Environmental Scanning, Industry Analysis,

Competitive Intelligence and ETOP Study

Environmental Ananlysis

INTRODUCTION
Strategic analysis is basically concerned with the structuring of the relationship
between a business and its environment. The environment in which business operates
has a greater influence on their successes or failures. There is a strong linkage
between the changing environment, the strategic response of the business to such
changes and the performance. It is therefore important to understand the forces of
external environment the way they influence this linkage. The external environment
which is dynamic and changing holds both opportunities and threats for the
organisations. The organisations while attempting at strategic realignments, try to
capture these opportunities and avoid the emerging threats. At the same time the
changes in the environment affect the attractiveness or risk levels of various
investments of the organizations or the investors.

BROAD DIMENSIONS OF EXTERNAL ENVIRONMENT

The macro environment in which all organizations operate broadly consist of the
economic environment, the political and legal environment, the socio cultural aspects
and the environment related issues like pollution, sustainability etc. The technological
temper and its progress has been the key driver behind the major changes witnessed in
the external environment making it increasingly complex.

Strategic Analysis These factors often overlap and the developments in one area may influenc
developments in other. For example, the opening up of economy integrated the markets
globally and increased the competition between private and public firms. This forced
the Indian government to revisit its economic policies. Under its new liberalization
policy and economic reforms of 1991, regulations like MRTP, which restricted the size
of the business and therefore inhibited their efficiency and competitive levels, were
removed with a positive impact on the indigenous industries. However, the delay in
addressing to the policies like Indian companies act or Exim policies, organisations
both from domestic and abroad still find the Indian business environment not so
conducive for business. The current political developments are sure to have more
uncertainties in the minds of business people regarding the future policy direction in
certain sectors. The social considerations in the context of a developing country like
India also plays a critical role in deciding the broad dynamics of the business
environment. The clash of ideologies between preserving the Indian ethos and culture
and giving a freedom of choice to people often create problems and confusion for
business.
PESTEL FRAMEWORK
Careful analysis of the above factors will help in identifying major trends for different
industries. Exhibit-1 shows the PESTEL framework which is most popularly used for
such analysis.

The external forces can be classified into six broad categories: Political, Economic,
Social, Technological, Environmental and Legal Forces. Changes in these external
forces affect the changes in consumer demand for both industrial and consumer
products and services. These external forces affect the types of products produced, the
nature of positioning them and market segmentation strategies, the
types of services offered, and choice of business. Therefore, it becomes
important for the organizations to identify and evaluate external opportunities and
threats so as to develop a clear mission, designing strategies to achieve long-term
objectives and develop policies to achieve short-term goals. Here, we will discuss all
the six forces individually and then try to come to the conclusion regarding
environmental analysis.

Few indicative points are listed to guide you to find the key forces at work in
the general environment. While the framework may be used to understand the
most important factors at the present time, it should be primarily used to
look into the future impact which may be different from their present or
past impact.

The PESTEL Framework – Macro-environmental influences. The framework

primarily involves the following two areas:
1. The environmental factors affecting the organization;
2. The important factors relevant in the present context and in the years to come.

Political
1. Government stability
2. Political values and beliefs shaping policies
3. Regulations towards trade and global business
4. Taxation policies
5. Priorities in social sector

Environmental Analysis Economic Factors

1. GNP trends
2. Interest rates/savings rate
3. Money supply
4. Inflation rate
5. Unemployment
6. Disposable income
7. Business cycles
8. Trade deficit/surplus

Socio-cultural Factors
1. Population demographics
l ethnic composition
l aging of population
l regional changes in population growth and decline
2. Social mobility
3. Lifestyle changes
4. Attitudes to work and leisure
5. Education – spread or erosion of educational standards
6. Health and fitness awareness
7. Multiple income families

Technological
1. Biotechnology
2. Process innovation
3. Digital revolution
4. Government spending on research
5. Government and industry focus on technological effort
6. New discoveries/development
7. Speed of technology transfer
8. Rates of obsolescence

Legal
1. Monopolies legislation/Antitrust regulation
2. Employment law
3. Health and safety
4. Product safety
Political: Politics has a serious impact on the economic environment of a country.
Political ideology and political stability or instability strongly influence the pace and
direction of the economic growth. Also it contribuies to the economic environment
which is conducive for some businesses to grow or remains indifferent for some
businesses and at times is a hurdle. Subsequent to general elections of 2004 in the
country, there has been a change in the government at the centre. A new coalition
United Progressive Alliance (UPA) led by the Congress party and supported by Left is
ruling at the centre and the implications on business can be seen through few of the
policy statements announced by the government. Even though the broad policy
direction is in line with the policy of an open economy and private sector initiative, the
Strategic Analysis Common Minimum Programme has identified few priority areas which is g
have an impact different than before. Particularly when there are certain ideologies
which view differently the issues like FDI and privatization, the future of different
sectors like insurance and banking, aviation and telecommunication have become
uncertain.

Looking back into the history due to certain ideological beliefs prevalent in some
section of politics, foreign companies like Coca Cola and IBM had to move out of
India in the late 70s. Entry barriers, protectionist policies, high tariffs, nationalist
pursuits all worked towards a closed economy which continued till the time
liberlization policies were introduced in 1991. This situation had a cumulative effect
on making the economy weak and the businesses were hardly competitive as compared
to the international standards. However in subsequent years, the political consensus
developed on issues such as labour reforms, power sector reforms, importance of
infrastructure sector is doing a lot good for business. Nevertheless, the deteriorating
standards in politics, increasing corruption and the criminal nexus are creating hurdles
for business in certain areas.

Common Economic Indicators

A. National Income
B. Policy Initiatives
GNP Monetary policy
Personal disposable Income Fiscal policy
Personal consumption Labour and employment policy
C. Savings
D. Foreign Sector
Personal savings Exchange rates
Corporate savings Exports/Imports
Balance of Payments
E. Industry
F. Sectoral Growth
Industry Investment Agriculture
FDI flows Industry
Services
Infrastructure
G. Capital Market H. Prices, Wages, Productivity
Equity market Inflation
Bond market Labour productivity

Economic factors throw light on the nature and direction of the economy in which
firm operates. The firms must focus on economic trends in segments that affect their
industry. For example the present trend of low interest rates on personal savings may
compel individuals to move towards equity and bond markets leading to a boom in the
capital market activity and the mutual fund industry. Consumption patterns are
usually governed by the relative affluence of market segments and firms must
understand them through the level of disposable income and the tendency of people to
spend. Interest rates, inflation rates, unemployment rates and trends in the gross
national product, government policies and sectoral growth rates are other economic
influences it must consider.

The services sector’s contribution to national income is increasing year after year and
the family incomes are rising faster than individual incomes, job opportunities are
more diverse and therefore these speak for different types of opportunities and
challenges which are emerging before the business. With the opening up of the
economy, trends in global market needs a careful look.
The above needs to be analyzed and incorporated in your inferences for the general
environment and its other forces and how all these together may influence business.

Social Demographic Factors: Demographic characteristics such as population, age

distribution, literacy levels, inter-state migration, rural-urban mobility, income
distribution etc. are the key indicators for understanding the demographic impact on
environment. The shifts in age distribution caused by improved birth control methods
have created opportunities for youth centric products ranging from clothes to
entertainment to media. The growing number of senior citizens and their livelihood
needs have been highlighted and the government is being forced to pay more attention
in the form of social security benefits etc.

Considering Literacy and the composition of literates in the country creates

opportunities for particular type of industries and type of jobs. For example on one
hand, the presence of a large number of English speaking engineers encouraged many
software giants to set up shops in India and on the other, the availability of cheap
labour, India becomes a destination for labour intensive projects. Moreover, large
labour mobility across different occupations and regions, in recent times, has cut
down wage differentials greatly and this has an impact for business which needs to be
understood.

Cultural Factors: Social attitudes, values, customs, beliefs, rituals and practices also
influence business practices in a major way. Festivals in India offer great business
opportunity for certain industries like clothes and garments, jewellery, gift items,
sweetmeats and many others, the list could be endless.
Social values and beliefs are important as they affect our buying behaviour. For
example, Mc Donalds does not serve the beef burgers in India because Indians do not

Strategic Analysis have cow meat since the animal is considered holy and sacred. A related ex
Walt Disney also brings out clearly, the impact different cultures may bring to
business. Walt Disney which has been so suffcessful in US market could not be so
similarly successful in European countries because of the difference in the way in
which people entertain themselves there. Walt Disney had to customize its offerings in
order to be successful in these markets. The spread of consumerism, the rise of the
middle class with high disposable income, the flashy lifestyles of people working in
software, telecom, media and multinational companies seem to have changed the
socio-cultural scenario and this needs to be understood deeply.
Values in society also determines the work culture, approach towards stakeholders and
the various responsibilites the organization thinks of owing to its stockholders and the
society.

Technology: Technological factors represent major opportunities and threats which

must be taken into account while formulating strategies. Technological breakthroughs
can dramatically influence the organisation’s products, services markets, suppliers,
distributors, competitorss, customers, manufacturing processes, marketing practices
and competitive position. Technological advancements can open up new markets,
change the relative position of an industry and render existing products and services
obsolete. Technological changes can reduce or elimiate cost barriers between
businesses, create shorter production runs, create shortages in technical skills and
result in changing values and expectations of customers and employees.
The impact of information technology (IT) which combines fruits of both
telecommunications and computers has been revolutionary in every field. Not only has
it opened up new vistas of business but also has changed the way the businesses are
done. IT has specifically brought in another dimension ‘Speed’ which organizations
recognize as the additional source of competitive advantage beyond low cost and
differentiation. Manufacturers, bankers and retailers have used IT to carry out their
traditional tasks at lower costs and deliver higher value added products and services.

Environment: Environment conservation and protection is an issue, which Environmental An

has gained prominence because of deteriorating environmental balance which is
threatening the sustainability of life and nature. Largely, business is also held
responsible for such situations as emissions from industries poluting the air,
excessive chemical affluents drained out in water making it poisonous and unfit for
use, usage of bio non-degradable resources affecting the bio-chain adversely and
exposure of employees to hazardous radiations bring their life in danger. All these
have been taken very seriously by different stakeholders in the society including the
government and legislations and movements are creating pressure for an
environment friendly business. These have far reaching implications for business
ranging from the kind of business, the product being manufactured, how it is
manufactured and how friendly it is for mankind and nature. Big companies like Coca
Cola and Pepsi have also come under the purview of the society regarding the
environmental hazards. If the charges on them of using chemicals beyond accepted
levels for manufacturing soft drinks are confirmed, they will have a black spot on their
names and business. So, it is important for the organisations to take care of the
environment as well.
Legal: Licensing policies, quota restrictions, import duties, Forex regulations,
restrictions on FDI flows, controls on distribution and pricing of commodities
together made business difficult during license permit raj before the liberalization
policy of 1991. However, with economic reforms things have changed and legal
formalities have eased. Nevertheless with globalization, the rules of competition, trade
mark rights and patents, WTO rules and implications, price controls and product
quality laws and a number of other legal issues in individual countries have become
important and therefore they need to be included while understanding the general
environment.

GENERAL ENVIRONMENT AND ORGANIZATIONS’ STRATEGY

As a next important step the manager needs to analyze the kind of impact the change
may bring in their own industry as the impacts are never same for all industries. For
example, the emerging younger demographic profile of India will have very different
consequences for businesses say in health care or entertainment. While the former will
face an adverse effect, the latter will have a positive effect and this needs to be
analyzed and integrated into strategic decision making. In response to these
assessments of differential impacts, managers will be able to take advantages of the
opportunities or guard themselves of the threats. Exhibit 4 shows in how different
ways various industries get affected by the different environmental trends.
Responding to these various impacts with new strategic initiatives the managers must
take notice of the fact that if the changes are significant, it may have the potential of
changing the competitive rules of the game in the industry. For example, in India the

Strategic Analysis competitive rules of the game for sectors like telecom, banking and insuran
in the post liberalization period changed specially in last two years. With the easing of
FDI and particiption of major global players, norms have changed dramatically which
is reflected in the strategies of most of the firms in the sector. These changes can be
seen in the area of technology and pricing, intensity of advertising and promotions,
their business alliances and network in the country.
Managers need to be cautious of the fact that there may be developments, which are
not so easy to be predicted and therefore need further attention so that they can be
incorporated in their strategy. In the global context, the managers must see the kind of
impact any single change will have in different markets. It is quite possible that they
are very different both in degree and their nature.

Exhibit 4
Environmental Potentially positive Probably neutral Probably negative
Trends effects effects effects
1. Aging population medical services minerals colleges and schools
2. Multiple income fast food machine tools grocer’s supplies
families
3. Deregulation shipping financial sector
4. Increased waste management software leather
environmental
lelgislation
5. Growing global telecommunication competition mining
small scale/handicrafts
Structural Drivers to Change
The PESTEL analysis gives a number of factors and their likely influences. However
it is important to identify the specific factors which may influence an industry and
force them towards competitive adjustments. These factors are termed as structural
drivers of change which have the likely effect on the structure of an industry or on the
competitive environment.
As a first step based on PESTEL analysis, the key driving forces need to be identified
and then impact of the combined effect of these forces should also be made. Increasing
globalization of the industry and the E enabled era could be such driving forces
capable of affecting the structure of an industry or its environment.

ENVIRONMENTAL SCANNING
The factors or the forces understood under PESTEL framework put together, present
a highly complex and uncertain environment which are difficult to predict or foresee.
From a long term view of strategy however, reaching somewhat closer to such forces
are important in understanding the key factors influencing the success of such
strategies.
Environmental scanning is one of the few ways to detect future driving forces early
and this involves studying and interpreting the developments of social, political,
economic, ecological and technical events that could become driving forces. It
attempts to figure out few radical happendings or path breaking developments which
may be catching on and see their possible implications 5 to 20 years into the future.
The purpose of the environmental scanning is to raise the consciousness of managers
about potential developments that could have an impact on industry conditions and
bring in new threats or opportunities.

Environmental scanning is normally accomplished by systematically monitoring and

studying current events, constructing scenarios and employing the Delphi method (a
technique for finding consensus among a group of knowledgeable experts).
Constructing scenarios involves a detailed plausible view of how the business
environment of an organization might develop in the future based on the groupings of
key environmental influences and drivers of change about which there is high level of
uncertainty. For example in industries like energy, transportation, defence equipment
etc. there is a need for views of the business environment of more than 10–15 years
and factors like raw materials, substitutes, consumption patterns, geo politics etc.
would be of crucial importance. Foreseeing precisely for such a longer duration may
be very difficult but drawing up possible futures may be possible. It is not unnatural
to believe that several scenarios could unfold overtime and these need to be
understood.
Scenario Planning technique is briefly discussed in Unit 5 under the competitive
environment.

SUMMARY
Understanding of the general environment in which an organization operates is the
foremost pre-requisite towards strategy formulation. The six broad dimensions which
the PESTEL framework provides of the environment-political, economic, sociocultural,
technological, environmental and legal are capaable of giving a
comprehensive overview of how things may be unfolding. The objective of the
analysis out of this framework however should not only restrict to the present and past
but the real focus should be on projecting the trends into future in order to get the real
feel of the environment then. This shall enable the firm to proactively strategize for
future considering the general environment, it is going to face and the issues which
will be of importance.

REFERENCES AND FURTHER READINGS

Johnson, Gerrry & Scholes, Kevan. (2004). Exploring Corporate Strategy. Sixth
edition, Prentice-Hall of India, New Delhi.
Thompson, A. Arthur, Jr. and Strickland, A.J. III. (2003). Strategic Management,
Concepts and Cases, Thirteenth edition. Tata McGraw Hill Publishing, New Delhi.
Miller, Alex. Strategic Management, Third edition. Irwin McGraw Hill.
Peters, Thomas J. and Robert, H. Waterman, Jr. (1982). In Search of Excellence:
Lessons from America’s Best-Run Companies, New York: Harper and Row.
David, R. Fred. (1997). Concepts of Strategic Management. Prentice Hall
International Inc.

Process of Business Environement Analysis

Background
Environmental analysis is a systematic process that starts from identification of
environmental factors, assessing their nature and impact, auditing them to find
their impact to the business, and making various profiles for positioning. A
common process of environmental analysis or scanning is discussed in the
following section.

Environmental Analysis Process

A business manager should be able to analyze the environment to grasp
opportunities or face the threats. Organizations need to build strength and
repair their weakness available in the business environment. Therefore, this
process consists not only a single steps but a process of various steps.
Environmental analysis comprises scanning, monitoring, analyzing, and
forecasting the business situation. Scanning is to get the relevant information
from the information overload. It is to focus on the most relevant information.
Monitoring is to check the nature of the environmental factors. Analyzing
requires data collection and use of different required tools and techniques.
Forecasting is to find the future possibilities based on the past results and
present scenario.

Environmental analysis process is not static but a dynamic process. It may

differ depending on the situation. However, a general process with few
common steps can be identified as the process of environmental analysis
these are a) Monitoring or identifying environmental factors, b) Scanning and
selecting the relevant factors and grouping them, c) Defining variables for
analysis, d) Using different methods, tools, and techniques for analysis, e)
Analyzing environmental factors and forecasting, f) Designing profiles, and g)
Strategic positioning and writing a report. Brief discussion is made on each of
the step of this environmental analysis process.

Identifying environmental factors

First of all a strategist should identify all the relevant factors that might affect
his or her business. In this process, one should first know what the internal
areas of the business are. This includes all the systems, internal structure,
strategies followed, and culture of the organization. All these areas can be
covered into the five functional areas in classical approach. Similarly, a
business daily interacts with the close environmental components outside the
business such as customer, competitor, and supplier. It might cover all other
stakeholders such as trade union, media, and pressure group. Furthermore,
general such business environment factors as political-legal, economic, sociocultural,
and technological factors are to be identified

Scanning and selecting relevant and key factors

Out of all the business environmental factors, a strategist should focus only on
the relevant factors for further analysis. All the factors are not equally
important and affecting to the business. In this context, a strategist has to scan
the environmental trend to select only the most affecting environmental factors
from the information overload. This step paves the way of environment
analysis and forecasting.

Defining Variables for Analysis

Selected environmental factors are to be further specified into the variables. A
concept can be interpreted into different variables. For example, political
situation can be measured using few variables such as instability, reliability,
and long-term effect. Economic environment might cover many variables such
as Per Capita, GDP, and Economic policies that can be further classified into
many other variables. Variables are the basis of measurement in
environmental analysis process. Variables can be compared, grouped,
correlated, and predicted to find the clearer picture of the broader concept. It
is, therefore, necessary to define the variables first in any kind of analysis
including the environmental analysis.

Using Different Methods, Techniques, and Tools

Different types of methods, tools, and techniques are used for analysis. Some
of the major methods of analysis can be Scenario Building, Benchmarking,
and Network methods. Scenario presents overall picture of its total system
with affecting factors. Benchmarking is to find the best standard in an industry
and to compare the one’s strengths and weakness with the standard. Network
method is to assess organizational systems and its outside environment to find
the strength and weakness, opportunity and threats of an organization.

Some of the techniques of primary information collection can be Delphi,

Brainstorming, Survey, and Historical enquiry. Delphi technique collects
independent information from the experts without mixing them. Brainstorming
is information collection technique being open minded without criticizing
others. Survey is to design questions and to ask them to the participants
whereas the historical enquiry is a kind of case analysis of past period.
Analysis tools can be statistical such general descriptive tools as mean,
median, mode, frequency. Tools can be inferential as ANOVA, correlation,
regression, factor, cluster, and multiple regression analysis. There are many
tools of analyzing functional areas. Finance and accounting use mostly
profitability, leverage, fund flow and other similar accounting and financial tools
for analysis. Human resources use employee turnover, training, satisfaction
and many others as the basis of evaluating strength and weakness.
Production area is assessed using quality control, productivity, breakdown,
and many others. Similarly, marketing effectiveness is judged from the sales
volume and market coverage. Research and development is perceived
successful if it can really develop the strength in an organization.

Forecasting Environmental Factors

Collecting relevant information from the selected areas and to identify the
variables in such areas are the basics of analysis. Analyzing the past
information to predict the future is the main objective of this step. As discussed
earlier, use of different methods, techniques, and tools comes under the
analysis process. It is, therefore, a comprehensive process that analyzes
collected information using different tools and techniques.

Designing Profiles
After analyzing the environmental factors they are recorded into the profiles.
Such profiles record each component or variables into left side and their
positive, negative, or neutral indicators including their statement in the right
side. Internal areas are recorded in Strategic Advantages Profile (SAP) and
external areas are recorded in Environmental Threat and Opportunity Profile
(ETOP). Strength, Weakness, Opportunity, and Threat (SWOT) profile can be
designed combining both of these two profiles into one.

There are varieties of reporting formats or profiles used for external and
internal business environment analysis. Environmental Threat and Opportunity
Profile (ETOP) is commonly used to report the external environmental situation
whereas Strategic Advantages Profile (SAP) to report the internal
environmental situation1. Both of these profiles can be merged into Strength-
Weakness-Opportunity-Threat (SWOT) profile. David used
External Factor Evaluation (EFE) Matrix to present weighted score of external
environmental factors. Similarly, he used Internal Factor Evaluation (IFE)
Matrix to make the reporting of internal environmental audit.
Whellen & Hunger used External Factors Analysis Summary (EFAS) and
Internal Factors Analysis Summary (IFAS) as described.
Environmental threats and opportunities profile (ETOP) is a commonly used
profile related to external business environment. Strategic advantages profile
(SAP) is related to internal business environment. Nowadays, strength &
weakness and opportunities & threats (SWOT) profile has become very
popular. Present writing pursued the approach of reporting external and
internal business environment using the same approach.

Preparing ETOP
Environmental threat and opportunity profile is referred as ETOP profile. It
identifies the relevant environmental factors. Such factors might be general
environmental factors and task environment factors. Thereafter, it is necessary
to identify their nature. Some factors are positive to the organization whereas
others are negative. Therefore, it is necessary to find out their impact to the
organization. Positive, neutral, and negative sign in ETOP denotes the
relevant impact of environmental factors.

Preparing SAP
Strategic advantage profile is known as SAP. It shows strength and weakness
of an organization. Preparation of SAP is very similar process to the ETOP.
There are generally five functional areas in most of the organizations. These
areas are Production or Operation, Finance or Accounting, Marketing or
Distribution, Human Resource & Corporate Planning, and Research &
Development. These functional areas are listed to identify their relative
strength and weakness in SAP. Very similar to the ETOP, positive, neutral,
and negative signs are denoted and brief description is written in SAP profile.
Each functional area is very broad having many components inside.
All these above described profiles provide a clear picture to understand the
strategic position of an organization.
Strategic Position and Report Writing
After analysis of business environment a strategist knows the actual situation
and can make some future forecasting based on the environmental analysis.
After preparing the profiles strategists prepare formal report that describes the
business environment. The report might present issues and best strengths of
business environment in a systematic process. One can draw future strategies
based on the strategic analysis followed.

In conclusion, a strategist or a manager first identifies the relevant

environmental factors then analyzes using different tools and techniques to
find out the actual situation. This overall process is sometimes known as
SWOT analysis, environmental scanning, environmental analysis, or
monitoring-forecasting. This process is very important for a manager to make
his or her organization success by choosing the best available alternative
strategy.