Business leaders can control aspects of the internal environment that can positively or negatively affect a company’s operating and financial results. For example, leaders shape their company’s culture, establish the company’s organizational structure and create policies that guide employee behavior. However, the greatest challenges to business success may be a consequence of the external environment over which a company has little, if any, control. To address these challenges, business leaders conduct an environmental analysis and develop policies and processes that adapt company operations and products to this environment.
The external environment consists of a general environment and an operating environment. The general environment consists of the economic, political, cultural, technological, natural, demographic and international environments in which a company operates. The operating environment consists of a company’s suppliers, customers, market intermediaries who link the company to its customers, competitors and the public. Both the general and operating environments provide business opportunities, harbor uncertainties and generate risks to which a business must adapt. For example, countries with large populations may coincide with a large market size for particular products. However, to offer its products in these markets, a company may be required to contend with a government that erects obstacles to trade in the form of tariffs, product standards and customs procedures.
Purpose of Environmental Analysis
Successful businesses adapt their internal environment — including human and financial resources, policies, technologies and operations — to the external environment. The company performs an environmental analysis to identify the potential influence of particular aspects of the general and operating environments on business operations. This analysis identifies the opportunities and threats in a business environment in terms of a company’s strengths and weaknesses. For example, a company may consider the impact of operating in a communist country and the threats posed by government-controlled resources. A company might also consider the opportunities of a government-controlled market in terms of competing products, the implications of well-educated and well-paid consumers to product development and sales and the impact of the location of its primary suppliers in a country in economic crises.
Environmental Analysis Process
An organization relies on strengths to capture opportunities and recognize weaknesses to avoid becoming a victim of environmental threats. A company performs an environmental analysis to gain an understanding of these strengths, weaknesses, opportunities and threats. The environmental analysis then influences corporate planning and policy decisions.
This environmental analysis is a three-step process in which a company first identifies environmental factors that affect its business. For example, the company might consider if a market is “difficult” because of its remote geographic location or the area’s unfavorable economic conditions. The company then gathers information about the selected set of environmental factors that are most likely to impact business operations. For example, the company might review International Trade Center surveys that relay information about trade barriers that companies face in particular countries. This information serves as input to a forecast of the impact of each environmental factor on the business. For instance, a company might project the volume of products likely to be sold in a country in light of existing poor economic conditions and significant trade barriers.
Limitations of Environmental Analysis
An environmental analysis reviews current environmental conditions to forecast a future business environment. The static nature of the analysis ensures that unexpected environmental changes are not considered in a company’s business projections. In addition, the environmental analysis is but one source of information that’s evaluated as a company develops a strategic plan. As a result, the analysis does not guarantee business success. The benefit of the analysis is also limited by the reliability and timeliness of data used in the analysis.
Strategic management is the continuous planning, monitoring, analysis and assessment of all that is necessary for an organization to meet its goals and objectives. Fast-paced innovation, emerging technologies and customer expectations force organizations to think and make decisions strategically to remain successful. The strategic management process helps company leaders assess their company’s present situation, chalk out strategies, deploy them and analyze the effectiveness of the implemented strategies. The strategic management process involves analyzing cross-functional business decisions prior to implementing them.
Importance of strategic management
Strategic management necessitates a commitment to strategic planning, which represents an organization’s ability to set both short- and long-term goals, then determining the decisions and actions that need to be taken to reach those goals.
The strategic management process is a management technique used to plan for the future: Organizations create a vision by developing long-term strategies. This helps identify necessary processes and resource allocation to achieve those goals. It also helps companies strengthen and support their core competencies.
By determining a strategy, organizations can make logical decisions and develop new goals quickly to keep pace with the changing business environment. Strategic management can also help an organization gain competitive advantage and improve market share.