Environmental Scanning: Meaning, Purpose and Examples

Environmental scanning is a constant and careful analysis of the internal and external environment of an organization in order to detect opportunities, threats, trends, important lessons, and weaknesses which can impact the current and future strategies of the organization.

Identification of these variables can either be used to build strategies either to expand the business or to minimize their impacts on the growth of the business. and we also learn

Strategic business units are absolutely essential for multi product organizations. These business units are basically known as profit centres. They are focused towards a set of products and are responsible for each and every decision / strategy to be taken for that particular set of products. Strategic business units can be best explained with an example.

There are several reasons SBU’s are used in an organization and they are mentioned in my post on the importance for using SBU’s in a multi product organization. However, along with the reasons for using SBU’s there are also some powers which needs to be inferred on an SBU. Planning independence, Empowerment and others are such powers which influence a SBU. 3 of such features are discussed below.

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What is Environmental scanning?

Environment Scanning

Environmental scanning is an important part of the business process as it is the responsibility of an organization to keep a check on things which can put negative impacts on their business and their consumers.

The members of the organization look for the prominent internal and external threats which adversely affect the organization. Not only the issues which directly impact their consumers and suppliers but also the issues which impact the competitors and overall environment of the industry are scanned and new strategies are developed to deal with these issues.

Large organizations have employees specially hired for the research purpose who constantly research and learn about market changes and provide information to the higher management so that company doesn’t lag behind because of the lack of the knowledge about the market place changes.

Having knowledge about the issues in the business and market changes, management can take important decision for the future of the organization.

Followings are the efforts made by the organization to do an environmental scanning:

  1. Market research is performed and the data collected from the market research process is studied in order to make planning for future actions.
  2. Comparing the performance of the competitor company in order to learn about their strategies and business ideas.
  3. Learning from the executives of the organization.
  4. Analyzing and making decisions on the basis of the demographic data.
  5. Collecting information from articles issued, web pages, journals, magazines, and newspapers, etc.

Importance of environmental scanning

Environmental scanning plays an important role in the business process of an organization. There are many advantages of performing environmental analysis that helps the organization to stay safe from the business loss and to stay ahead in the competition.

  1. By performing environmental analysis, you can learn about the strengths, opportunities, opportunities available, and threats lurking around the industry. Having knowledge about all these things you can take a decision regarding your business and can reform your business strategies.
  2. The environmental analysis helps us to determine whether the resources such as human resource, capital resource, etc. are being used properly or not. It helps us to curb down the wastage of these important resources.
  3. Constant environment scanning helps the organization to learn about the opportunities and threats occurring in the industry and on the basis of that information future strategies can be planned and implemented. Hence, it helps the organizations to stay strong in the game.
  4. Environmental scanning helps you to learn about the business strategies of your competitors. You can take ideas from the strategies and can also form your strategies accordingly so that you can give constant competition to them.
  5. The data collected from environmental scanning plays an important role in long-term business planning.
  6. Environmental scanning helps you to stay connected with your consumers. You can learn about the changing expectations of your consumers and provide them services accordingly.

Components of Environmental Scanning

Business environment of an organization can be divided into two types of environment external environment and internal environment. there are different components associated with both the environments.  Let us learn about them one by one.

#1 Internal Environmental components:

Internal environmental components are the components which lie within the organization and changes in these components impacts the overall performance of the organization. There are various internal environmental components such as different resources like human resources, capital resources, technological resources, etc., Objectives, Organizational structure, Value system, corporate structure, and labor union, etc.

These components play an important role in structuring the future of an organization therefore, it is important to analyze these components as a part of environmental scanning.

#2 External Environmental components:

External components are the components which exist outside the walls of an organization. Even though these components are not part of the organization, they still impact the business of the organization. The external environment can be divided into two categories such as Microenvironmental components and macro environmental components.

A) Micro Environmental components:

Micro environment components consist of components such as Competitors, suppliers, industry, organization, consumers, and market, etc.

B) Macro Environmental Components:

Macro environmental components consist of components such as Demographical environment, Economic environment, political environment, cultural environment, technological environment, etc.

Purpose of Environmental Scanning

Environmental scanning is conducted to collect data on for the various areas such as competition, employment trends. Geopolitical climate, economic condition, industry, technological advancement, industry, and global opportunities, etc.

It is important for an organization to consistently track the changing trends and to develop strategies accordingly. It also helps in decision making, for example, you can learn about the current demands and expectations of the consumers and produce and sell products accordingly so that you can expand your business.

However, in less dynamic organization environmental scanning can be done once in a year to just to learn about the issues faced by the organization.

Techniques of Environmental scanning

Environment Scanning

Environmental scanning is a process where deep analysis of an environment is done in order to learn about the new opportunities and threats on the basis of which new strategies can be prepared.

Here, you will learn about the different techniques which are used for environmental scanning purpose.

#1 Research:

Environment scanning is conducted to learn about the latest trends of the industry and the lurking threats so that opportunities can be exploited and precautionary steps can be taken to reduce the impacts.

Research is an old method that has been used by various industries to learn about the industry in detail. Even there is a different department named as “Research and Development (R&D) department to conduct all research.

#2 Getting the opinions of experts:

In this method, the management of the organization take the opinion experts who have deep knowledge about the industry and can easily decode its latest trends and recognize the first appearance of the opportunities.

#3 SWOT analysis:

#3 SWOT analysis

SWOT stands for Strength, Weaknesses, Opportunities, and Threats.  This is a strategic technique opted by an organization to learn about its internal strengths and weaknesses. It is important to learn about business competition and project planning.

SWOT analysis is a technique to learn to identify internal and external factors which can be helpful in achieving the goal of an organization.

#5 PEST analysis:

PEST analysis is done to learn about the external macro environmental factors. PEST stands for P: Political, E: Economic, S: Social, T: Technological. These external macro environmental factors put an impact on the business of the organization and it is important for an organization to keep a track of them.

Political factors are regulated by the government and the changes in the political factors can put a great impact on the business environment, for example, the change in the tax policy or employment laws, etc.

#5 Analysis of industry:

#5 Analysis of industry

There is a different organization in an industry which can be your direct or indirect competitors. They are part of the microenvironment. Environmental scanning is done to learn and understand the business strategies of your competitors in order to plan strategies to give competition to them.

Examples of Environmental scanning

The PepsiCo company is planning to shift its investment from producing beverages to producing healthier and functional foods using the knowledge from the environmental scanning and market research.

They are planning to collaborate with various food companies to produce healthy food and beverages by following the demand of the time as more and more people are now preferring healthy drinks and foods and not cold drinks and fast food.

1) Empowerment of the SBU manager

Several times the empowerment of SBU managers is crucial for the success of the SBU / products. This is mainly because this manager is the one who is actually in touch with the market and knows the best strategies which can be used for optimum returns. Thus several times, the SBU manager might need a higher investment for his products. At such times the manager should be supported from the organization. Only this confidence will help the manager in the progress of the SBU.

2) Degree of sharing of one SBU with another

This point is directly connected to the first one. What if one SBU needs some budget but the same is not offered because the budget is being shared by 2 other SBU’s and as it is the budget is short. Thus the first SBU does not get the independence to implement some important strategies. Similarly there might be other restrictions applied to one SBU as it is using some resources which are shared by another SBU. This might not always be negative. Of one SBU gains more profit then usual, this revenue might also become useful for the other SBU thereby promoting growth of both of them. This is where sharing actually plays a positive role.

3) Changes in the market

An SBU absolutely needs to be flexible because it needs to adapt to any major changes in the market. For example –  if an LCD manager knows that LED’s are more in demand now, he needs to communicate to the top management that he would also like a range of LED products to make the SBU even more profitable. Thus by adding LED to its portfolio, the SBU can immediately become double profitable. Thus by adjusting to change on SBU levels, the organization as a whole can become profitable.

Strategic business units Examples

The best example of strategic business unit would be to take organizations like HUL, P&G or LG in focus. These organizations are characterized by multiple categories and multiple product lines. For example, HUL may have a line of products in the shampoo category, Similarly LG might have a line of products in the television category. Thus to track the investments against return, they may classify the category as a different SBU itself.

The key to Strategic business management is to have a strict watch on the investment and returns from each SBU. The SBU manager too plays a crucial role in this and hence he is recruited from the industry with extensive experience of that particular industry. Portfolio / Multi SBU management and is done at the absolute top level of the management. Each and every change in the market, and its affect on SBU’s is anticipated which is then taken into consideration. Hence, for a multi product organization, business management may actually mean product portfolio management or SBU management.

Other references –  BCG Matrix, 6 reasons SBU’s are important for multi product organizations.

What is Cost Advantage?

There are various strategies which can be used by companies to gain market share and acquire new customers. Suthe ch strategies are known to give a “Competitive advantage” to the company. One of these competitive advantages is the Cost advantage.

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Definition of Cost Advantage

The cost advantage is an advantage that the firm has over competitors in terms of costs. A company which can keep costs lower can have a great advantage over competitors who have higher costs and therefore the prices of their products and services will be higher.

There are many factors which can help in reducing the cost of a firm. Several such factors are discussed below in this article. However, a summary of these factors includes Distributiontechnology, volume and scale of the company, raw material and procurement costs as well as processes adopted by the company. Innovation and research and development play a major role in acquiring a cost advantage.

For example – Firm A has a product which is equivalent in cost to Firm B. However, Firm A has a manufacturing which is much closer to the city. As a result, Firm A saves on transportation. However, Firm B Is located far away from the city and hence its transportation costs and therefore prices are higher. Due to the transport cost being lower for Firm A, it has the cost advantage.

Now Firm B spends good money in its R&D department and comes up with a product which has the same features but is 40% cheaper than the product of Firm A. As a result, even though Firm B is costly in transportation, its product is cheaper, and it now gains market share due to the innovation in the product. Ultimately, market share is being won by a company which is lower in costs.

Examples of Cost Advantage

Cost Advantage - 1

1) HUL & P&G

These 2 companies dominate the FMCG market due to one reason – Economies of scale. These companies are very large and have the massive presence which results in them having lower costs. Lower costs of transportation and distribution due to multiple products being distributed to the same retailer. Similarly low costs of raw material because they buy and product in huge bulks. Due to the economies of scale and therefore the cost advantage, these 2 companies are ruling in the FMCG market.

2) Amazon

Amazon has adopted the ed many different technological methods to reduce cost. It has started using robots for its warehousing purpose. This means higher work times at lower costs. Similarly, they are coming up with various AI an algorithm which is helping the company with automation, thereby reducing costs.

3) Airlines

Another industry which is focused on cost is the Airline industry. Across the globe, the brands winning major market share domestically are brands which have reduced their airline costs and hence are giving better prices to customers. Such airlines are winning from the bigwigs of the industry which have a lot of bloat in their infrastructure.

How can companies use Cost advantage?

Companies can use the cost advantage in two ways.

  1. If the company has lower costs, then it can still increase the price of the product and get higher margins. This will make the company more solid and even recession will not affect the company.
  2. If the company has lower costs, it can use penetration pricing in the market and sell at the lower cost then competitors. As a result, it gains market share and acquires customers, cutting costs further because of the volume of sales that it achieves.

Benefits of Cost Advantage strategy

1) Better Prices

The best advantage of this strategy is that better prices are maintained in the market. The company might have more margins or pass on the margins to consumers to gain market share. Nonetheless, better cost means better prices which is good for the company.

2) Market penetration

A major reason cost advantage strategy is used is when the product is selling in an existing market and the company wants to penetrate the market. If customers are getting a better price, they will definitely buy the product and this helps with market penetration and more volumes being achieved.

3) Focus on development and innovation

A company which wants to achieve cost advantage will always be focused on development and innovation. Such a company would want to find out processes and adopt technologies which will reduce the cost.

4) Can be a major advantage if sustained

One of the key word here is “Sustainable competitive advantage”. This basically means to have a competitive advantage which is sustainable. A company which innovates and then patents procedures can have a sustainable cost advantage which will help the firm in the market for a really long term. Software companies are the best examples of such cost competitive advantages.

Problems with Cost advantage strategy

1) External factors play a major role

The Business environment plays a major role in cost advantage. Labour, Government policies, Costs of transportation and other variables play a major role in achieving the cost advantage. In the same way, they can disrupt any advantage the firm has.

2) Companies should not ignore marketing expenses

To cut costs, companies can ignore some key procedures which it should invest in to grow further. Example – the company can reduce marketing and branding expenses to reduce cost. However, these expenses are necessary for the company to become a brand in the long run. Just cost advantage should not be the focus. The focus should be on building a brand with many advantages.

How to get a Cost advantage over competitors?

Cost Advantage - 2

Companies need to lower their costs so that they can sell at lower prices than competitors. To do that, they can use many variables available to the company.

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