A business entity cannot exist in isolation from its environment. It inter-relates with it environment which includes actual customers, potential customers, markets competitors, suppliers, government, various interest groups that exist in the society location in which it operates and so on.
The critical aspects to the strategic analysis of organisations are:
- To assess the nature of the environment to discover whether it is simple, state dynamic or complex environment. key environmental forces
- To identify the opportunities and (Structural Analysis) according to their varying circumstances.
- To identify strengths and weaknesses by carrying out strategic mismatch and strategic standing strength (SSS) analysis through situational analysis.
- Analyse the organisation objectives, values and evaluate the expectations ot the stakeholders looking at their influence on the organisation objectives.
Simple/Static Business Environment
An organisation is faced with an environment that is not too difficult to understand if is simple or static. This also applies to an environment that is not undergoing significant changes. If the environment is simple or static, one needs to only understand the past thoroughly to be able to project into the future accurately. This is because the environment is static which is not realistic but theoretical. Historical analysis is used to forecast trends in a simple or static environment.
Dynamic Environment
This is a business environment that is changing and therefore organisation is faced with:
- Technological advances
- International dimensions
- More sophisticated consumers and also with
- Intenalisation of markets
Here, organisation cannot make decisions based on past data or historical facts or reoccurrence of events of the past. Organisation planning need to device means to forecast based on analysis which can be carried out through:
- Organisation responses and
- Information gathering responses
- Organisation Responses
The organisation responses involve ensuring that the structure of the organisation is such that can sense effectively what is going on in the environment and also flexible enough to respond to these changes.
Information gathering
This is usually important and done in the fore-front of scenario planning. It involves qualitative and quantitative approach to making projections into the future.
I. Qualitative – Executive opinion gathering through questionnaires, executive jury approach etc.
II. Quantitative – Trend analysis of forecasting e.g. Time Series Analysis, Simple and Multiple Regression Model etc.
Complex Environment
Organisations in complex situations are faced with environmental influences which are difficult in themselves to comprehend. Organisations in complex environment can also face dynamic situations with the growth and application of more technological advancement.
There is an increasing move towards this greater complex environment for instance; computer, electronics, airline and telecommunication industries are all moving into this dynamic complex environment. Examples are smart chips replacing manual operation, digital automation in place of manual production processes, online transaction that mitigated the barrier of distance etc.
Organisations may cope with the complexity by trying to ensure that complexity as a result of diversity is dealt with by ensuring that different types of the organisation responsible for different types of resources to handle their different types of diversification are present.
How to Handle different Environmental Conditions
1. If the organisation business environment is static and simple, a detailed analysis of the past trends and events may be very sensible to predict the future for decision formulation and planning.
2. The more the situation becomes dynamic, then the more the focus of the future is essential perhaps through some exercises such as scenario analysis and contingency planning.
3. The more complex the environment becomes in terms of information processing or technology advancement, the more it may be necessary to move towards a more sophisticated techniques such as model building and simulation.
4. If both dynamic and complex situation exist, it is important to remember the significance of continuous examination of the suitability of the structure and the management systems.
Environmental Uncertainty
According to Inegbenebor, the uncertainties that pervade the business environment call for proactive measures on information gathering that are relevant to the business and is able to predict changes that may likely occur in them in the future.
To further buttress this point. Inegbenebor X-rayed the environmental uncertainty in two dimensions: simple-complex dimension and static-dynamic dimension.
The simple-complex dimension is defined by number of variables at play and the extent of their dissimilarity, In a simple environment, the number of relevant environmental factors is small and somewhat similar whereas, a complex environment involves a large number of relevant factors which are dissimilar.
The static-dynamic dimension is determined by the rate of change of the relevant variables. A static environment is that in which the relevant factors remain basically the same or change very slowly. On the other hand, a dynamic environment is that in which the elements change rapidly and unpredictably. He said, combining these two dimensions yields a framework that can be used to assess the environmental uncertainty which a business enterprise could face.
We will give a model that enables you to recognise the environmental uncertainty faced by the management of a business enterprise. Uncertainty is low when the number of external elements at play is perceived to be small and similar, and the rate of change of such elements is slow. On the other hand, environmental uncertainty is high when the number of external elements at play is perceived to be high and dissimilar, and the rate of change in the elements is high and unpredictable. We can deduce here that the degree of uncertainty faced by a given business enterprise is as perceived by its management. Managers take decision in accordance with their perception of the situation facing them.
- Strategy Application
- Ensure that the members of the management team complement each other.
- Ensure different knowledge and perspective of each member is harnessed favourably.
Environmental Factors
Successful companies take an outside-inside view of their business. The business environment is subject to constant change that comes with opportunities and threats. Ability to continuously monitor trends and events in the environment; disseminates the information obtained to the management for decision-making, planning and control will go a long way to determine the success of organisations. Kotler emphasised that many companies fail to see change as opportunity. They ignore or resist changes until it is too late. Their strategies, structures, systems and organisational culture grow increasingly obsolete and dysfunctional. The environmental factors are categorised into two:
- Internal environmental factors, and
- External environmental factors
Internal Environmental Factors
The internal environmental factors are those internal capabilities of the organisation. They are variables the organisation can adjust to suit its mission. Examples of variables that produce higher organisational performance include managerial skills and competence, adequate financial resources, technological skills, product or services innovation skills, high quality materials, popular brand names etc. Other variables that indicate deficiencies or negative conditions restraining better organisational performance or leading to lower performance include inexperienced managers and workforce, outdated machinery and technology, over-extended credit, poor quality products or services, poor brand name etc.
Assessing Strength and Weaknesses
In designing strategy plans, the board of directors and top management take other company groups into account groups such as middle management, finance, marketing, research and development, quality control, information technology. purchasing, manufacturing and accounting. All these interrelated groups form the internal environment.
Assessing strength and weaknesses here means that the organisation will evaluate various capabilities of the company’s groups in order to identify factors that constitute strengths or limit the achievement of their objectives. Management sets the company’s mission, objectives and policies. Their decisions must be compatible with the internal capabilities of various groups in the organisation otherwise the implementation of strategy will only be a mirage.
It is expected of organisation to maximize their areas of strengths and also minimise weaknesses that may limit their capabilities too.
Internal Analysis: A case of Lagos Business School (LBS)
By assessing the position and knowing its competitors very well, some managers and companies can strategise to gain competitive advantage, improve market shares, and make impressive sales and profits. The story of Lagos Business School (LBS) is an example.
Mini Case: Lagos Business School
A few years after LBS started its highly-successful first programme (the Chief Executives Programmes, or CEP), the competitive environment for executive development programmes in Nigeria changed dramatically. Initially, LBS faced competition from a few very strong overseas providers of executive development programmes (Harvard, INSEÁD etc) bur very little local competition. By the mid-1990s, however, as many as two dozen local competitors had emerged.
In the face of this increase in local competition, the LBS leadership team decided to examine the characteristic quality perceived by executives and to request from these respondents’ assessments of the value for money offered by competing programmes. Because the author was familiar with the relevant research tools and procedures, he was asked to conduct the study and to report back to the Director General Dr. Albert Alos
The author’s first challenge was to identify the characteristics of executive development programmes associated with quality. Using nominal group technique the author developed a list of half a dozen quality characteristics
The second challenge was to assess the relative importance of each quality characteristic. This was done by asking a group of executives to indicate the relative importance of the various quality characteristics by allocating points across them.
The third challenge was to collect from respondents their perceptions of the strengths and weaknesses of competing programmes, on each of the quality characteristic. Also, respondent perceptions regarding the process for week-long seminars from each competitor were collected.
In the end, the author’s analysis indicated that LBS was perceived to offer a high-priced but very high quality executive development programme. Thus, even though the price was high, participants perceived that they were receiving m good value-for-money. This information impacted many of LBS’ marketing strategy related decisions, including target market, positioning, pricing, product development, and promotion giving it edge over rivals in the industry.
External Environmental Factors
External environmental factors are those constants outside the influence of the organisation.
They are macroenvironmental forces that often shape the way and manner people carry on with business. They are significant trends and developments that affect company’s ability to earn profits.
These trends and developments are associated with opportunities and threats. Opportunities are factors that attract success to the organisation and should be classified according to their attractive and success probability. Threats are challenges posed by an unfavourable trend or development and should be classified according to their seriousness and probability of occurrence.
External Environmental Factors: A case of Cadbury, Nigeria
Some organisations understand their environments very well and are able to produce impressive sales and profits, even when overall market demand and general economy are down. The history of Bournvita (the chocolate drink produced and marketed by Cadbury Nigeria) is such a case.
Mini Case: Cadbury, Nigeria
In 1995, as the economic condition of the Nigerian economy worsened, Bournvita’s sales and profits fell sharply. But because Bournvita generates many millions of naira in sales and is one of Cadbury’s flagship products, the company launched intense efforts to understand the reasons for this large drop in sales. Ultimately, feedback from customers and distributors indicated that in these harsh economic conditions,
increasing numbers of parents no longer felt justified treating themselves to the luxury chocolate drinks.
While the Bournvita brand manager knew economic conditions were expected to continue deteriorating, she also knew Cadbury expected her to leave no stone unturned in her attempt to reverse the negative trend in sales and profits for this flagship product. In the process of reviewing their assumptions about and forecasts for the business, the brand m team examined key usage-related issues such as: (i) who uses the drink, (ii) how much they use and (iii) why they use it (that is what benefits usage provides to consumers). During these discussions, a way forward emerged, centred around the idea that while parents might no longer treat themselves to Bournvita, they might pinch naira somewhere so as to be able to provide the children with the same Bournvita-related experiences they themselves had enjoyed as children.
Based on the above insights as to the economic conditions and the long history of consumption of Bournvita in Nigeria, Cadbury revised its marketing strategy. Children replaced adults as the target users, and Bournvita’s adverts were adjusted to remind parents of their own childhood consumption experiences and the sacrifices their parents had made many years before to keep Bournvita available to them. In addition, Cadbury initiated various kid-focused promotional efforts, including Bournvita buses to help ensure that even in hard times; kids would continue to have the opportunity to attend school.
The rest, as they say, is history. Sales and profits for Bournvita soared, and have continued to be strong even in subsequent dull markets.
Environmental Forces
Atimes, environmental factors that pose threats to entities may be converted to opportunity that will translate into profitability. The Nigerian Brewery case is a typical example of how environmental forces which can limit or constrain the ability of entities to achieve objectives could be turned to opportunity. In this situation, the Nigerian brewery management did not allow the environmental force (government policy) to overwhelm it, but rather took advantage of the circumstance to benefit its business.
Mini case 3: Nigeria Breweries
During the 1980’s, brewing companies in Nigeria was shocked when shortage of foreign exchange led the federal government to prohibit the importation of malted barley (a key ingredient for all beers). During this, Nigerian Breweries was already the largest brewer in Nigeria. However, there were a large numnber of smaller brewing companies scattered all around the federation. As supplies of malted barley were used up, most of these small brewers simply padlocked their gates and dropped out of the brewing business. For the top management of Nigerian Breweries, however, such a step was unthinkable. Based on the strong culture the company had developed over the years, it was also unthinkable that Nigerian Breweries would attempt to circumvent the law. Instead, the top management team jump-started two major initiatives: i). they conducted an intensive drive to identify local ingredients (sorghum, malze etc) which could be substituted for the malted barley which was no longer available. ii), they kicked off a drve to quickly develop an export business for their major brands (Star and Gulder) in selected overseas markets with large numbers of overseas Nigerians
By the end of the decade, the result of the prohibition on the import of malted barley and the two subsequent initiatives by Nigerian Breweries were extremely clear The maize-based beers now brewed by Nigerian Breweries had a very acceptable taste and costs which were considerably lower than those of the products based on malted barley. In Nigeria therefore, Nigerian Breweries dominated y segment and market for beer except Stout, and profitability had increased dramatically
A structured approach to analysing the external environment of an entity is PESTEL analysis. PESTEL analysis is used to extrapolate current influences and possible future influences of environment on the entity. It is however grouped into categories of environmental influence identified below:
P-Political environment
E- Economic environment
S- Socio-cultural environment
T- Technological environment
E-Ecological influence
L- Legal environment
Political Environment
Political development across the borders, including international relations constitutes important aspects of political environment. Political considerations are particularly important for business entities operating in countries with unstable political regime or dictatorship.
Nigeria political business environment is quite unstable and dynamic due to constant change in government policies as different administrations fail to maintain continuity in government policy. For example, the Buhari led administration stance on maintaining single government account known as TSA (Treasury Single Account) will have adverse economic effects on many banks that leverage on government deposits in the past. Again, the disturbances in the political environment in Nigeria in 1994 of Abacha dictatorship had serious adverse implications and spill-over effects on ports operations. Partly as a result, fewer ships were patronising Nigerian ports while their counterparts (stakeholders in the international environment) in neighbouring countries were, as it were reaping where they did not sow. Investment decisions by companies will be influenced by political factors such as:
Government regulations in economic and social issues. Considering the threat of government to nationalise the industry and seize ownership from private business for instance.
Political stability
Tax policy
Trade restrictions and agreements
Environmental regulations.
The threat of civil unrest and wars.
Security of life and property.
The threat of kidnapping and terrorism.
Economic Environment
A speculation of the economic conditions in the business environment is paramount to business success. Economic factors could affect a decision by a company about where to invest. Tax incentives, the availability of skilled labour, a good transport infrastructure, a good power supply, a stable currency, and other factors that can influence strategic choices are recipe for such decision. Shortage power supply is the major setback of economic growth in Nigeria. Leading economic indicators includes:
The rate of inflation
The rate of growth in the economy i.e gross domestic product (GDP)
The level of interest rates, whether it may go up or fall
Government tax rates, government subsidies and incentives to industry.
Government fiscal and monetary policies.
The level of competition that could facilitate innovation among firms.
Level of employment and Unemployment.
Capacity utilisation and state of infrastructure.
Foreign exchange rate, i.e. whether dollar will get weaker or stronger
Existence of trading blocs of countries like ECOWAS, AU, EU, UAE etc.
Existence of trade barriers between countries like Nigeria and Kenya.
Socio-cultural Environment
The speculation of the social and cultural environment is a very complex task. An entity is affected by social and cultural influences in the . countries and regions in which it operates, and by social customs and attitudes. The mode of dressing by women in the northern Nigeria for instance will influence the fashion industry up north. Greece has a close family ties hence, the short working hours and many hours dedicated to leisure with families. Time series analysis judgmental approach and scenario developments are techniques of social analysis. They are used to analyse:
The demographic trends, housing, health and nutrition, household income and expenditure patterns.
Beliefs, norms, customs and attitudes.
Ethnic and religious tolerance
Value system relating to crime and corruption.
Prevalence of poverty and social values of the people
Population and lifestyle changes.
Show patterns of work and leisure, . such as length of working week
Influence of religion and religious attitudes in society
Show the ethnic structure of society.
Technological Environment
Necessity they say. is the mother of invention. The competitive environment necessitated new innovation which in turn influenced technological change. The importance of innovation has made technological strategy to be as complex as economic strategy. Strategy is a long range planning that seeks to answer questions like:
What will be the impact of technological development?
When will the organisation embark on new product to modify the existing one?
What will be the impact of computerisation on the banking services?
What is the impact of robotic technlogy on automobile assembly industry?
What influence does a smart chip have on production critical paths and so on?
What level of efforts is directed at R&D to facilitate innovation?
How has technology facilitated innovation?
What protection is government giving to industrial property- patents, copyright. design rights?
For strategic planning, companies need to undertake exploratory strategy and normative strategy. Exploratory strategy anticipate future technological changes on the basis of what the trend was and what the current progress would be, while normative strategy considers what future technological changes would be and works backwards to existing capabilities.
A typical example is how smart phones have encouraged effective journalism in Nigeria and the global community. Common technological indicators include:
Rate of technological change
Innovation and automation
Research and development incentives
Skills of workforce
Make or buy’ possibilities.
Ecological Environment
Ecological environment was not given serious attention until recently. It is sometimes referred to as the ‘environment.’ The deterioration of the natural environment is a major global concern as the world contemplates and considers ways in which organisations can produce its goods or services with the minimum environmental damage. The environmental pollution by oil industries in the Niger-Delta of Nigeria is generating a lot of concern to the host communities.
The ozone layer depletion challenge to the world also informed President Obama of America to influence legislation on commercial activities that generate greenhouse gases like carbon monoxide and methane.
The demand from developed economies to acquire energy from renewable energy sources will affect developing economies like Nigeria whose economy is solely dependent on carbon oil. Governments of various countries are embracing strict legislations to control the damage done to the ecosystems by companies. Such legislations will influence the activities of industries in such areas as:
Gas flaring and automobile carbon (Co2) emission that must cut levels o atmospheric pollution
Fishery industries that must substitute their raw materials that are endangered species
Timber industries that must mitigate deforestation by afforestation
Medical science research involving cloning and transgender malfeasance that alter the natural course of human sex
Packaging industries that must embrace use of package materials that are recyclable
Wild life preservation of endangered animals.
Agricultural activities leading to land degradation due to surface vegetation removal and other farming activities.
Environmental protection is now a key aspect of corporate social responsibility. Pressure on businesses for better environmental performance is Coming from many quarters, i.e. the Niger-Delta region of Nigeria.
Legal Environment
The legal environment consists of the laws and regulations influence on the way organisations carry out their business activities, Both regulations in force and expected new laws are of serious interest to managers. Business laws and regulations have three main purposes: to protect companies from unfair competitions, to protect consumers from unfair business practices and to protect interests of society from unbridled business behaviour of some organisations considering especially the damage done by them to the environment.
Laws vary between different countries, although international regulation is accepted in certain areas of commercial activity, such as banking, aviation, oil and gas etc. Managers’ decisions might be affected by legal considerations including:
Contract law
Company law
Grants and incentives
Employment law
Deregulation of public enterprise.
Health and safety legislation.
Consumerism that protect consumer of company products.
Legislation on economic, labour, environmental regulations.
Assessing Opportunities and Threats
Note that the first two stages of environmental analysis helped us to identify the general forces at work in the environment that has an impact on the strategies of the organisation.
These general conditions have to be understood more specifically as they relate to their impact on the organisation whether environmental factors are opportunities or threats to the business. Organisations should take advantage of opportunities and avoid or better still, limit activities that enforce threats to restrict its operations.