How to Evaluate Environment For Running a Successful Business

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By: Site Engineer, Staff

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It is a fact that accurate and timely information is the foundation for running a business. It has become necessary for an organization to scan the external environment to identify possible opportunities and traits and their internal environment for strengths and weaknesses. Environmental scanning is the monitoring the evaluation and dissemination of information fix in the external and internal environment to key people within the corporation. A corporation uses these tools to avoid strategic surprise and to ensure its long-time health.

However, information about the environment is not always readily available thereby making it difficult for managers to understand, predict and monitor the future.

Organizations need a good deal of time and money to monitor the environment to understand and predict changes opportunities, and threats in it. Managers need to be exposed to scenario developments, forecasting, and benchmarking as tools for monitoring and evaluating the environment.

1. Benchmarking: This means identifying and comparing the best practices of various firms to a firm’s processes to understand the other firms’ sources of competitive advantage. Normally, a benchmarking team of an organization would collect information on the organization’s operations and those of other firms to identify and learn the underlying causes of performance differences. The organization would then map out a set of best practices that would lead to world-class performance.

2. Scenario Development: Managers determine the effect of environmental forces on their organizations through developing scenarios of the future. These scenarios here may be regarded as to represent alternative combinations of different factors into a total picture of the environment and the firm. Most often, organizations develop three scenarios, a best-case scenario (if events that are favorable to the firm occur), a worst-case scenario (if events that are unfavorable to the firm occur) and some middle ground scenario (if average events occur). The benefit of scenario development is that it assists managers to develop contingency plans to cope with different outcome situations.

3. Forecasting: It is used to predict future changes in the variables of the environment. In making capital investment decisions, firms normally forecast how interest rates will change. Several publications help predict the environment of organizations in the future. Managers must be warned that forecasts are based on past data and the predicted future may not exactly reflect the past.

Management of the Environment

Management of the environment involves responding to the environment. Managers of organizations can manage their business environments by adapting to the environment, influencing the environment and lastly selecting a new environment.

1. Adapting to the Environment: The organization adapts to cope with the environment. Its processes and people are made to adjust to the reality of the environment confronting the organization. This can be achieved through buffering, smoothing, and flexible processes. Buffering entails creating supply and demand for excess resources in cases of unpredictable needs. Smoothing involves leveling off fluctuations in demand like clearance sales in anticipation of incoming inventories. Flexible processes involve changing technical methods to adapt to changes in the environment.

2. Influencing the Environment: This approach of management of the environment entails anticipating and taking actions to change the environment. An organization can act on its own to change the environment or corporate with other organizations to influence the environment. Through reduced prices, public relations, social responsibility, competitive advantage, and political actions, an organization can influence its alliances, partnership, joint ventures, and mergers organizations can influence environmental uncertainties. The cooperation may be necessary if it can reduce the organization’s cost and risk and also increase its power to accomplish the changes they desire.

3. Selecting a New Environment: This approach involves organizations changing or getting out of their current environment into another environment. Through this approach, organizations can maneuver around potential threats and capitalize on arising opportunities. Organizations can seek new products and markets, diversify their products and markets, merge and acquire new enterprises to change the environment they are operating.

In selecting a response approach, organizations should attempt to change appropriate levels of the environment by choosing responses that focus on relevant elements of the environment and offer the highest benefits at the lowest cost.

Theories of Organizational Adaptation

Globalization and electronic commerce present real challenges to the strategic management of business corporations. How can anyone, the company keep track of all the changing technological, economic political-legal, and socio-cultural trends around the world and make the necessary adjustments? This is not an easy task.

Various theories have been proposed to account for how organizations obtain fit with their environment, the theory of population ecology, for example, proposes that once an organization is successfully established in a particular environmental niche, it is unable to adapt to changing conditions. Inertia prevents the organization from changing.

The company is thus replaced (is bought out or goes bankrupt) by other organizations more suited to the new environment. Although it is popular in sociology, research fails to support the arguments of population ecology.

Institution theory, in contrast, proposes that organizations can and do adapt to changing conditions by imitating other successful organizations. To its credit, many examples can be found of companies that have adapted to changing circumstances by imitating an admired firm’s strategies and management techniques. The theory does not, however, explain how or by whom successful new strategies are developed in the first place.

The strategic choice perspective goes one step further by proposing that not only do organizations adapt to a changing environment, they also have the opportunity and power to reshape their environment. This perspective is supported by research indicating that the decisions of a firm’s management have at least as great an impact on firm performance as overall industry factors. Because of its emphasis on managers making rational strategic decisions, the strategic choice perspective is the dominant one taken in strategic management.

Its argument that adaptation is a dynamic process fits with the view of organizational learning theory which says that an organization adjusts defensively to a changing environment and uses knowledge offensively to improve the fit between itself and its environment. This perspective expands the strategic choice perspective to include people at all levels becoming involved in providing input into strategic decisions.

In agreement with the concepts of organizational learning theory, an increasing number of companies are realizing that they must shift from a vertically organized, top-down type of organization to a more horizontally managed, interactive organization. They are attempting to adapt more quickly to changing conditions by becoming “learning organizations”.

Creating a Learning Organization

Strategic management has now evolved to the point that its primary value is in helping an organization operate successfully in a dynamic, complex environment. Some big companies are now using strategic planning as a tool to drive organizational change.

Managers at all levels are expected to continually analyze the changing steel industry to create or modify strategic plans throughout the year. To be competitive in dynamic environments, corporations are becoming less bureaucratic and more flexible.

In stable environments such as those that existed in years past, a competitive strategy simply involved defining a competitive position and then defending it as it takes less and less time for one product or technology to replace another, companies are finding that there is no such thing as a permanent competitive advantage. This means corporations must develop strategic flexibility, the ability to shift from one dominant strategy to another.

Strategic flexibility demands a long-term commitment to the development and nurturing of critical resources. It also demands that the company become a learning organization, an organization skilled at creating, acquiring, and transferring knowledge and at modifying its behavior to reflect new knowledge and insights.

Organizational learning is a critical component of competitiveness in a dynamic environment. It is particularly important to innovation and new product development. For example, Hewlett-Packard uses an extensive network of informal committees to transfer knowledge among its cross-functional teams and to help spread new sources of knowledge quickly.

Learning organizations are skilled at four main activities:

  1. Learning from their own experiences and history as well as from the experiences of others.
  2. Transferring knowledge quickly and efficiently throughout the organization.
  3. Solving problems systematically.
  4. Experimenting with new approaches.

Business historian Alfred Chandler proposes that high-technology industries are defined by “paths of learning” in which organizational strengths derive from (earned capabilities.

According to Chandler, companies spring from an individual entrepreneur’s knowledge which then evolves into organizational knowledge.

This organizational knowledge is composed of three basic strengths:

  1. Technical skills mainly in research;
  2. Functional knowledge, such as production and marketing; and
  3. Managerial expertise.

This knowledge leads to new businesses where the company can succeed and creates an entry barrier to new competitors. Chandler points out that once a corporation has built its learning base to the point where it has become a core company in its industry, entrepreneurial startups are rarely – able to successfully enter. Thus, organizational knowledge becomes a competitive advantage.

Strategic management is essential for learning organizations to avoid stagnation through continuous self-examination and experimentation. People at all levels not just top management; participate in strategic management helping to scan the environment for critical information, suggesting changes to strategies and programs to take advantage of environmental shifts, and working with others to continuously improve work methods, procedures, and evaluation techniques. For example, Motorola developed an action learning format in which people from marketing, product development, and manufacturing meet to argue and reach an agreement about the needs of the market, the best new product and the schedules of each group producing it.

This action learning approach overcame the problems that arose previously when the three departments met and formally agreed on plans but continued with their work as if nothing had happened. Research indicates that involving more people in the strategy process results in people not only viewing the process more positively but also acting in ways that make the process more effective.

Organizations that are willing to experiment and can learn from their experiences are more successful than those that do not. For example, the most successful firms were those that improved products sold in the United States by incorporating some of what they had learned from their manufacturing and sales experiences in other nations. The less successful firms used foreign operations primarily as sales outlets not as important sources of technical knowledge.

Strategic management consists of four basic elements:

Environmental Scanning

Environmental scanning is the monitoring, evaluating, arid disseminating of information from the external and internal environments to key people within the corporation. Its purpose is to identify strategic factors – external and internal elements that will determine the future of the corporation.

The simplest way to conduct environmental scanning is through SWOT analysis. SWOT is an acronym used to describe the particular strengths, weaknesses, opportunities, and threats that are strategic factors for a specific company.

The external environment consists of variables (opportunities and threats) that are outside the organization and not typically within the short-run control of top management. These variables form the context within which the corporation exists. They may be general forces and trends within the overall societal environment or specific factors that operate within an organization’s specific task environment often called its industry.

The internal environment of a corporation consists of variables (strengths and weaknesses) that are within the organization itself and are not usually within the short-run control of top management.

These variables form the context in which work is done. They include the corporation’s structure culture and resources. Key strengths form a set of core competencies that the corporation can use to gain a competitive advantage.

Strategy Formulation

Strategy formulation is the development of long-range plans for the effective management of environmental opportunities and threats, in light of corporate strengths and weaknesses (SWOT). It includes defining the corporate mission, specifying achievable objectives, developing strategies, and setting policy guidelines.

 

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