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No single organization can exist in a vacuum. For a successful business operation, an organisation needs to interact with various other actors and players around it. These may range from political institutions to other business and financial institutions. These institutions are called environment of an organisation. In this assignment, we would try to illustrate the importance of environmental analysis for a business organisation.
The conceptualisation of environment holds the central position in this discussion. Thompson uses the term 'operating or task environment, or inner layer' for immediate or internal environment (Thompson, 1997). It relates to that domain where staff from one organisation interacts with people from others in their day to day business relationships (Douglas Brownlie, 1994b). Brownlie employs the term 'remote or general environment, or outer layer' for external or macro environment (Douglas Brownlie, 1994b). This refers to those factors which are outside of company's direct control but have significant direct and indirect influence on company's operations.
For a company to be successful, it needs to be fully aware of its environment as it allows an organisation to respond to the needs and requirements in its environment. 'Whilst organisational decision makers may wish to believe that they are the masters/mistresses of their organisation's destinies, in reality that destiny is shaped by governments, customers, suppliers and other stakeholders, including competitors'.(Roger Cartwright, 2002)
The starting point here is the conceptualisation of environment. By environment we mean those, 'factors which are not only outside the system's control, but which determine, in part how the system performs' (Churchman, 1968). These factors are termed as internal and external factors and 'exert direct or indirect influence on the firm in any perceptible way' (Terreberry, 1968). Kotler argues the case of successful company is one which constantly taking 'an outside-inside view of their business' (Phillip Kotler, 2003). It is the existence of perceived strategic uncertainty and perceived strategic importance which compel strategic decision makers to scan events in selected sectors of environment. ( Deft, et la, 1988 )
The goals of environmental analysis depend upon the purpose an organisation has in its mind for it. It also depends upon the nature of an organisation and how it is going to use it in a broader decision making process. (Douglas Brownlie) Brownlie also assigns environmental analysis the responsibility of monitoring, forecasting and interpreting issues, trends and events in the task environment. In addition it is expected to provide a broad but penetrative view of remote environment. Thus arming strategic decision makers with 'intelligence' so that organisation can respond successfully to environmental changes (Douglas Brownlie). Thus the environmental analysis 'is the key link in a chain of perceptions and actions that permits the organisation to adapt to changes in its environment' (Daft et la, 1988).
Among other things Jain discusses six objectives for environmental analysis. That includes helping an organisation to capitalise on early opportunities. It also provides early signs of impending dangers. It sensitizes organisation to changing environment. It can help an organisation in improving its image. Provides a strategic tool of 'intelligence' for strategic decision making and last but not least it provides a continuous and broad informational and educational resources for company's executives (Jain, 1984).
The Microenvironment consists of the forces close to the company that affect its ability to serve its customers-the company ,suppliers ,marketing channel firms, customer markets ,competitors and publics (Kotler et al,2002,p118). Gilbert Harrell in his own view emphasizes on stakeholders and industry competition as integral part of the microenvironment. Looking at the stakeholders as this literally means those who have a stake in an organization. They are relevant to the day to day running of the company and therefore company need to understand them. This is so because to a large extent they have an impact on the market decision and can be affected by it at the same time. Another phenomenon that is noteworthy is competition. 'The marketing concept states that to be successful ,a company must provide greater customer value and satisfaction than its competitors do(Kotler,2002,p121).In other words ,marketers ought to go beyond the level of market targeting, but also Â allow a strategic positioning to come to play in order to beat their competitors to it. This strategy must be relative to the size and industry position compared to those of its competitors. It is imperative for an organization to also build and maintain a lasting relationship with other stakeholders apart from the customers. This is so because stakeholders can help serve customer needs and wants and can also help the organization accomplish its set goals and objectives. As a result of this we shall look at the relationship between these various stakeholders and the organization.
Owners and Employees
Every organization is set up for a certain set of goals and objectives.
These objectives are set so as to primarily be of benefit to the owners.
They are also set in such a way so as to bring profit substantially .In non
profit organization however, the objectives are usually aimed at benefiting
a target audience or constituents.
Employees: Employees is another group of stakeholders owing to the fact
that their means of livelihood depends on the company. By virtue of their
contribution to delivering value to end customer, each employee has a high
stake in the organization. Companies that take to heart the interest of its
employees get in return maximum productivity from the employees
According to the president of Carlson Hospitality Worldwide Eric Danziger, "If you have people who want to work for you, keeping them is more
important than getting them, it is tough to get the right person ,when you get
them, you want to keep them." In other words contented employees are more likely to produce contented customers.
Suppliers and Intermediaries
Suppliers are stakeholders who provide a company with Â necessary
services ,raw materials and components. Very few organizations can exist
without suppliers, who also can be major factor in creating customer
satisfaction. Ford has more than 1,700 suppliers in its automotive
operations. If you like the dashboard, seats or electronics on the new Ford
Expedition, chances are a supplier work with ford to design it .Suppliers
manufacture many of the components that go into vehicles-no matter what
The impact of suppliers on an organization can never be over-
emphasized. Having said this they are also saddled with the task of
devising new technology which could affect positively the general
production of the main company and enable it to compete comfortably with
rival organizations. Intermediaries: These are independently owned organizations that enable the company to promote, sell, and distribute its goods to final buyers or users. Their role is crucial because they make the products or services
reach the customers wherever they may be. This group includes
Resellers, Physical distribution firms, Marketing services agencies and
financial intermediaries. Some book wholesalers and Campus bookstores help big publishers to make their books reach final users like learning institutions and students.
Action Groups: These are stakeholders that canvass or mobilize support
for some cause perceived to be in the interest and benefit of the consumers
or the environment. They checkmate the excesses of company in their pursuit
to maximise profit at the expense of the publics and environment.
The Green Campaign Group is relentless in its intensive campaign against
environmental pollution through industrial development so as to preserve
and protect the ecology.
Contrary to general speculation competition is not limited to two rival
organizations of equal status testing for strength and wits; it could also involve companies of different types and sizes. "Competition is a crucial fact of life to most organizations operating in a commercial environment. Competition usually arises when companies seek to attract customers from rival companies by offering better products and /or lower prices. Competition can also arise in the acquisition of resources, and where these are scarce relative to the demand for them; rival buyers will bid up their price."(Palmer & Hartley 2002, p 172)
It is therefore important to have a thorough understanding of the market
situation so as to identify each major competitor. "This includes how each
competes against your company and every other in the industry. You should
examine each rival's strategy in terms of current and potential products, pricing, promotion& distribution." (Harrell, 2002, p71)
The Microenvironment of a company can not be reasonably exhausted
without looking at the publics. The public to some extent has or
potentially could have an impact on an organization in its effort to
achieve set objectives. Armstrong & Kotler identifies seven types of publics.
Financial publics like banks, Investment houses and stockholders which
all can affect the company's access to funds. Media publics like newspapers, magazines, radio and TV which could make or mar the company's image before the public. Government publics whose policies, gazettes and directives on product safety, public health, advertising among other issues should be keenly
considered by the company's lawyers. Citizen action groups whose agitation in the interest of the public and environment should be carefully handled by the company's public relations department. Local publics like neighbourhood residents and host community organizations which company should learn how to relate with tactfully lest they are alleged of exploitation. General public is one whose attitude and perception of the company's product and activity count. Internal public ranges from the workers, managers, volunteers and the board of directors. Employees must be made to feel good about the company so
as to affect the external publics with the positive attitude.
Macro environment is much more nebulous then micro environment. It consists of general trend and forces which may affect companies' relationship with its customers, suppliers and intermediaries, with changes in environment. According to Kotler, within rapidly changing picture the firm must monitor six major forces. These are demographic environment, economic environment, natural environment, technological environment, political legal environment and social cultural environment. The macro-environment is complex and interdependent. We will consider each of these following.
The Demographic Environment
"Demography is the study of populations in terms of their sizes and characteristics". The main demographic force that marketers monitor is population, because people constitute the markets. The human population characteristics that surround a firm or nation and that greatly affect markets. The demographic environment includes such factors as age distributions, births, deaths, immigration, marital status, sex, education, religious affiliations, and geographic dispersion-characteristics. That is often used for segmentation purposes. So marketers must be aware of size and growth rate of population in cities, regions and nations.
Population age mix is also an important demographic force. Different people with different ages may live in the same city and hence may vary in their preferences and buying habitsOther demographic forces consist of ethnic factors and geographical shifts. Migration of people from one place to another, having different cultures and habits constitute to ethnic factors. Ethnic diversity leads to new opportunities to provide services and goods according to ethnic preferences.
Educational groups and household patterns: there can be high demand of books and other related products if the people are literate. Similarly there can be higher needs of goods and services in a joint family rather than single family.
The Economic Environment
Economic environment is one of the key factors which influence the marketer's decision. "Markets require purchasing power as well as people". Factors affecting purchasing power are current income, prices, savings, debt, and credit availability. Marketers therefore keep a close watch on such indicators of the economy as it can affect the business of various organisations. Thus it is important for marketers to observe such changes in good time and develop their plans accordingly. One of the key forces in economic environment is income distribution. Spending habits of people depends upon the amount of credit they have. For people having high incomes tend to spend on luxury goods, whereas people living in low income society tend to spend on basic needs. Thus marketers need to select their targets accordingly. Savings, debt, and credit availability also contribute to the economic environment. These economic factors are largely outside the control of the individual firm, but their effects on individual enterprises can be profound. Political and economic forces are often strongly related. A much quoted example in this context is the 'oil crisis' caused by the Mideast War in 1973 which produced economic shock waves throughout the Western world, resulting in dramatically increase in crude oil prices. This in turn increased energy costs and the cost of many oil-based raw materials like plastics and synthetic fibres. This contributed significantly towards recession in world economy and it all serves to demonstrate how dramatic economic change can upset the traditional structures and balances in the world business environment.
The natural environment
With increasing pollution levels and growing concern of people about their natural environment, it has become an important research sector for various marketers. There is much legislation imposed by government on the various manufacturers in order to reduce pollution. There has also been an increase in no of customers who are ready to pay a premium price in order to buy green products. Shortage of raw material is also a big concern for companies. Also shortage of non renewable raw materials has led many companies to invest in the field of research which can lead to new opportunities.
Also an increase in the cost of energy due to the increased cost of oil has led many companies to harness other sources of energy.
The Technological Environment
It is a fact that the businesses which fail to adapt themselves with new technology gradually decline. Thus with increasing pace of technological development marketers should be aware of the effect of technology on their business. New technologies can lead to development of new product, make existing products more cheap and development of new distribution methods. Also with development of internet companies can gather the public response towards their product and make changes accordingly.
The Political / Legal Environment
Political environment is a bit less predictable element in a firms marketing environment. The political environment includes all laws, government agencies, and lobbying groups that influence or restrict individuals or organizations in the society. Governments pass legislations which directly or indirectly affect firms marketing opportunities. Such as legislations against selling of faulty goods. Also there are restrictions such as export restrictions. New laws and their enforcement will continue or increase. Business executives must watch these developments when planning their products and marketing programs. Marketers need to know about the major laws protecting competition, consumers, and society. So any organisation has to keep these factors in mind before taking any decisions.
The Social / Cultural Environment
"The cultural environment includes institutions and other forces that affect the basic values, behaviours, and preferences of the society-all of which have an effect on consumer marketing decisions".
People's persistence of cultural values and a shift in secondary cultural values can affect marketing decision making. The major cultural values of a society are expressed in people's views of themselves and others, as well as in their views of organizations, society, nature, and the universe.
SWOT analysis is a strategic planning tool used to evaluate an organization and its internal and external environment. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Environmental factors internal to the organization usually can be classified as strengths (S) or weaknesses (W), and those external to the organization can be classified as opportunities (O) or threats (T).
The SWOT analysis provides information that is helpful in matching the 'Resources' and 'Capabilities' theories of the organization (Iain Fraser, 1998) to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. The following diagram shows how a SWOT analysis fits into an environmental scan
SWOT Analysis Framework
Internal Factors External Factors
Strengths Weaknesses Opportunities Threats
Internal Environmental Analysis (Strengths and Weaknesses)
It is one thing to discern attractive opportunities and another to be able to take advantage of these opportunities (Philip Kotler, 2003). Each organization needs to evaluate its internal strengths and weaknesses.
In specific consideration of 'strengths', it is essential, if not mandatory, that they be 'unique' and 'uncopiable', if they are to act as a sound basis for developing a competitive advantage. They are the organization's main source of 'sustainable competitive advantage'. They constitute the benefits that must be communicated forcefully to the market (Iain Fraser, 1998). Examples of such strengths would be such as:
Good reputation among customers
Cost advantages from proprietary know low
Exclusive access to high grade natural resources
Favourable access to distribution networks
The absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weakness:
Lack of patent protection
Undifferentiated products or services
Location of the organization
Poor quality goods or services
Sometimes, a weakness may be the flip side of strength. Take this in which an organization has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be considered a weakness if the large investment in manufacturing capacity prevents the organization from reacting quickly to changes in the strategic environment.
External Environmental Analysis (Opportunities and Threats)
In general, an organization unit has to monitor key macro environment forces (demographic-economic, technological, political-legal, and social-cultural) and significant microenvironment factors (customers competitors, distributors, supplies) that affect its ability to earn profits. The organization units should set up a marketing intelligence system to track trends and important developments. For each trend or development, management needs to identify the associated opportunities and threats (Philip Kotler, 2003)
An opportunity is the chance to introduce a new product or service that can generate superior returns. Opportunities can arise when changes occur in the external environment. Some examples of such opportunities include:
An unfulfilled customer need
Arrival of new technologies
Loosening of regulations
Removal of international trade barriers.
Changes in the external environmental also may present threats to the organization. An environmental threat is a challenge posted by an unfavorable trend or development that would lead, in the absence of defensive marketing action, to deterioration in sales of profit. For example:
Price wars with competitors
A competitor has a new, innovative product or service
Taxation is introduced on product or service
Shifts in consumer tastes away from the organization's products
The Benefits of SWOT Analysis
SWOT analysis can provide:
A framework for identifying and analyzing strengths, weaknesses, opportunities and threats.
The impetus to analyze a situation and develop suitable strategies and tactics.
A basis for assessing core capabilities and competences.
The evidence for, and cultural key to, change.
A stimulus to participation in a group experience.
SWOT Analysis Limitation
While useful for reducing a large quantity of situational factors into a more manageable profile, the SWOT framework has a tendency to oversimplify the situation by classifying the firm's environmental factors into categories in which they may not always fit. The classification of some factors as strengths or weaknesses, or as opportunities or threats is somewhat arbitrary. For example, a particular company culture can be either strength or a weakness. A technological change can be a either a threat or an opportunity. Perhaps what is more important than the superficial classification of these factors is the firm's awareness of them and its development of a use them to its advantage
Singapore Airlines is reputed for its highly courteous customer services, award winning gourmet cuisine, great in-flight entertainment and modern fleet. First to introduce worlds' largest A380.
Star Alliance Networks operates in 181 countries that cover 1160 destinations.
Operates highly successful airports in Singapore and have code sharing agreements with major airlines around the world such as Turkish Airlines, Air India, Malaysian Airlines, Virgin Atlantic Airways and US Airways etc
Highly rewarding Frequent Flyer programme, KrisFlyer
Highly luxurious and world renowned SilverKris Lourges .
Its size makes it subject to the inefficiencies inÂ bureaucracy that always arise for large organizations
It has large amounts of debt, which will affect it strongly if interest rates continue to increase
Large capital expenditures on new planes and expansion or airport infrastructure mean the Singapore Airlines has little free cash for innovation
In new business environment where major airlines are struggling to cope with competition from budget airlines, Singapore Airlines may be lacking in experience and expertise. Any company is bound to have teething troubles in new markets
Large inefficiencies because of large number of staff that impinge on its profitability.
Highly prescriptive business strategy making it difficult to change quickly against changes in business environment like events of 9/11, Swine Flu, Boxing Day Tsunami that almost crippled Singapore Airlines.
Improving customer relationships, and increasing sales, through better integration of high street and internet resources
Using the vast amount of offline information on customers online, and vice versa
Large capital expenditures on new and modern fleet and infrastructure mean the Singapore Airline is ready to accommodate not only its own passengers but its partner airlines as well.
With the abolition of Open Sky agreement between major European airline and American Airlines, it offers greater opportunity for Singapore Airlines to gain access into this highly lucrative airline market that is becoming increasingly free and open for all.
Rise in fuel prices means increase in operating cost.
Online and offline innovation by other major airlines aimed directly at taking customers from Singapore Airlines.
An expansion of low cost, budget airlines in regional air space.
A weakening world economy.
In conclusion, macro environment can and often will affect the success of any business. The Macro environmental analysing includes the company operating and general environment such as demographic, economic, natural, technological, political and social cultural factors.
The micro environment includes company's internal environment. It influence marketing decision making. Customers, competitors, intermediaries, suppliers, government, financial community, local community, pressure groups, value chain.
The marketing environment is a complex group of demands and constraints that a company faces as it tries to compete and grow. These can be both external and internal. The company has the power to directly affect some but all of the areas in the environment. Those areas beyond the company's control are constantly changing in various ways, it is the responsibility of the company to take notice of and bring on board any successful changes or advances made in the industry. In the same way they need to identify problems affecting the industry as a whole and react accordingly to minimise negative effect. Consumer satisfaction is the ultimate goal of the marketing environment.
The market environment is always changing and it is important any organisation is able to keep up with these changes. Marketers need to identify which environmental factors can be moulded to suit marketing but also need to be change to fit in with those factors that can not be. Failure to keep up with these changes and show unresponsive behaviour to the market can often lead to a drop in sales and loss of market share. In theory a responsive business is a successful business.
To conclude the whole notion of SWOT is the matching specific internal and external factors, which create a strategic matrix that makes sense. It is essential to note that the internal factors are within the control of the organisations, such as operations, finance, and marketing, etc. On the other hand, the external factors are out of organisation's control, such as political and economic factors, new technologies, and its competition.
SWOT is a useful technique to analyse the business environment. Also SWOT is a very popular tool for analysing organisations because it is quick and easy to learn. This tool can be used in any organisation whether it is public or private sector. SWOT analysis can also be used in conjunction with other tools for strategic analysis, such as PEST analysis and Porter's Five-Force analysis.
Although there are advantages of SWOT discussed earlier. There are also problems inherent with this technique. SWOT analysis is fine for an initial classification of the issues when we are getting to know a company, a situation or a case study.
By doing PEST and SWOT analysis, the company should now be able to remain the strengths, avoid or improve their weaknesses.