Paper E3 Enterprise Strategy: The Sheer Rate of Change in Business Is Exacerbating the Shortcomings of Older Environmental Analysis Methods Such as Pest. Firms Are Therefore Adopting a More Responsive Approach: Corporate Foresight
Dickson-Green, Ben, Financial Management (UK)
Environmental analysis is the detailed evaluation of external forces and conditions that affect an organisation now or may do so in the future. It is an extremely important topic, not only in professional accountancy exams such as E2 and E3, but also in the day-to-day running of most successful organisations. So why is understanding the environment through careful analysis so crucial - and how should it be done?
Consider a company, ABC, which retails high-quality clothing for adults via a UK-wide chain of high-street stores. Environmental analysis would be important to this business for a number of purposes, including the following:
* Identifying threats. Environmental analysis will help ABC to identify potential problems that it may have to face. For instance, a shift in customer buying habits towards online purchasing is likely to lead to a fall in demand for its products. ABC could therefore take measures, such as offering its own website to tap into this area of the market, to manage the risk.
* Determining opportunities. An analysis of ABC's environment will help the firm to identify potential areas for growth and development. The company may identify a growing trend towards socially responsible shopping in the clothing market and it could therefore consider offering garments that are made using ethically sourced materials by suppliers following globally recognised employment standards. Alternatively, ABC may see a growth opportunity beyond its core business, such as the market for children's wear.
* Assessing the competition. Environmental analysis forces firms such as ABC to examine the actions of their rivals. Many traditional clothing retailers in the UK have been put under pressure by the big supermarket chains, which tend to offer clothing at relatively low prices. Understanding how these competitors attract custom may help ABC to take measures that will help it to maintain its own customer base.
* Identifying strengths and weaknesses. ABC may have a well-known, recognisable brand owing to the company's heavy presence on the high Street. Environmental analysis can help to put this strength in context - ABC is likely to need a strong brand name if it is planning to expand into the online channel. If the company has any weaknesses, such as a poor cash position, the directors will be aware that this might restrict it from taking advantage of any online expansion.
* Meeting stakeholder needs. Environmental analysis will help the company to gain a better understanding of its stakeholders' expectations. For instance, it will allow ABC to understand the customers' needs in more detail. If the cheaper clothing offered by supermarkets is selling well, this may indicate that ABC's market is price sensitive, with customers willing to purchase lower-quality garments in order to achieve discounts. ABC may therefore need to review its pricing strategy in order to keep attracting custom.
Environmental analysis: The challenges Although environmental analysis is a crucial part of any organisation's strategic management process, it has become more difficult to do as the pace of change in the global economy has increased over the past decade. The business environment has become more volatile for a number of reasons:
* Globalisation has led to problems for organisations all around the world. ABC, for instance, is likely to feel the impact not only of fluctuating demand in its home market, but also of issues affecting its suppliers overseas - e.g. regulatory changes in their jurisdictions.
* Continuing weakness in the global economy has kept demand unpredictable in many markets while also causing ongoing problems for businesses in obtaining credit, which could affect ABC's cash position in future.
* Changing technology is leading to the development of new products and services and/or altering how existing ones are delivered. The emergence of sophisticated online clothing retail websites is likely to reduce demand for ABC's products and so harm its high-street sales. …