Need of the environmental analysis: the strategies that a company may adopt are influenced by the environment. An organization cannot keep itself insulated from the environment. It cannot take decisions on policies and performance, independent of the happenings in the environment around it, as it affect the strategic decisions required to be taken by the company. An analysis of environment and its behaviour gives ample scope for companies to anticipate various opportunities and threats and to be protective towards them. Implies that the organizations can turn them to their maximum advantage. If companies lack direction focus, a perception of changing business scenario, that may be able to withstand predatory competition. Many companies in India went out of business due to their myopic approach towards the changing environment. They considered themselves invisible and that nothing in the environment could deter their progress. Today we do not see some of those brand names, which enjoyed supremacy in the sixties and seventies. With the markets being flooded with different designs of swashing machines from Videocon, Whirlpool Godrej, etc. a number of local manufactures lost their market. The same is true with Vijay Super and Lamberts scooter which are no longer visible which no on India roads are. It is important for managers to scan the environment in order to know the following:
1. The various factors and their interactions taking place in the environment, which would be conductive to the strategies of the company to know how far they would be helpful in accomplishing the objectives set for company.
2. The various factors and their interactions that would threaten the survival and growth of a company and evolution of alternatives that would possibly turn threats into the opportunities.
3. The various factors and their interactions that would generate new opportunities for the company to grow and accomplish stretched goals.
4. Targets that a company would like to formulate for itself which would be not only realistic but would also pose a challenge to motivate the workforce.
Strategic factors and their effects
Big markets attract big and new entry, weak competitions are sidelines.
Surpluses lead to downfall to price and profits.
Entry or exit barriers
Strong barriers results in the protection and competition.
More buyers buy at lower prices
Buyer change the seller
Raise risk, as it is fast
High capital requirements make investments decisions difficult. Vertical integration raised requirements of high capital
Economics of scale
Increase of volumes and increased market share for being cost competitive
Reduce life cycle and increase risk