In the external environmental analysis, the entrepreneur evaluates various factors to determine opportunities, threats, reactions, neglects, investigations for his enterprise and adjusts his strategies and objectives, according to them.
He uses the following methods and techniques through which he carries out external environmental analysis:
- To Collect Information.
- In Filtrating and Spying.
- Market Survey.
- Environmental Threats and Opportunity Profile (ETOP).
- Strength, Weakness, Opportunity and Threats Analysis (SWOT).
These Methods and Techniques of External Environmental Analysis are explained, as follows:
1. To Collect Information
This method of external environmental analysis is very important and useful. Without it, no entrepreneur can either make his existence nor he may develop.
Till knowledge of environment and factors related to it is not available, the decision cannot be taken about how to adjust with them and the extent of adjustments.
So, the detailed information about all environments and their factors is necessary.
Only that entrepreneur may be successful whose strategies are in accordance with environmental requirements.
Development, expansion, downfall and other long term changes are also mainly due to various environmental factors.
The information may be collected by the following two methods:
1. Verbal Information
Verbal information means that information and knowledge which an executive obtains from hearing from someone. This information may be formal or informal.
However, the formal method is more reliable and good, because it provides real information.
Verbal information may be obtained from the following sources:
- Through radio, television, dictaphone and other means of broadcasting.
- By the employees working in the enterprise at various levels, like – subordinates, executives and other officers.
- From persons, outside the enterprise, like – customers of the enterprise, persons engaged in distribution chain of the product and services of the enterprise, like wholesales, intermediaries, retailers, agents and other persons, suppliers of the enterprise, competitors of the enterprise and their employees, financial executives, like – bankers, shareholders and stock analysers, etc.
- Through lectures, seminars, conferences, meetings, etc.
The physical information obtained from various parties is real and highly effective and is prone to improvements.
It saves money and time. By this information, the entrepreneur may determine environmental policy and adjustments therein is easy.
However, it lacks written proof and is for short term.
Such information is centered towards individual interests only and hence many pieces of information are of no use. Possibilities of ambiguity are also much more.
2. Written Informations
Written information means that information, which is obtained in written from any person, institution or government.
This information is obtained, only when detailed information of permanent nature, related to various persons, institutions and parties are needed.
Written information may be obtained from the following sources:
1. Information published by central and state governments, like – census reports, census of manufacturing industries, statistical abstracts of various ministries, particularly information and publicity, industries, commerce, external trade, finance, agriculture ministries, economic surveys and information provided by various government organizations and agencies.
2. Publications of various organizations, like – center monitoring economy, etc. Journals and papers, like, business world, business today, economic times, business standard and financial express also provide very useful information. The online database system is also much useful, these days.
By obtaining written information, higher clarity is possible and these may be used as proof also. It does not require direct contact and is particularly useful for detailed information. The existence of this information is long-lasting and more effective.
However, the demerits of obtaining information in writing are that it may cause delays in activities and lacks confidentiality also. These cannot be easily improved and are costly also in it reaction is not quickly known.
2. Infiltrating and Spying
Spying is also an important method for external environmental analysis. By this method, important information may be collected in the industrial world.
This is a method in which the high-level executives gather knowledge about the secrets of other entrepreneurs.
This is a method, just as criminal intelligence police reports to all types of activities to catch hold of the actual culprit, so that real information may be known.
Big enterprises appoint capable and efficient high executives, to obtain information for external environmental analysis.
Their function is also to gather various reliable information about the competitive institutions, but while doing so, such things should not come in the knowledge of those institutions, otherwise, it will not be carried out by some employee, supplier, the customer of the competent institution or by some professional.
These persons collect various types of information regarding the successes of competitive institutions. Like:
- The methods adopted for recruitment, promotion, salary, and motivation of the employees.
- How human relations are cordial between the employer and the employees and in between the employees?
- Who supplies materials and machinery to the competitive institutions, and on what terms and conditions?
- Why the customers of the competitive institutions are satisfied and what facilities and incentives are being provided by that institution to the customers?
- What are the factors attributing to the sound economic status of the competitive institution?
That way, sping activities may be carried out on various issues.
Thereafter, the best policies maybe followed, by taking rational decisions for self.
Forecasting is also a method to obtain information for external environmental analysis.
This is a formal process to estimate the future events, on whose basis an entrepreneur decides the working system for his enterprise.
The forecasts make the advance assessment of possible events to have safeguards against future risks.
The enterprises make several types of forecasts to obtain information, like – general economic forecasts, institutional forecasts, and industry related forecasts factors of the firms, like price policy, competition policy, cost and sale policy, and labour policy, etc.
These forecasts may focus on specific issues affecting the enterprise, like – various types of environment and factors related to them.
There are several methods to obtain information on the basis of forecasts, like -observation method, survey method, brainstorming, induction deduction method, time series analysis, and arithmetic analysis, etc.
Following are the advantages of obtaining information through forecasting method:
- The entrepreneur may easily establish a new business.
- Since forecasting is the basis of planning, the entrepreneur may make his plans successful.
- Usually, for forecasting, information is obtained from all units of the business. Hence, it becomes easy to bring out coordination between them.
- The achievement of objectives becomes easy with the help of forecasts.
- Since it is possible to forecast, where and how to use the available sources of the enterprise, their most optimum use may be made possible.
The forecasts are related to future and future is always dynamic, complicated and uncertain. It is difficult to determine it with certainty.
Following are the limitations or demerits of forecasting:
- Although the reliability of forecasts has increased, by the use of scientific techniques, it is not essential that these may always be true.
- Forecasting is a complicated task, because it is not essential that the future may also behave, according to past or present circumstances.
- It is not essential that the assumptions on which forecastings are done may always prove correct. If the assumptions get wrong, the forecasts also become meaningless.
- Substantial time and money are to be spent on collection and analysis of facts related to forecasting.
- Forecasting is basically a mental function. Hence, it is done only by intelligent people. Due to the limited availability of such capable persons, the reliability of forecasts become doubtful.
4. Market Survey
The market survey is such a method of external environmental analysis, in which an entrepreneur makes efforts to know the new trends and challenges developing towards the commodity or service, so that he may take suitable decisions to meet the likings and requirements of the consumers.
In this method, the entrepreneur makes inquiries from either selected customers or all customers about their purchase plan or their intentions in a certain period, through personal contacts, telephone, and post.
This inquiry may be regarding general scheme or regarding specific commodity, brand name, the quantity of the commodity and prices, etc.
Thereafter, forecasting may be done, on the basis of information collected during the course of inquiries.
Following are advantages of market survey method:
- Good relations may be established with the purchasers.
- The defects, omissions may be improved upon, since surveys have facilities of repetition.
- The forecasts are real since information is collected directly from the consumers.
- Reliability may be observed in the information.
- By this method, it is easy to assess the intentions and expectations of the consumers.
- Usually, this method is easy and less expensive.
- This method is more useful for short term forecasts.
However, market survey method has the following demerits also:
- This is an impractical method because the consumer in present days does not have so much time, so as to tell all things required in the survey.
- Sometimes, it takes a long time and becomes quite expensive also.
- To obtain information about the intentions and expectations may become difficult because they go on continuously changing.
- Since purchase plans of the consumers are not correctly known, their analysis also becomes quite difficult.
- This method is not suitable for long term forecasts.
- Exact measurement of expectations is difficult.
5. Environmental Threats and Opportunity Profile (ETOP)
Environmental threats and opportunity profile method are also used for external environmental analysis.
This is a method, in which effects various factors of the environment are analyzed and evaluated.
Bonus: Top 11 Rules to Becoming a Successful Entrepreneur.
6. Strength, Weakness, Opportunity and Threats Analysis (SWOT)
The SWOT analysis method is used to understand the internal and external environment of entrepreneurship. The full description of this method is strength, weakness, opportunities and threats analysis.
We may explain this method as follow:
1. Potential Strengths
Following are the indicators of possible strength for an entrepreneur. By using them, the environment may be easily understood.
- Sound financial position and financial resources/sources for development and expansion.
- Adequate capacity to take advantages of large scale production.
- Capacity or capability to cover a large geographical area.
- Best intellectual capital resources in important areas.
- Strong strategy, widely supported by experts in basic areas.
- The reputed market, entrepreneur or seller, by whose name alone the customers get attracted.
- Costs and profits.
- Achievement of wider and better skills for improvements in production process and methods.
- Strong brand name and sound reputation of goodwill of the company.
- Effective advertisements, publicity, and promotion.
- Reputation for better customer service.
- Better professional skills.
- Production innovation skills.
- Better skills in the distribution chain.
- Better relations with other competitive firms, which may be helpful in providing important technological and other market facilities.
2. Potential Weakness
Following are the indicators of potential weakness.
- Lack of clear strategic directions.
- Lack of sufficient funds and financial resources to take strategic advantages.
- Overall high unit cost.
- Use of inferior policies and methods to face the competitors.
- Being away from profitability.
- Lack of traditional facilities or modern facilities.
- Statement of the high debt burden.
- Being seriously uncomfortable due to problems of internal operation.
- Limited production in comparison to the competitors.
- Inferior quality of production and low technological knowledge.
- Weak brand reputation.
- Lack of capability to quickly attract new customers.
3. Potential Opportunities
Following are the important potential opportunities.
- Wider possibilities of entry into new geographical areas in comparison to the competitor.
- The wider possibility of opening new market areas in comparison to the competitor.
- Taking over of competitive firms.
- Joint entrepreneurial agreement to develop competitive capacity.
- Use of existing corporate skill and technical knowledge to enter into the new production line or business.
- The wider possibility of expansion in the production line, which substantially fulfills the requirements of the consumer.
- Use of electrical techniques to search for new sale opportunities.
- Capacity to develop fast with the increase in demands in the market areas.
- Capacity to explore new technology.
- Reduction in trade union obstacles, in the way to attract foreign markets.
4. Potential Threats
Following are the important indicators of threats and challenges for the enterprises.
- Competition at the height.
- Negligible possibility for entry in new areas of competition.
- Important changes in respect of population, like – reattraction from cities to villages.
- Continuous fall in market additions.
- Increase in costs of requirements, due to the effects of new rules and acts etc.
- Losses in the sale of substituted products.
- Rapid fall in demand for products of the firm, due to technological changes or product innovations.
- The continuous rise in the bargaining power of the customers or consumer and suppliers.
- Adverse changes in foreign exchanges rates.
- Adverse changes in trade policies.
Following are the advantages of the use of SWOT analysis method for external environmental analysis.
1. SWOT method provides an important base for external environmental analysis.
2. This is a systematic method to understand the internal and external environment of entrepreneurship.
3. The expert strategy planners or entrepreneurs may formulate effective strategies by adjusting the existing strengths and weakness of the entrepreneurs, according to the opportunities and threats, with the help of SWOT analysis.
4. By this method, the entrepreneur may substantially and strategically utilize the internal powers by taking effective advantage of environmental opportunities.
5. With the help of this method, an entrepreneur becomes successful in removing or controlling the challenges or deficiencies, and taking full advantages of the opportunities, by keeping his powers and strengths, in view.
Thus, now you know the Methods and techniques of external environmental analysis.