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Environmental Analysis
Most organisations work within a business environment of constantly changing forces that guide (and
sometimes hinder) their overall strategic direction. This article examines these environmental influences
in more detail.
The business environment can be separated into the internal and external environment as shown in the
diagram below. Both of these environments have a huge impact on an organisation, and the strategic decisions it
makes.

The internal environment

Environmental analysis begins with an examination of internal factors and how these help or hinder
organisational performance. An organisation will wish to carry out an internal analysis that examines the
strengths and weaknesses of its:

· physical resources, including its products

· financial resources

· human resources

· intellectual resources

· operational capacity and efficiency

· strategic capabilities/competence

· organisational structure

· organisational culture

The results of this analysis can then be fed into a SWOT analysis (see later). Porter’s Value Chain can also help
the organisation to pinpoint strengths contained within the organisation by examining which of its activities
create value for the company.
The external environment
Organisations need to identify the key opportunities and threats that are likely to arise from the external
environment. The external environment can be split into two areas, the near environment and the far
environment.
The near environment
This comprises the industries and sectors, competitors and markets where the organisation competes for
resources and consumers (it is sometimes referred to as the ‘competitive’ environment).
All organisations need to be aware of the factors and conditions that impact on their particular industry or sector.
For example, the boundaries between separate industries may change, resulting in convergence, such as is the
case with the computing, telecoms and entertainment industries.
Key to making sense of the near environment is an awareness and understanding of the competitive forces that
exist. Porter’s Five Forces model was devised to help organisations to do exactly this by assessing:

· the threat of entry of new rivals

· the bargaining power of buyers

· the bargaining power of suppliers

· the threat of substitute products

Despite being devised in the 1980s, Porter’s Five Forces is still a favoured method of industry analysis today.
As well as analysing its industry, an organisation will wish to carry out market segmentation in order to
understand customers and satisfy their needs better than the competition. Many organisations segment
consumer markets differently from industrial markets.
Consumer markets tend to be segmented along differing customer characteristics such as:

· Geographic: e.g. country, region, neighbourhood.

· Demographic: e.g. age, gender, occupation, race, religion.

· Psychographic: e.g. interests, values, opinions.

· Behavioural: e.g. brand loyalty, readiness to buy, user status (first-time buyer, regular buyer, etc.).

Industrial markets tend to be segmented by:

· Location: e.g. distance from vendor.

· Company type: e.g. size, product or service offered.

· Behavioural characteristics: e.g. buyer status, purchasing methods.

By segmenting its industry and markets, an organisation can gain a better understanding of its customers and
potential customers, and therefore tailor its products and services to match customer needs as closely as
possible.
The far environment
The six main pressures and influences on organisations in the ‘far’ external environment are represented by the
acronym PESTLE which represents the following external forces:

· Political: the existing and potential influences that government places on organisations, via government
agencies, pressure groups, etc.

· Economic: the impact that the national and international economy has on all types of organisations. For
example, when bank interest rates are low, people have more disposable income to spend on a range of
goods and services; but when interest rates are high, consumer spending will reduce.
 · Social: changes in society have a considerable impact on how organisations set strategies. When analysing
the external environment, organisations should consider demography, i.e. the impact that the size and
structure of the population has on customer demand and on the workforce, e.g. an ageing population. Social
culture will also affect the demand for goods and services, e.g. increasing environmental awareness has
created a demand for eco-friendly products.

· Technological: advances in technology probably have the most profound effect on organisational strategy.
The arrival of the internet, for instance, has transformed the way that organisations sell their products, and
how they communicate with customers and employees across the globe.

· Legal: organisations need to be aware of existing and upcoming local, national and international legislation
that affects their business, including employment law, competition law, and health and safety regulations.

· Environmental: factors such as environmental protection laws and regulations, and social attitudes to
energy consumption and waste disposal can all affect organisations and the way they do business.

A PESTLE analysis is a popular technique that can be used to examine the many different external factors
affecting an organisation, in order to help organisations systematically identify any threats.
Once an organisation has identified the main characteristics of the external environment in which it operates, it
should look for ways to minimise any possible threats and exploit new opportunities.
Spotting the opportunities
Johnson and Scholes point out that if organisations consistently compete with market rivals that have the same
or similar products or services, then everyone will find the market tough and unattractive. This can be countered
if an organisation can spot a strategic gap in the market.

Strategic gap

‘An opportunity in the competitive environment that is not being fully exploited by
competitors.’ [1]

Johnson and Scholes suggest the following areas in which organisations may find such opportunities:[2]

· Opportunities in substitute industries: e.g. a software company substitutes paper encyclopaedias with CD
Rom versions.

· Opportunities in other strategic groups: [3] e.g. privatisation of the rail network in the UK means that
bus operators can apply for rail franchises.

· Opportunities for complementary products: e.g. people go to the gym to stay in shape and look good, so
some private gyms also have beauty salons on-site.

· Opportunities in new market segments: e.g. Starbucks has turned coffee into an experience, not just a
drink, by providing customers with the opportunity to customise their beverage, and enjoy it in a relaxing
atmosphere.

· Opportunities over time. Where an organisation anticipates a change in the competitive environment, it
can gain first mover advantages, e.g. eBay anticipated that the internet could revolutionise the ‘small ads’
business, which it has turned into a multi-million dollar enterprise.

SWOT analysis
The combination of outputs from the analysis of both the internal and external environment is a SWOT
analysis, which helps organisations analyse their overall Strengths,Weaknesses, Opportunities and Threats.
These are often set out in table form as shown below. The example shown is for a small pharmaceutical
company.

This approach, however, does not put the strengths, weaknesses, opportunities and threats in context. In
particular, it does not relate them to one another, or illustrate how a particular strength will allow an organisation
to exploit an opportunity or counter a threat. Nor does it highlight whether acknowledged weaknesses might
leave the organisation vulnerable to a threat or unable to exploit an opportunity.
To develop strategies that take into account the SWOT profile, therefore, it is a good idea to carry out a
matching process, by constructing a TOWS matrix as shown below.

Strengths Weaknesses
Opportunities S-O Strategies W-O Strategies
Threats S-T Strategies W-T Strategies

· S-O Strategies represent opportunities that are a good fit with the organisation’s strengths.

· S-T Strategies indicate ways for the organisation to use its strengths to counter external threats.

· W-O Strategies help the organisation to overcome its weaknesses to pursue opportunities.

· W-T Strategies help the organisation to prevent its weaknesses from rendering it vulnerable to external
 threats.[4]

In addition, an organisation should consider its SWOT profile in terms of how it compares to those of its
competitors.
The importance of scenario planning
Given the rapid pace of political, environmental and technological change in today’s society, strategic decisions
can be increasingly difficult to make. Scenario planning can be a very useful way to analyse the environment in
this regard.

‘Scenario planning is a discipline for rediscovering the original entrepreneurial power

of creative foresight in contexts of accelerated change, greater complexity, and
genuine uncertainty.’ [5]

It differs from conventional market research or financial forecasting techniques by depicting alternative ‘futures ’
instead of projecting forward current trends.[6] This enables organisations to model a series of potential futures
and to modify their future plans according to the most feasible scenarios. Scenarios are not predictions, then, but
plausible, well-illustrated hypotheses of various ‘what if’ possibilities.
Conclusion
In order for organisations to make informed and appropriate strategic choices, they must first develop a clear
understanding of both their internal and external environment. Internal analysis of the organisation involves a
thorough examination of the firm’s strengths and weaknesses. External analysis looks at the opportunities and
threats posed by competitors in the organisation’s industry and markets, and by existing and potential
opportunities and threats that exist in wider society. The results of internal and external analysis can be brought
together and summarised in a SWOT analysis, which can then be used to inform future strategic development.

[1] Johnson and Scholes, Exploring Corporate Strategy (FT Prentice Hall, 2005) p 99.
[2] Ibid pp 99-100.
[3] Strategic groups are industry subgroups that compete directly for the same customers, or for similar
resources. For example, grocery retailing has several strategic groups, including supermarkets, minimarts and
corner shops.
[4] www.quickmba.com (25 May 05).
[5] Pierre Wack, Royal Dutch/Shell, 1984. GBN Global Business Network, Scenarios.
[6] GBN Global Business Network, Scenarios, at: www.gbn.com