sectors of External Environment
3. Internal Environment
4. SWOT Analysis

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Concept of Environment
Environment literally means the surroundings, external objects,
influences or circumstances under which someone or something exists.
The environment of any organisation is "the aggregate of all conditions,
events and influences that surround and affect it.”

Characteristics include:

► Environment is complex

► Environment is dynamic
► Environment is multi-faceted
► Environment has a far-reaching impact

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Internal and External Environment
The internal environment refers to all factors within an organisation
that impact strengths or cause weaknesses of a strategic nature.

The external environment includes all the factors outside the

organisation which yield opportunities or pose threats to the
organisation.

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General Environment and Relevant Environment

The external environment encompasses a variety

of sectors like international, national, and local
economy, social changes, demographic variables,
political systems, technology, attitude towards
business, energy sources, raw materials and others
resources, and many other macro-level factors.
These are categorized as the general environment.

The immediate concerns of any organisation are

confined to just a part of the general environment
which is of high strategic relevance to the
organisation. This part of the environment could
be termed as the immediately relevant
environment or simply, the relevant environment.

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External Environmental Factors: Economic Environment
The economic environment consists of macro-level factors related to the means of
production and distribution of wealth that have an impact on the business of an
organisation.
Some of the important factors include :
► The economic stage in which a country exists at a time such as agrarian, industrial or
post-industrial economy

► The economic structure adopted, such as a capitalistic, socialistic or mixed economy

► Economic policies such as industrial, monetary and fiscal policies.

► Economic planning, such as five-year plans, annual budgets, etc.

► Economic indices like national income, distribution of income, rate and growth of GNP,
per capita income, disposable personal income, rate of savings and investments, value of
exports and imports, the balance of payments, etc.

► Infrastructural factors such as financial institutions, banks, modes of transportation, and

communication facilities, etc.

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External Environmental Factors: International Environment
The international (or global) environment consists of all those factors that operate
at the transnational, cross-cultural or across-the-border level having an impact on
the business of an organisation.
Some of the important factors include:
► Globalisation, its process, content and direction

► Global economic forces, organisations, blocs, and forums

► Global trade and commerce, its processes and trends

► Global financial system, sources of financing, and accounting standards

► Geopolitical situation, equations, alliances,

► Global demographic patterns and shifts

► Global human resource: institutions, availability, nature and quality of skills and
expertise, mobility of labour and other skilled personnel

► Global information system, communication networks, and media

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External Environmental Factors: Market Environment
The market environment consists of factors related to the groups and other
organisations that compete with and have an impact on an organisation's markets
and business.
Some of the important factors includes:
► Customer or client factors such as the needs, preferences, perceptions, attitudes,
values, bargaining power, buying behaviour.

► Product factors such as the demand, image, features, utility, function, design, life cycle,
price, promotion, distribution, differentiation.

► Marketing intermediary factors such as levels and quality of customer service,

middlemen, distribution channels, logistics, costs, delivery systems and financial
intermediaries.

► Competitor-related factors such as the different types of competitors, entry and exit of
major competitors, nature of competition.

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External Environmental Factors: Political Environment
The political environment consists of factors related to management of public
affairs by the state including its institutions and legislations and their impact on
the business of an organisation.
Some of the important factors include:
► The political system and its features like nature of the political system, ideological
forces, political parties and centres of power.

► The political structure, its goals and stability.

► Political philosophy, government's role in business, its policies and interventions in

economic and business development.

► Political processes like operation of the party system, elections, funding of elections,
formation of governments and legislation with respect to economic and industrial
promotion and regulation.

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External Environmental Factors: Regulatory Environment
The regulatory environment consists of factors related to planning, promotion, and
regulation of economic activities by the government that have an impact on the
business of an organisation.
Some of the important factors includes:
► The constitutional framework, directive principles, fundamental rights, and division of
legislative powers between the Central, State, and local governments.

► Policies related to licensing, monopolies, foreign investment, and financing of industries.

► Policies related to distribution and pricing, and their control.

► Policies related to imports and exports.

► Other policies related to the public sector, small-scale industries, sick industries,
development of backward areas, control of environmental pollution and consumer
protection.

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External Environmental Factors: Socio-Cultural Environment
This environment consists of factors related to human relationships within the
society, the development, forms & functions of such a relationship and learned &
shared behaviour of groups of human beings having a bearing on the business of an
organization.
Some of the important factors include:
► Demographic characteristics, such as population, its density and distribution, changes in
population and age composition.
► Socio-cultural concerns such as environmental pollution, consumerism, corruption, use
of mass media.
► Socio-cultural attitudes and values, such as expectation of society from business, social
customs, beliefs, rituals and practices.
► Family structure and changes in it, attitude towards and within the family, and family
values.
► Role and position of men, women, lesbian, gay, bisexual and transgender (LGBT)
community members, children, adolescents, and aged in family and society.
► Educational levels, awareness and consciousness of rights, work ethic of members of
society.
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External Environmental Factors: Supplier Environment
The supplier environment consists of factors related to the cost, reliability, and
availability of the factors of production or service that have an impact on the
business of the organization.
Some of the important factors includes:
► Cost, availability and continuity of supply of raw materials, sub assemblies, parts and
components.

► Cost, availability and the existence of sources and means for supply of plants and
machinery, spare parts and after-sale service.

► Cost and availability of finance for implementing plans and projects.

► Cost, reliability and availability of energy used in production.

► Cost, availability and dependability of human resources.

► Infrastructural support and ease of availability of the different factors of production,

bargaining power of suppliers, and existence of substitutes.

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External Environmental Factors: Technological Environment

The technological environment consists of those factors related to knowledge

applied and the material and machines used in the production of goods and
services that have an impact on the business of an organization.

Some of the important factors includes:

► Sources of technology like company sources, external sources, and foreign sources; cost
of technology acquisition; collaboration in, and transfer of, technology.

► Technological development, stages of development, change and rate of change of

technology, and research and development.

► Impact of technology on human beings, the man-machine system, and the environmental
effects of technology.

► Communication and infrastructural technology in management.

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SWOT Analysis
A simple application of SWOT analysis technique involves these steps:
► Setting the objectives of the organization or its unit
► Identifying strengths, weaknesses, opportunities, and threats
► Asking four questions
► How do we maximise our strengths?
► How do we minimise our weaknesses?
► How do we capitalise on the opportunities in our external
environment?
► How do we protect ourselves from threats in our external
environment?
► Recommending strategies that will optimise the answers from the four
questions

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SWOT Analysis

Benefits Pitfalls

▪ Simple to Use ▪ Oversimplified

▪ Low Cost ▪ Might just turn into a list than

▪ Flexible thinking about what is important.

▪ Misinterpreted to justify a previous

▪ Clarification of Issues
course of action.
▪ Development of Goal Oriented
▪ May take a lazy course of action of
Alternatives
looking at strengths.
▪ Useful for Strategic Analysis

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SWOT Analysis

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Generating Strategic Alternatives through TOWS Matrix

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 ► Module III: Internal Appraisal

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 DYNAMICS OF INTERNAL ENVIRONMENT

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 TOOLS OF INTERNAL ENVIRONMENT

• VRIO/VRIN Framework
• Value Chain analysis
• SWOT analysis

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 FINANCIAL CAPABILITY
Strengths that Support
FACTORS
Financial Capability
1. Factors related to Sources • Access to financial resources
of Funds
• Amicable relationship with financial
institutions
2. Factors related to usage of Funds
• High level of credit-
3. Factors related to management of worthiness
Funds
• Efficient capital budgeting system

• Low cost of capital as compared to

competitors

• High level of shareholder’s

confidence
• Effective management control system

• Tax benefits due to various

government policies.

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 MARKETING CAPABILITY
Strengths that Support Marketing
FACTORS
Capability
• Wide variety of products
1. Product related factors
• Better quality of products
2. Price related factors • Sharply-focussed positioning
3. Place related factors • Low prices as compared to those of
4. Promotion related factors similar products in the market
5. Integrative & systematic • Price protection due to government policy
factors • Quality customer service
• Effective distribution system
• Effective sales promotion
• High profile advertising
• Favourable company and product image

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 OPERATIONS CAPABILITY
Strengths that Support Operations
FACTORS Capability
• High level of capacity utilization
1. Production system
• Favorable plant location
2. Operations & control
system • High degree of vertical integration

3. R & D system • Reliable sources of supply

• Effective control of operational costs
• Existence of good inventory control
system
• Availability of high caliber R & D
personnel
• Technical collaboration with reputed
firms abroad

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 PERSONNEL CAPABILITY
Strengths that Support
FACTORS
Personnel Capability
1. Personnel system • Genuine concern for human resources
2. Organisational & employee
management and development
characteristics
3. Industrial relations • Efficient and effective personnel systems
• The organization perceived as a fair and
model employer
• Excellent training opportunities and
facilities
• Congenial working environment
• Highly satisfied and motivated workforce
• High level of organizational loyalty
• Low level of absenteeism
• Safe and salutary working conditions
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 INFORMATION MANAGEMET CAPABILITY
Strengths that Support
FACTORS
Personnel Capability
1. Acquisition & retention of • Ease and convenience of access to information
information sources
2. Processes & synthesis of • Widespread use of computerized information
information
system
3. Retrieval & usage of information
4. Transmission & Dissemination • Availability and operability of high-tech
5. Integrative, systematic & supportive equipment
factors • Positive attitude to sharing and disseminating
information
• Wide coverage and networking of computer
systems
• Presence of fool-proof information security
systems
• Presence of buyers and suppliers conversant with
IT applications
• Top management understanding of, and support
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to, IT and its application26within organisation
 GENERAL MANAGEMENT
FACTORS Strengths that Support
1. General management system Personnel Capability
2. General manager • Effective system for corporate planning
• Control, reward, and incentive system for top
3. External relationships managers geared to the achievement of
4. Organisational climate objectives
• Entrepreneurial orientation and high propensity
for risk-taking
• Good rapport with the government and
bureaucracy
• Top management conscious of sustainability
impact of decisions
• Favourable corporate image
• Commonly being perceived as a good
organization to work for
• Development-oriented organizational culture
• Political processes used for consensus-building
in organizational interest
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Effective management of organizational change