Environmental Analysis and Forecasting

By Amlin David

Karunya University

Introduction

• Business decisions particularly strategic ones, need a clear identification of the relevant variables and a detailed in depth analysis of them to understand their impact and implications for their organizations. Eg What is the impact of the different aspects of liberalization on a company? What are the implications of liberalizations for the company? etc

Stages of Environmental AnalysisThe process of environmental analysis is divided into 4 stage1. Scanning the environment to detect warning

signals2. Monitoring specific environmental threats3. Forecasting the direction of future

environmental changes4. Assessing current and future environmental

changes for their organizational implications

Scanning

• Scanning is the process of analyzing the environment for the identification of the factors which impact on or have implications for the business. Such factors may include those which have appeared suddenly or evolved over the time, identification of emerging trends etc.

Monitoring

• It is a perspective follow up and a more in depth analysis of the relevant environmental trends identified at the scanning stage. The effort here is more focused and systematic than in scanning. The purpose of monitoring is to assemble sufficient data to discern whether certain patterns are emerging. However they are likely to be a complex of discrete trends.

Forecasting

• Anticipating the future is essential for identifying the future threats and opportunities and for formulating strategic plans. Forecasting is concerned with the development of the plausible directions, scope, speed and intensity of environmental change, to lay out the evolutionary path of anticipatory change.

Assessment

• The purpose of environmental analysis is to assess the impact of the environmental factors on the organizations business or their implications for the organization. Assessment thus involves drawing up implications/ possible impacts.

Approaches to environmental Analysis

1. Outside – in ( Macro ) Approach2. Inside – Out ( Micro ) Approach• Macro approach takes a broad view of

business environment with a long term perspective and develops alternative scenarios of the future. The implications of the alternative scenarios for the industry and organization are drawn up with reference to different scenarios.

Techniques for environmental Analysis

• Verbal and written information• Search and scanning• Spying• Forecasting

Steps in Environmental Forecasting

• Identification of relevant Environmental variables

• Collection of information• Selection of forecasting technique• Monitoring

Identification of relevant environmental variables

• Include all variables that would have a significant impact although their probability of occurrence is low

• Disregard major disasters such as nuclear war• Aggregate when possible into gross variables• If the value of one variable is based on the

value of the other, separate the dependent variable for future planning

Collection of Information

• This involves identification of the sources of information, determination of the types of information to be collected, selection of methods of data collection and collection of the information.

Selection of forecasting technique

• The choice of forecasting depends on such considerations as the nature of forecast decision, the amount and accuracy of available information, the accuracy required, the time available, the importance of the forecast, the cost and the competence and interpersonal relationships of the managers and forecaster involved

Types of Forecasting

1. Economic forecast2. Social Forecast3. Political Forecast4. Technological Forecast

Economic forecast

• Important economic factors often considered include general economic condition, GDP, growth rate, per capita income, distribution of income, structural changes in GDP, Investment and output trends in different sectors and subsectors/ Industries, price trends, trade and BOP trends etc

• Reliable forecast give very useful picture of the future scenario helpful to planning and strategy. For example details of power development would indicate the scope of investment in power sector itself and related industries like generators, cables, transformers, switch gears etc.

• Short term economic forecasts are very useful for demand and sales forecasting and marketing strategy formulation

• Quantitative and such as econometric methods & time series models and qualitative techniques such as judgement models can be used for economic forecasts

Social forecast• There are number of social factors which have

profound impact of business. It is therefore very essential to forecast the possible changes in the relevant social variables. Important factors include population growth/ decline, age structure of the population, ethnic composition of population, occupational pattern, rural- urban distribution of population, migration, factors related to family, lifestyle, income levels, expenditure pattern, social attitudes etc.

Technological Forecast• Innovations and other technological

developments an drastically alter the business environment. Technological forecast therefore implies great significance.

• Technological forecast encompass not only technological innovation but also the pace and extent of diffusion and penetration of technologies and their implications

Techniques for environmental forecasting

1. Econometric techniques2. Trend extrapolation3. Scenario Development

Econometric Techniques

• Economic techniques involve casual models to predict major economic indicators. Where there is well established 2 or more variables, that causal relationship can be used to forecast the future. The most commonly used econometric environmental forecasting techniques are multiple regression analysis and time series regression model.

Trend extrapolation

• Time series models assume that the past is prologue to the future and extrapolate the historical data to the future. This technique may use simple linear relationship or more complex non linear relationships to forecast trends.

Scenario development

• Scenario analysis is a technique used to forecast the occurrence of complex environmental events. Its is particularly useful for forecasting events in which many variables play a role. Shrivasta suggests the following steps to develop scenarios.

Steps to develop scenarios1. Identify strategic environmental issues that

are likely to affect the industry/firm2. Select the most important issues as focus for

scenario development3. Prepare a preliminary description of these

issues and how they evolved4. Draw out the implications of the issue for

organizational performance5. Develop detailed descriptions of the future in

the form of scenarios

6. Discuss the scenarios with top level management and refine them7. Develop contingency plans for each scenario

Benefits of Environmental Analysis1. Makes one aware of the environment- organization

linkage2. Helps identify future threats & opportunities3. Provides picture of factors which influence the

business4. Helps to understand the transformation of the

industry environment5. Technological forecasting will indicate some of the

future opportunities and challenges 6. Environmental analysis is a prerequisite for

formulation of strategies

7. Environmental analysis helps in identification of risks8. Environmental monitoring helps suitable modification of the strategies as and when required9. Environmental analysis keeps the managers informed, alert and often dynamic

Limitations of Environmental ForecastingEnvironmental analysis has certain limitations, some of them arise from the forecasting techniques used. Further there are also chances of certain errors affecting the reliability of the forecasts. Errors may occur in1. The selection of the variables included in the

predictive model2. Selection of the functional form for linking these

predictor variables to the variables being predicted3. The estimation of correct values for the predictor

variables. Several techniques use opinions of people and they may be affected by subjectivity.

THANK YOU