Environmental Analysis
During the strategic planning process one of the areas that don’t seem to get as much attention as it should is the environmental analysis. These external factors can have a major influence upon a company’s direction and the strategies that it develops. Typically, it is common to divide the environmental analysis into three broad categories for discussion and analysis.
- Remote
- Industry
- Operating
The remote environment is one in which a company has little if any influence. It includes the economic, social, political, technological and ecological factors. For example, the social factors that affect a company include the values, beliefs, attitudes, opinions and lifestyles of those in the external environment. Translating social change into business strategies is not easy. However, gaining a better understanding of such things as changing work values, geographic shifts in populations, ethical standards, etc. can result in developing successful strategies.
Factors in the industry environment include how the industry is structured. For example, in the book, Competitive Advantage, Michael Porter discusses the five forces influencing competition within an industry. There are the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products or services, and the positioning among existing companies. Designing viable strategies requires a complete and thorough understanding of the five forces.
The operating environment consists of factors relating to the competitive situation that can directly influence a company’s ability to profitably market its products and services. This category can be separated into competitive position and customer profiles. When looking at competitive position, many factors are included such as breadth of product line, price competitiveness, relative market share, capacity and productivity, raw material costs, caliber of personnel, effectiveness of sales distribution, etc. When conducting a competitive analysis, this is generally the type of information that you are seeking about your competitors.
Customer profiles are essentially an understanding of a company’s customers. This includes a segmentation of customers along the lines of geographic, demographic, psychographic and behavioral. Profiling your current customer base identifies those characteristics that will be useful for identifying new customers with similar characteristics.
Although it can be time consuming, a thorough analysis of your environment can provide the basis for a well-thought-out strategy that will allow your company to anticipate future business conditions and result in improved performance and profitability.