What is Environmental Appraisal ?
There are numerous factors that affect the organisation and its operations. These factors can influence the organisation in both positive as well as negative ways. Identifying the issues and challenges. existing in the external environment is extremely important for an organisation. In order to identify the factors in external environment, an appraisal process of the industry's environment is necessary. Environmental appraisal facilitates the managers with the ability to study the competitive structure and competitive position of the organisation along with the position of its competitors.
By analyzing and appraising the external environment, the existing opportunities and threats can be identified. It is the responsibility of the managers to avoid the threats and to reap the benefits from the opportunities in the market. Environmental appraisal also helps the managers in analyzing the effects of globalization on the level of competition within a particular industry.
It is well-known that business environment never remains stable rather keeps on changing rapidly. As the businesses grows and expands, the changes in external environment compels the organizations to make efficient strategies to deal with the contingency situations. Environmental appraisal also allows an organisation to study the steps taken by competitors in the market. By appraising the external environment the companies can improve their internal capabilities and strengths for adapting to the changes in the external. environment.
Definition of Environmental Appraisal
According to Abell :
"Environmental appraisal is the identification, measurement, and assessment of environmental impacts".
Levels/Components of Environmental Appraisal
By analyzing the external environment of a business the marketers are able to identify and highlight the opportunities from the threats and strengths from the weaknesses. the The factors which are not dependent on organisation and their existence is not based on the activities of the organisation are called as external factors. While strengths and weaknesses are internal. opportunities and threats are external and are not in control of the organisation. Opportunities are those situations that the organizations can use to their advantage. While threats are those negative situations that if not tackled promptly can harm the well-being of the the organisation. Analyzing the external environment requires analyzing following areas :
1) Environmental Scanning :
In environmental scanning the broad environmental factors are analyzed and studied. These factors are not a part of the organization's internal environment and hence are uncontrollable in nature. These factors influence the businesses in a significant manner. These factors are a part of the macro environment or the general environment. The common macro environmental factors are economic, political, legal, technological, social, etc.
2) Industry Analysis :
Industry analysis is a tool which is used to assess the degree of competition and complexity within a particular industry. With the help of industry analysis, the marketers study and scrutinize the macro environmental factors that influence a particular industry. Industrial analysis helps the strategic leaders formulate various strategies to neutralize the threats and reap the benefits from the opportunities. Various environmental forces to be studied in the industry analysis are the bargaining power of buyers and suppliers, position of business and competitors. and threats of new entrants as well as the substitutes within the industry.
3) Competitive Analysis :
While appraising the external environment, it is very important to analyze the strengths and weaknesses of the existing and probable competitors. It helps the organisation to formulate the strategies required to survive and succeed in the highly competitive environment. It also outlines the strategies adopted by the competitors. The influence of competition is directly proportional to the degree of concentration in the industry, i.e., if the concentration of the industry is high, the influence of competition is high, and vice versa. Competitive analysis helps the organizations in identifying threat sand opportunities by providing defensive and offensive strategic moves.
Process of Environmental Appraisal
The process of environmental appraisal includes the following steps :
1) Understand Nature of Environment :
Before starting the environmental appraisal, the strategists must understand the nature, i.e., the volatility of external environment. The volatility here implies to the changes in the environment. To understand the nature of environment, the strategic leaders need to answer following questions :
- Is the environment stable or dynamic?
- In which ways does the environment change?
- Are the changes identifiable?
Answering these questions would help in deciding the future course of actions.
2) Analyze the Past Influences of Environmental Factors :
Once, the nature of external environment is identified, the next step is to identify the factors that have influenced the performance of organisation in the past. Analyzing these factors will help in planning and formulating strategies to handle future scenarios.
3) Identify Critical Competitive Forces :
The next step is to identify the key competitive forces existing within the industry with the help of structural analysis. This step helps to analyze the organization's current position, the bargaining power of buyers and suppliers, the new entrants in the industry, and the existing competitors of the organisation.
4) Analyze the Strategic Position :
In this step, the managers analyze the strategic position of the organisation in relation to its competitors in terms of resources, customers, etc. To identify and analyze the strategic position of an organisation, following ways should be adopted:
- Growth/Share analysis
- Attractiveness analysis
- Strategic group analysis
- Study of market segments and market power
- Competitor analysis
5) Identify the Opportunities and Threats :
Identify the opportunities and threats prevailing in the environment. Formulate efficient strategies to reap the benefits from the opportunities so that the threats can be neutralized. The selection of strategy and effective utilization of selected resources in an effective manner is crucial for this stage.
Techniques of Environmental Appraisal
While analyzing the environment, the strategists should remember to select those techniques only that match the needs of organisation from every aspect. There are many techniques for analyzing the environment, among which some of the important environmental appraisal techniques are as follows :
QUEST Analysis
The QUEST or "Quick Environmental Scanning Technique" is a technique that facilitates estimation of wide-ranging environmental factors and assesses their influences on the organisation. It tries to scrutinize the environmental forces on the basis of events and trends occurring in the market. Some of the assumptions made for analyzing the environment using this technique are :
- The strategic executives have views about the dynamic environmental forces.
- These views about the environment collectively signify the understanding of the environment by the organisation.
Hence, it can be said that having knowledge about the environmental forces can be useful only when there is a mechanism to interpret and analyze them. In the absence of a specific technique, it is possible that all the future expectations and plans go wasted, as these cannot be shared with the executives. QUEST analysis allows the executives to understand and analyze the different perceptions, interpretations and points of mistakes regarding the environment.
This technique helps the executives in voicing their perceptions and analyzing the points at which their individual views differ from each other. Once the points at which the executives disagree are identified, it is possible for the management to negotiate with them so that a consensus can be achieved. The information generated by different views would lead to better decision-making for the achievement of organizational goals. This also allows the organizations to make combined decisions rather than independent and individual ones.
According to Nanus, "QUEST is a future research process designed to permit executives and planners in an organisation to share their views about trends and events in future external environments that have critical implications for the organization's strategies and polices. It is a systematic, intensive, and relatively inexpensive way to develop a shared understanding of high priority issues and to focus management's attention quickly on strategic areas for which more detailed planning and analysis would be beneficial".
Various tools can be used to perform QUEST, such as questionnaires, stakeholder analysis, Delphi technique, structural analysis, etc.
Process of QUEST
1) Preparation for QUEST :
The first step of QUEST analysis is to make preliminary preparations. These preliminary tasks are as follows :
- Define the environmental issues
- Select the members for the analysis (12 to 15)
- Document the complete information about the past trends of environment relevant for the organisation
- Decide the location to carry-out the analysis
2) Analyze the Environment :
As soon as the preparations have been completed, the environment in which the organizational activities are performed is analyzed. This step Marts with identifying the vision, mission, and objectives of the organisation. Following the discussions about organizational goals, the past trends and environmental patterns that may influence the operations of the organisation, are discussed. It should be noted that the cross impact of these forces are also analyzed to estimate the capability and strength of the organisation Strategic leaders should devote considerable time to analyze the environment.
3) Document the Discussions in a Report :
Once, the business environment is analyzed, all the outcomes are combined and presented in form of a brief report. This report has two sections, where the first part illustrates about the organization's strategic content, the second part elaborates about the future possibilities to he faced by the organisation.
4) Discuss the Report :
At last the strategic leaders should discuss the documented report in a meeting, and analyze the alternative courses of actions available to the organisation. These alternative courses of actions should also be evaluated according to the desired future position of the organisation keeping in mind the resources and strengths of the organisation. QUEST does not suggest the strategies to be made; it highlights the issues and challenges to be considered while formulating the strategy.
ETOP Analysis
Environmental Threats and Opportunities Profile (ETOP) is a technique used to structure the issues of environment. This technique was given by W.F. Glueck. The ETOP categorizes different environmental issues in various sectors which in turn helps the management to focus their attention towards specific areas. It helps in identifying the potential factors that influence the organisation.
Diagnosing the external environment closely is very essential as it points out the opportunities and threats. While some of the factors create suitable circumstances, other factors impose threats. ETOP facilitates an in depth analysis of environmental factors that allows the organizations to identify the potential opportunities and threats. This results in more efficient strategic planning. An opportunity can be defined as a favorable situation that provides prospects for a business to grow, expand and make profits as well. For example, an untapped market, an unaddressed potential need of customers, new technology, etc. Constraints are those factors that limit the ability to grow and reduce sales and profit potential. A threat can be defined as an unfavorable situation that restraints the growth and profits of an organisation.
For example, new entrants, availability of substitutes at low cost, etc.
ETOP Preparation
To prepare ETOP of an organisation, the strategists need to classify the environmental factors in specified categories, after which the impacts of those factors can be analyzed. This categorization simplifies the overall analysis process.
PEST Analysis
"PEST" or "Political, Economic, Social and Technological" analysis is one of the techniques of environment appraisal which provides a deep insight about the macro-environmental factors that affect the operations of a business. The level of importance given to these factors varies as per the industry in which a company works and the goods/services it deals in.
Some strategists have increased the scope of this technique by adding two more factors into it, i.e., environmental and legal factors. Hence, the extended version of this technique is known as "PESTEL". This technique has another variant known as "LONGPESTEL" or "Local, National, Global, Political, Economic, Social and Technological" analysis. This technique is used when the organizations are categorized as per the geographical basis. When these macro environmental factors are integrated with the external micro-environmental factors, then the analysis carried-out is SWOT analysis.
Factors Analyzed in PEST Analysis
Various factors that are analyzed in PEST analysis are as follows :
1) Political Factors :
Political factors are the laws, orders, and interventions made by the government in order to regulate the businesses. These regulations influence the operations of business in a significant way.
2) Economic Factors :
Economic factors are the current and past patterns that exist in the country. These factors encompass the rate of economic growth, inflation, exchange rates, average income, etc., which heavily influence the money circulation and hence regulate the business activities.
3) Social Factors :
Social factors include all those factors that are related to the general public. These factors are closely knitted with the consumption by public, which influences the gross demand of products and services. These factors, involve the rate of population growth. literacy rate, employment, public safety, etc.
4) Technological Factors :
Technological factors. are one of the prime factors that affect the business operations in the dynamic business. environment. These factors involve arrival of new technology in market, automation of business processes, research and development. projects, etc.
SWOT Analysis
Another well-known technique for analyzing the internal and external environment of business is "SWOT" or "Strengths, Weaknesses, Opportunities and Threat" analysis. It is a simple tool that is helpful in studying the internal strength and weaknesses, and the external threats and opportunities of a company. SWOT analysis involves identifying the business objectives and defining the significant internal and external factors for achieving the identified objectives.
The main aim of conducting a SWOT analysis is to help the business in protecting itself against the threats and to exploit the potential business opportunities. This analysis is essential for formulating strategies as is provides a base for strategy formulation. SWOT analysis helps in studying the overall soundness of the business.
Components of SWOT Analysis
1) Internal Factors :
The first two letters in the acronym S (strength) and W (weaknesses) refers to internal factors that are the resources available in the organisation. These factors may impart strengths which can be utilized to exploit the opportunities or become a cause of weaknesses of a strategic nature for the organisation.
i) Strengths :
These are the factors that provide competitive advantage to the organisation. These factors collectively may allow an organisation to bring change in an organisation. These factors can be different for different organizations. These can be resources, skills, etc. For example,
- Presence in global market & collaboration with reputed international firms,
- Tie-ups with internationally reputed manufacturers and exporters,
- Experience in tooling selectivity and metal cutting,
- Manufacturers certified with ISO 9001 certification.
ii) Weaknesses :
Weaknesses are the factors: that limit the growth of company or restrict the company from moving in a desired direction. These factors also hinder the organisation from achieving success through the internal capabilities. These factors vary as per the organisation. A weakness can be anything such as lack of resource, lack of market understanding, lack of fund, etc. For example,
- Inconsistencies in cash flow system,
- Lack of research facilities and use of out dated research data,
- Lack of latest technologies and no web presence,
- New firm and hence lack of goodwill.
2) External Factors :
External factors reside outside the organisation. These are of two types :
i) Opportunities :
An opportunity is a major favorably situation in the firm's environment. The industry should build its production capacity to meet the upward moving demand, both for domestic and international markets. Opportunities are those factors which act as the favorable situations for the organisation. These situations encourage the organisation to grow more and earn more profits. For example,
- Loyal customers in market,
- High demand of certain products in a particular season,
- Poor substitutes available in the market,
- Obsolete technologies of the competitors.
ii) Threat :
Threats are the external unfavorable conditions. They act as barrier for the organisation in achieving its desired market position. These factors also differ as per the organisation and the areas in which it operates. For example,
- Too many competitors of the similar product,
- Introduction of taxes or increase in tax rates,
- Recession in economy,
- Latest technology used by competitors.