subject: ENVIRONMENTAL ANALYSIS [print this page] ENVIRONMENTAL ANALYSIS ENVIRONMENTAL ANALYSIS
*Shanmukha Rao. Padala **Dr. N. V.S. Suryanarayana
INTRODUCTION:
Strategic management involves three levels of analysis viz., the organisation's macro environment/general environment, the industry in which the organization operates, and the organization itself. Every company operates within a complex network of external environmental forces both international and national.
All external forces which have an impact on the functioning of an organization is referred as Macro Environment. According to Barry M. Richnam and Melvyn Copen, "Environment factors or constraints are largely, if not totally, external and beyond the control of individual industrial enterprises and their managements. These are essentialthe givers within which firms and their managements must operate in a specific country and they vary, often greatly, from country to country."
The macro environment is not simply the forces operating outside the organization. The forces create opportunities for the business organizations for their existence and development and pose threats or challenges affecting the business adversely. The environment includes factors outside the firm which can lead to opportunities for or threats to the firm.'
A host of external and often largely uncontrollable factors influence a firm's choice of direction and action and, ultimately, its organizational structure and internal processes. These factors which constitute the external environment can be divided into two interrelated subcategories those in the remote environment and those in the more immediate operating environment. This is also known as task or competitive environment.
REMOTE ENVIRONMENT:
The remote environment is composed of a set of forces that originate beyond and usually irrespective of any single firm's operating situation that is political, economic, social, technological and industry factors. It presents opportunities, threats, and constraints for the firm, while the organisation rarely exerts any meaningful reciprocal influence. Thus, organisation environment interaction has a number of implications.
The environmental forces may affect different parts of the organisation in different ways because different parts interact with their relevant external environment. The technological environment may affect the R&D department. The environmental influence process is quite complex because most things influence all other things. Many of the environmental forces may be interacting among themselves and making the impact on the organisation quite complex.
The organisational response to the environmental forces may not be quite obvious and identical for different organisations but these are subject to different internal forces. The environment is quite dynamic and not static; the rate of changes may not be uniform over a period of time. The impact of the environmental forces on the organisation is not unilateral but the organisations may also affect the environment.
ECONOMIC ENVIRONMENT:
All those economic factors which have a bearing on the functioning of a business is called as Economic Environment. Economic environment and business are mutually independent. In fact, the dependence of the business on the economic environment is more. The important economic factors that constitute the economic environment are:
Growth strategy.
Economic system.
Economic planning.
Industry
Agriculture.
Infrastructure.
Financial and fiscal sectors.
Removal of regional imbalances
Price and distribution controls
Economic reforms
Population
Per capita and national income.
Indian is one of the major economies in the world. India has developed her economy in different areas. The important factors of Indian economic environment are discussed hereunder:
Industrial Policy: Industrial policy is the most important document which indicates the relationship between the government and business. The Industrial Policy Resolution 1948, 1956, 1977 and 1980 laid emphasis on industrial development through the development of public sector. The Industrial Policy, 1991 is a major departure from the earlier policies. The significant objectives of this policy are: self-reliance to build on the many-sided gains already made, removing regulatory system and other weaknesses, link the Indian economy to the global markets so that we acquire the ability to pay for imports, and to make us less dependent on aid, increasing competitiveness of industries for the benefit of the common man and ensuring running of public sector undertakings on business lines and to reduce their losses.
Industrial Licensing: Abolition of industrial licensing for many projects except those specified (13 in number), irrespective of levels of investment is worthwhile. These specified industries will continue to be subject to compulsory licensing for reasons related to society, strategic concerns, social reasons, problems related to safety, overriding environmental issues, manufacturing of products of hazardous nature and articles of elitist consumption.
Foreign Investment: It has been decided to provide approval for direct foreign investment up to 51 per cent foreign equity in high priority industries requiring large investments and advanced technology. There shall be no hurdles in this process. This group of industries is generally known as the "Appendix-I Industries" and are areas in which FERA companies have already been allowed to invest on a discretionary basis.
Foreign technology Agreements: Government of India now, provides automatic approval for technology agreements related to high priority industries within specified parameters, in order to inject the desired level of technological dynamism in Indian industry. Other industries can also avail similar facilities, if the agreements do not require free foreign exchange. Indian entrepreneurs can negotiate the terms to technology transfer. The hiring of foreign technicians and foreign testing of indigenously developed technologies do not, now, require prior clearance.
Public Sector: The objective of the Government before opening the Indian economy to the rest of the globe had been to establish pattern of society. This objective made the government to give top priority for public sector to develop industrial sector in the country. Public sector played a dominant role by establishing industries in the areas of public utilities, infrastructure, development banks, capital goods industries, core and key industries and industries requiring huge capital resources.
In fact the government nationalized commercial banks, insurance industry and coal mines to achieve its objectives. Public sector was made responsible to achieve the objectives of the government like creation of employment opportunities, balanced regional development, providing infrastructural facilities and acting as a model employer. Public sector has played a crucial role in the country in the direction of these objectives. But, the public sector, in view of its conflicting dual roles of profit making and service rendering, it could not do juistice to any of these two objectives. Serious problems observed are: insufficient growth of productivity, poor project management, over manning, absence of continuous technological up-gradation, inadequate attention to R&D and human resource development. These factors, led to the disinvestment and privatization of public sector in addition to liberalization of the economy.
Monopolies and Restrictive Trade Practices: The Monopolies and Restrictive Trade Practices Act, 1969 had two objectives before 1991. they were:
(i) Regulation of monopolies and prevention of concentration of economic power and
(ii) Prohibition of monopolistic, restrictive and unfair trade practices.
The economic liberalization of 1991, which aims at achieving high productivity, competitive advantage to the domestic industry in the international market and economies of scale led to the amendment of the Act in 1991. the objectives of the amended Act are:
(i) Controlling monopolistic trade practices, and
(ii) Regulating restrictive and unfair trade practices.
Foreign Trade: It is widely recognized during the 1990s that the internationalization of business, export-oriented industrial growth and self-reliance in the development of competencies are the high essential factors for rapid economic development of the developing countries. Some countries believe in import substitution whilst majority of the countries believe in mutual dependence of the world nations for production and consumption. India recognized the significance of export and import trade for its development. This is quite evident in the new economic policy of 1991. government announced the export-import policy (1992-1997) which came into force from 1st April 1992.
Privatisation: The word privatization has been receiving much attention in business and government all over the world. Privatization techniques have already been tried in countries like Great Britain, U.S.A., Turkey, Brazil, Eritrea, Mexico and Japan. The process of privatization has already been started in India through disinvestment of government's shareholdings in public sector. The process of privatization should be accelerated for effective functioning of public sector and rapid industrial growth. In fact, government of India recognized the need for privatization for rapid and efficient industrial growth.
Small Scale Industries: It was argued that small is beautiful'. It was further believed that small is efficient, innovative and productive. Further, government viewed that small scale sector solves the problems of the country like unemployment and regional imbalance. Consequently, the government provided huge financial and non-financial facilities to this sector. But the government realized that this sector failed to a greater extent in playing its role and is a misfit in the market economies.
10. Financial Sector: The financial sector consist of commjercial banks, development banks, mutual funds, unorganisaed financial sector institutions, custodial service institutions, stock exchanges, underwriting and capital issue houses. The economic liberalization brought significant changes in financial sector. The important ones among are:
Permission for NRIs to enter the Indian stocvk market;
Establishment of the Securities and Exchange Board of India;
Setting up of the Investment Information and Credit Rating Agency of India,
Establishment of Credit Rating Information Services of India Ltd.
Economic environment covers those factors, which give shape and form to the development of economic activities and include factors like nature of economic system, general economic conditions, various economic policies and various product factors.
General Economic conditions: Determine the extent to which various organisations find the economic forces favourable or unfavourable. The economic conditions are also affected by the political and social factors also.
i. Economic System Determines the extent to which the organisations have to face different constraints and controls by the economic factors.
ii. National Income Indicates the level of economic growth of the country.
iii. Distribution of Income Determines the type of products that may be demanded by the people. There is wide disparity in the distribution of national income.
iv. Monetary policy Regulates the economic growth through the expansion or contraction of money supply.
v. Fiscal policy Deals with the tax structure and governmental expenditure. Fiscal policy is adopted to mobilising maximum possible resources, optimal allocation of resources, attainment of greater equality in distribution of income and maintenance of greater equality in the distribution of income.
Factor markets: Determine the availability of these factors so that suitable strategies can be adopted for their procurement and utilisation.
i. Natural resources becomes a strategic planning factor for organisations requiring such resources in the production process.
ii. Infrastructural facilities provides the various supporting elements for the efficient functioning of the organisations.
iii. Raw materials and supplies requires continuous flow of raw materials to maintain its operations.
iv. Plant and Equipment.
v. Financial Facilities.
POLITICAL AND LEGAL ENVIRONMENT:
Political factors, which direction and stability are a major consideration for managers in formulating company strategy. Political considerations define the legal and otherwise governing parameters in which the firm must or may operate.
Political constraints are placed on each company through fair trade decisions, tax programs, wage legislation, pollution and pricing policies, administrative and many other actions aimed at protecting the consumer and the environment. Political and legal environment is an important element particularly in mixed economy like ours and affects directly the working of business organisations. This performs two roles: promoting and restraining.
The promoting role of political and legal environment includes the stimulation of business through the provisions of various facilities and incentives, protecting the markets, taking direct roles in the development of the business, and purchasing from business organisations. The political and legal environment however, works as restraining force by limiting the scope of business operations. A web of laws, regulations and court decisions encircles every manager.
Political and legal environment depends on (i) political stability like impact of changes in the form and structure of government, declaration of emergency etc., (ii) political organisations like political parties and their ideology; (iii) defence and military policy; and (iv) legal rules of the game of business- the formulation, implementation, efficiency and effectiveness.
The political and legal environment can be analysed in three respects: (i) political atmosphere; (ii) The general governmental approach towards business; and (iii) laws regulating operations of business in the country.
1. Political atmosphere:
The general political atmosphere of the country presents a mixed picture. These factors are quite favourable for the development of business in the country as a whole. On the other hand, we have certain problems, which have their direct impact on the working of business organisations. These problems are in the form of generation of regionalism at the political level, tug of war between Central and State governments.
2. Government's attitude:
Being a mixed economy, this offers considerable scope of government's role in business. There are four important roles of the government in relation to business: regulatory, promotional, entrepreneurial role and planning.
3. Laws regulating the Business:
With increasing role of the government in business, there is every possibility that the government will exercise more control over the business particularly in the private sector. The government tries to fulfill its regulatory role through various acts and the result is plethora of acts affecting business in the private sector.
TECHNOLOGICAL ENVIRONMENT:
The final set of considerations in the remote environment involves technological advancements. To avoid obsolescence and promote innovation, a firm must be aware of technological changes that might influence its industry. Creative technological adaptations can affect planning in that new products may be suggested or existing ones improved; manufacturing and marketing techniques may also be improved.
A technological innovation can have a sudden and dramatic effect on the environment of a firm. A breakthrough may swarm sophisticated new products and markets or significantly shorten the anticipated life of a manufacturing facility. Thus, all firms must strive for an understanding both of the present state of technological advancement affecting their products and services and of probable future innovations.
The key to beneficial forecasting of technological advancement lies in accurately predicting future capabilities and probable future impacts. A comprehensive analysis of the effect of technological changes involves study of the expected impact of new technologies on the remote environment, on the competitive business situation, and on the business-society interface.
SOCIAL AND CULTURAL ENVIRONMENT:
Social and Cultural Environment is quite comprehensive because it may include the total social factors within which an organisation operates. In fact, the political and legal environment is closely intertwined with social and cultural environment because laws are passed as a result of social pressures and problems. Social and cultural environment consists of attitudes, beliefs, desires, expectations, education and customs of the society at a given point of time.
From business organisation's point of view it may include (i) expectations of the society from the business; (ii) attitudes of society towards business and its management; (iii) view towards achievement of work; (iv) views towards authority structure, responsibility and organisational positions; (v) views towards customs, traditions and conventions; (vi) class structure and labour mobility; and (vii) level of education.
Often the social and cultural factors are not considered adequately. The operating environment also called the competitive or task environment differs from the remote environment in that it is typically subject to much more influence or control by the firm.
OPERATING ENVIRONMENT:
The operating environment involves factors in the immediate competitive situation that provide many of the challenges a particular firm faces in attempting to attract or acquire needed resources or is striving to profitably market its goods and services. Among the most prominent of these factors are a firm's competitive position, customer profile, reputation among suppliers and creditors, and accessible labour market. The operating environment also called the competitive or task environment differs from the remote environment in that it is typically subject to much more influence or control by the firm. Thus, when they consider conditions in the operating environment, businesses can be much more proactive in strategic planning than they are when dealing with remote factors.
COMPETITIVE POSITION:
By assessing its competitive position, a business improves its chances of designing strategies that optimize environmental opportunities. Development of competitor profile enables a firm to plan accurately both its short and long term growth and profit potentials. Although the exact criteria used in constructing a competitor profile are largely determined by situational factors in the environment. The following is the list of criteria which can be used for such a profile.
Market share;
Breadth of product line;
Effectiveness and sales distribution;
Proprietary and key account advantages;
Price competitiveness;
Advertising and promotion effectiveness;
Location and age of facility;
Capacity and productivity;
Experience;
Raw material costs;
Financial position;
Relative product quality;
R&D advantages/position;
Caliber of personnel; and
General image.
Once appropriate criteria have been selected, they are subjectively weighted to reflect their relative importance to a firm's success. Next, the competitor being evaluated is rated on the criteria. The type of competitor profile suggested is limited by the subjectivity of the criteria selection, weighting and evaluation approaches employed. Nevertheless, this process is of considerable value is helping a business to explicitly define its perception of its competitive position.
Comparing profiles of the firm and its competitors can further aid managers in identifying specific factors that might make a competitor vulnerable to alternative strategies the firm might choose to implement.
