STRATEGIC MANAGEMENT

Fifth Edition

AZHAR KAZMI & ADELA KAZMI

Chapter 3
ENVIRONMENTAL APPRAISAL
 Learning Objectives

Describe the concept of environment in the context of strategic

management

Name, describe, and demonstrate understanding of eight

environmental sectors

Describe the process of environmental scanning

Prepare environmental threats and opportunities profile (ETOP)

for an organization

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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.
• Strength is an inherent capacity which an organisation can use to gain strategic
advantage.

• Weakness is an inherent limitation or constraint which creates strategic

disadvantages.

The external environment includes all the factors outside the organisation
which yield opportunities or pose threats to the organisation.
• Opportunity is a favourable condition in the organisation's environment which
enables it to consolidate and strengthen its position.

• Threat is an unfavourable condition in the organisation's environment which

creates a risk for, or causes damage 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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Business Environment of an Organisation

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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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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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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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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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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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Areas of Legislative and Administrative
Controls
Industrial policy making, development and regulation, and licensing

Regulation over corporate management and avoidance of industrial sickness

Regulation of monopolies and restrictive trade practices

Regulation of foreign trade, capital, technology, and exchange

Regulation of money and capital markets, and stock exchanges

Regulation of pricing and distribution

Commodity exchange and its regulation

Protection of patents and trademarks

Regulation through environmental and consumer protection

Regulation of employment conditions through labour legislation

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Environmental Factors: Socio-Cultural
Environment
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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Environmental Factors: Supplier Environment

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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Environmental Factors: Technological
Environment
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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Environmental Scanning

Environmental scanning can be defined as the process by which

organisations monitor their relevant environment to identify opportunities
and threats affecting their business for the purpose of taking strategic
decisions.
Factors to be Considered for Environmental Scanning:
• Events are important and specific occurrences taking place in different
environmental sectors.
• Trends are the general tendencies or the courses of action along which events
take place.
• Issues are the current concerns that arise in response to events and trends.
• Expectations are the demands made by interested groups in the light of their
concern for issues.

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Approaches to Environmental Scanning

Systematic approach Under this approach, information for

environmental scanning is collected systematically.

Ad hoc approach Using this approach, an organisation may

conduct special surveys and studies to deal with specific
environmental issues from time to time.

Processed-form approach For adopting this approach, the

organisation uses information in a processed form available from
different sources both inside and outside the organisation.

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Sources of Information for Environment
Scanning
Documentary or secondary sources of information like different types of
publications. These could be newspapers, magazines, journals, books, trade and
industry association newsletters.

Mass media such as radio, television, Internet and social media.

Internal sources like company files and documents, internal reports and
memoranda, management information system, databases, company employees.

External agencies like customers, marketing intermediaries, suppliers, trade

associations, government agencies, etc.

Formal studies done by employees, market research agencies, consultants and

educational institutions.

Spying and surveillance through ex-employees of competitors, industrial espionage

agencies, or by planting 'moles' in rival companies.

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Pitfalls in Environmental Scanning
 Sometimes strategic planners may focus so excessively on the influences in the
relevant environment that they miss out the trends and issues in the general
environment that really matter.
 There is a danger of ‘paralysis by analysis’ meaning that environmental
scanning can create an overload of information that may prevent timely
action.
 Similarly, environmental scanning should not be too far from the realities of the
organisation making it an impersonal, staff function.
 Time consuming
 Uncertain future

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Factors Affecting Environmental Appraisal

Strategist-related factors: Characteristics such as age, education,

experience, motivation level, cognitive style, ability to withstand time
pressures and strain of responsibility have an impact on the extent to
which they are able to appraise their organisation's environment.

Organisation-related factors: Characteristics such as nature of business

the organisation is in, its age, size and complexity, the nature of its
markets, and the product or services that it provides

Environment-related factors: The nature of the environment depends on

its complexity, volatility or turbulence, hostility, and diversity. Information
processing perspectives suggest that scanning activity will increase in
response to increasing environmental uncertainty.

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Identifying High Priority Environmental
Issues

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Structuring Environmental Appraisal

The identification of environmental influences is helpful in structuring environmental

appraisal so that the strategists have a good idea of where the environmental
opportunities and threats lie.

Structuring the environmental appraisal is a difficult process as environmental

issues do not lend themselves to a straightforward classification into neat
categories.

An influence may arise simultaneously from more than one sector of the
environment. Strategists have to use their experience and judgement to place the
different environmental influences to where they mainly belong so that clarity
emerges.

The preparation of environmental threat and opportunity profile ETOP involves

dividing the environment into different sectors and then analysing the impact of each
sector on the organisation. A comprehensive ETOP requires subdividing each
environmental sector into sub factors and then the impact of each sub factor
on the organisation is described in the form of a statement.

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ETOP for a Bicycle Company

The next slide follows an Environment threat and

opportunity profile (ETOP) for a bicycle company.

Up arrows indicate favourable impact; down arrows

indicate unfavourable impact, while horizontal arrows
indicate a neutral impact.

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