Analysis and Diagnosis of Environment: 5 Techniques

This article throws light upon the top five techniques used by organisations to analyse and diagnose the environment. The techniques  are:  1. SWOT Analysis, 2. ETOP 3. Forecasting, 4. Verbal and Written information 5. Management Information System.

Technique # 1. SWOT Analysis:

S stands for strengths,

W for weaknesses,

O for opportunities, and

T for threats.

SWOT analysis is the starting point to formulate a strategy.

It is a technique of environment analysis which evaluates organisation’s strengths and weaknesses, environmental opportunities and threats and helps to formulate strategies and achieve objectives by:

1. Exploiting organisational strengths,

2. Exploiting environmental opportunities,

3. Minimising and correcting the weaknesses, and

4. Minimising environmental threats.

SWOT analysis compares organisation’s strengths and weaknesses (company profile) with external threats and opportunities (environmental analysis). “A company profile depicts the quantity and quality of a company’s principal resources and skills. It seeks to determine the firm’s performance capabilities on the basis of its existing and accessible resources and skills” and “environmental analysis is the systematic assessment of information about the firm’s external environment during the strategic planning process to identify strategic opportunities for the company as well as major threats, problems, or other possible impediments.”

SWOT analysis helps to make strategies which will overcome its weaknesses and utilize its strengths to gain competitive advantage in the market. Organisations conduct SWOT analysis to identify the factors that can improve their performance.

Objectives of SWOT analysis:

1. To compare company’s profile (strengths and weaknesses) with threats and opportunities in the product or market areas where it wants to compete. It highlights company’s strengths on which strategies will be based (to exploit environmental opportunities) and weaknesses that must be overcome.

2. To compare company’s profile with that of competitors. This highlight areas where company has advantage or disadvantage over competitors in different product/market areas.

Strengths and weaknesses reflect internal environment of the organisation (company profile) and opportunities and threats reflect its external environment (environmental analysis).

(i) Strength is a positive attribute of the organisation that enables it to accept environmental challenges and improve its competitive position.

Organisational strengths can be:

1. Common strengths, and

2. Distinctive competencies.

Common strength is the organisational skill and capability possessed by other organisations also, distinctive competencies the organisational skill and capability possessed by a small number of competing firms. Such competence is not commonly possessed by all the firms.

Organisations that exploit their distinctive competence perform better than competitors and attain high level of performance. SWOT analysis enables the organisation discover its distinctive competence, make strategies to exploit its strengths, explore environmental opportunities and improve performance.

Internal strength can be harmonious labour-management relations, optimum utilisation of resources, high managerial skill, innovative ability, profitable functional areas, efficient R&D department, huge financial resources, competent staff, updated technology, high quality products etc.

(ii) Weakness is an attribute which restricts competitive strength of the organisation. It restricts its ability to make effective strategies. Organisational weaknesses require change in objectives which can be achieved through present skills and capabilities or investment in capabilities to acquire organisational strengths. This enables the organisation implement strategies that help to attain its objectives.

Failure to overcome organisational weaknesses results in competitive disadvantages, that is, “a situation in which an organisation is not implementing valuable strategies that are being implemented by competing organisations”.

Internal weaknesses can be high cost of production, poor functioning of departments, conflicts amongst superiors and subordinates, lack of managerial or innovative ability, obsolete technology, low financial reserves, long delivery times, inadequate R&D facilities etc.

(iii) Opportunities are environmental challenges which improve organisation’s operational efficiency. They are the favourable environmental conditions.

The external opportunities are: boom in the economy, development of new technology, growing markets, liberal government policies, government subsidies, accelerating market growth etc.

(iv) Threats are environmental challenges which weaken the organisation’s competitive position. They are the unfavourable environmental conditions.

Some of the external threats are: recession in the economy, changing consumer preferences, new technology adopted by competitors, substitute products with high brand image or low cost, foreign competitors, increasing competition, political instability, economic downturn etc.

The impact of four variables (S, W, O and T) on strategy formulation is depicted through a matrix.

SO is the most desirable strategy where organisations use their strengths to exploit environmental opportunities and convert environmental threats into opportunities. In the worst situation, company’s weaknesses match the environmental threats. Organisations follow WT strategy to minimise their weaknesses, convert them into strengths and convert environmental threats to opportunities.

A brief description of four strategies is given below:

(a) SO strategy:

Company uses its strengths to take advantage of environmental opportunities. Weaknesses are overcome and converted into strengths. Environmental threats are overpowered by opportunities.

(b) WO strategy:

Company minimizes its weaknesses to maximise environmental opportunities by developing internal strengths or acquire the needed strength from outside (for example, adopt a new technology or seek the guidance of experts).

(c) ST strategy:

The company maximises its strengths (technological, financial, managerial etc.) to minimise environmental threats. For example, company can use technological developments to face competition in the market.

(d) WT strategy:

The company minimizes its weaknesses and environmental threats. It may require restructuring of the firm.

Technique # 2. ETOP:

ETOP means environmental threat and opportunity profile. It is a technique of environment analysis where organisations make a profile of their external environment. It analyses information about environmental threats and opportunities and their impact on strategic planning process.

It helps to identify strategic opportunities for the company. Environmental opportunities indicate new lines of business and threats restrain them from entering into new business lines. A firm that wants to manufacture shoes, for example, will prepare an ETOP to analyse demand for shoes in the market, purchasing power of consumers, gender composition of market (male-female ratio), government regulations, technology used etc. On analysing the environment, if it finds there is demand for shoes, it will venture into this business.

Technique # 3. Forecasting:

Forecasting means predicting future events and analysing their impact on plans. Organisations analyse the environment by applying various techniques to forecast Government policies, sales, technological developments etc. and use that information to formulate plans and strategies.

Technique # 4. Verbal and Written Information:

Verbal information is collected by hearing and written information is collected by reading articles, journals, newspapers, newsletters etc. Common sources of verbal information are radio, television, work force, outsiders (consumers, suppliers, bankers) etc. It informs changes in the environment and prepares organisations to incorporate them in their plans and strategies.

Technique # 5. Management Information System (MIS):

MIS is “a formal method of making available to management the accurate and timely information necessary to facilitate the decision-­making process and enable the organisation’s planning, control and operational functions to be carried out effectively.”

MIS provides timely, accurate, concise, complete and relevant information based on computer technology about present and future environmental changes. It facilitates decision-making process and helps in making decisions based on future environment.