There are various techniques which may be used in environment scanning namely:
- SWOT Analysis
- PEST/PESTEL Analysis
- Industry Analysis
SWOT ANALYSIS:
1. SWOT stands for the Strenghts-Weakness-Opportunities-Threats. SWOT Matrix is an important matching tool that helps managers develop four types of strategies:
- SO (strengths-opportunities) Strategies.
- WO (weakness-opportunities) Strategies.
- ST (strengths-threats) Strategies, and
- WT (weakness-threats) Strategies.
Matching key external and internal factors is the most difficult part of developing a SWOT Matrix and requires good judgment – and there is no one best set of matches. Note in Table below that the first, second, third, and fourth strategies are SO, WO, ST, and WT strategies, respectively.
Matching Key External and Internal Factors to Formulate Alternative Strategies
| KEY INTERNAL FACTOR | KEY EXTERNAL FACTOR | RESULTANT STRATEGY | ||
| Excess working capacity (an internal strength) | + | 20% annual growth in the cell phone industry (an external opportunity) | = | Acquire Cellfone, Inc. |
| Insufficient capacity (an internal weakness) | + | Exit of two major foreign competitors from the industry (an external opportunity) | = | Pursue horizontal integration by buying competitors’ facilities |
| Strong R&D expertise (as internal strength) | + | Decreasing numbers of younger adults (an external threat) | = | Develop new products for older adults |
| Poor employee morale (an internal weakness) | + | Strong union activity (an external threat) | = | Develop a new employee benefits package |
2. SO Strategies use a firm’s internal strengths to take advantage of external opportunities. All managers would like their organizations to be in a position in which internal strengths can be used to take advantage of external trends and events. Organizations generally will pursue WO, ST, or WT strategies in order to get into a situation in which they can apply SO Strategies. When a firm has major weaknesses, it will strive to overcome them and make them strengths. When an organization faces major threats, it will seek to avoid them in order to concentrate on opportunities.
3. WO Strategies aim at improving internal weaknesses by taking advantage of external opportunities. Sometimes key external opportunities exist, but a firm has internal weakness that prevent it from exploiting those opportunities. For example, there may be a high demand for electronic devices to control the amount and timing of fuel injection in automobile engines (opportunity), but a certain auto parts manufacturer may lack the technology required for producing these devices (weakness). One possible WO Strategy would be to acquire this technology by forming a joint venture with a firm having competency in this area. An alternative WO Strategy would be to hire and train people with the required technical capabilities.
4. ST Strategies use a firm’s strengths to avoid or reduce the impact of external threats. This does not mean that a strong organization should always meet threats in the external environment head-on. Rival firms that copy ideas, innovations, and patended products are a major threat in many industries. This is still a major problem for U.S. firms selling products in China.
5. WT Strategies are defensive tactics directed at reducing internal weakness and avoiding external threats. An organization faced with numerous external threats and internal weaknesses may indeed be a precarious position. In fact, such a firm may have to have to fight for its survival, merge, retrench, declare bankruptcy, or choose liquidation.
6. A SWOT Matrix is composed of nine cells. There are four key factor cells, four strategy cells, and one cell that is always left blank (the upper-left cell). The four strategy cells, labeled SO, WO, ST, and WT, are developed after completing four key factor cells, labeled S, W, O and T. There are eight steps involved in constructing a SWOT Matrix:
- List the firm’s key external opportunities.
- List the firm’s key external threats.
- List the firm’s key internal strengths.
- List the firm’s key internal weaknesses.
- Match internal strengths with external opportunities, and record theresultant SO Strategies in the appropriate cell.
- Match internal weaknesses with external opportunities, and record the resultant WO Strategies.
- Match internal strengths with external threats, and record the resultant ST Strategies.
- Match internal weaknesses with external threats, and record the resultant WT Strategies.
PESTLE ANALYSIS
1. PESTLE stands for – Political, Economic, Sociological, Technological, Legal and Environmental. The term PESTLE has been in regular use for last 10 years.
2. PESTLE analysis is in fact, an audit of environmental influences on the business idea with the purpose of using this information to preascertain the factors affecting the likely project and thereby guide strategic decision making in accordance.
3. PESTLE analysis is a useful tool for understanding the ‘big picture’ of the environment in which an entrepreneur is planning to operate.
4. A scan of the external macro-environment which are likely to influence the business idea can be expressed in terms of the following factors:
- Political Factors.
- Economic Factors.
- Social Factors.
- Technological Factors.
- Legal Factors.
- Environmental Factors.
- PESTLE Analysis
PESTLE stands for –
P – Political – Tax policy, employment laws, trade restriction, rule of law etc.
E – Economic – Exchange rates , labour supply , unemployment , demand, supply etc
S – Sociological – lifestyle, age distribution, health awareness etc.
T – Technological – Impact of new technology, research & development etc.
L – Legal – Employment laws, competition laws, foreign law etc.
E – Environment – Energy available, resources, environmental impact.
The term PESTLE has been in regular use for last 10 years.
PESTLE analysis is a useful tool for understanding the ‘big picture’ of the environment in which an entrepreneur is planning to operate.
PORTER’S FIVE FORCES MODEL TO INDUSTRY ANALYSIS AS A TOOL FOR ENVIRONMENTAL SCANNING.
- Another important tool for environment scanning is to conduct industry analysis which is to take a survey of the existing industry if any, before setting up an entrepreneurial endeavour.
- The Porter’s Five Forces tool is a simple but powerful tool to evaluate the power of business.
- This is useful, because it helps to understand both the strength of current competitive position, and the strength of the position, and the strength of the position moving into.
- Porter’s Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. These are:
(i) Supplier Power.
(ii) Buyer Power.
(iii) Competitive Rivalry.
(iv) Threat of Substitution.
(v) Threat of New Entry.
