Environmental analysis is undeniably one of the most critical tasks that an organisation has to perform in order to survive in the market. Organisations need to monitor and analyse the information offered by the environment to identify key threats and opportunities. In order to derive meaning from the infinite information the environment has to offer, many organisations perform analysis with formal and scientific approaches. This research sets out to investigate the possibility of an objective an impartial environmental analysis by first detailing the forces that affect the general marketing environment. The stages in an environmental analysis are then examined. Finally a discussion about the factors that influence the analysis process is raised, along with issues of objectivity and impartialness.
The Marketing Environment revisited
The term “marketing environment” is often used to describe the surrounding that an organisation operates in. Kotler (1994, pp 173) defines market environment as consisting of “the actors and forces that affect the company’s ability to develop and maintain successful transactions with its target customers.” Another definition of the marketing environment describes it as “the…forces that directly or indirectly influence an organisation’s acquisition of inputs and generation of output…” Dibb et al., (1999, pp35). It can be concluded therefore that the general marketing environment consists of both external and internal factors and forces which can influence the organisations operations.
According to Baker (1998), the marketing environment can be broken down into three main levels: Macro, micro and internal. At the macro level, the environment is further broken down into four sub-categories of factors, also commonly known by the acronym PEST (Baker, 1998):
(a) Political forces – e.g., the overall political stability, trade and other government policies.
(b) Economic forces – e.g., the general level of economic activity, industry infrastructure, distribution of wealth and taxation levels.
(c) Sociological forces – e.g., the cultural and demographic factors like race, language and religions, and spending patterns.
(d) Technological forces – e.g., the nature of the industry and its core technology, the products and equipment involved, and skills to manage current and new technology.
The second level, micro-environment, consists of people and organisations in the organisation’s immediate environment that affects its ability to serve its markets (Kotler, 1991). There are many factors in the micro-environment which govern the structure of industries and markets and the nature of competition (Baker, 1998). Porter’s 5 Forces theory (see Figure 1) illustrates the competitive external forces: the threat of new entrants to the industry, the threat of substitutes, the bargaining power of suppliers and buyers, and the level of rivalry among the already existing firms. These “determine the intensity of industry competition and profitability” Porter (1985, pp6).
Figure 1. Forces Driving Industry Competition
Adapted from Porter (1985, pp 4)
The third level of the marketing environment is the internal environment. Forces within an organisation can greatly affect its performance and profitability. A firm’s organisational strategy is largely dictated by the availability of assets, its understanding and utilisation of resources, skills, competencies and its organisational culture (Baker, 1996).
It is because of the vast numbers and variety of factors in each of the three levels which have the potential to affect a firm’s performance that environmental analysis should be, and is considered a vital organisational task. Kotler (2000, pp 136) states that “Successful companies…recognize that the marketing environment is constantly spinning new opportunities and threats and understand the importance of continuously monitoring and adapting to that environment.” This applies to all types and size of firms. There are many different models that describe the analysis process, but to keep within the context of this essay, the model of organisations as interpretation systems proposed by Daft and Weick (1984) will be used for discussion.
Daft and Weick (1984) characterised environmental analysis into 3 distinct tasks – scanning, interpreting and learning. Managers must first scan the environment to collect data on the actual and potential changes, trends and events. According to Aguilar (1967) and Auster and Choo (1993), environmental scanning is the “acquisition and use of information about events, trends, and relationships in an organisation’s external environment, the knowledge of which should assist management in planning the organisation’s future course of action.” Choo op. cit. (1998, pp 72)
However, the environment produces an infinite amount of information, and in practice organisations can only attend to a small part of information available (Aguilar, 1967). Therefore scanning must involve the filtering of perceived relevant information. It has been suggested that scanning approaches adopted by firms vary with the organisational strategies being pursued (Hrebiniak and Joyce, 1985). For example, firms with a proactive strategy would scan markets for opportunities, whereas firms with a reactive strategy would scan their markets for problems (Ansoff, 1975; Brownlie, 1995). Detailed strategies such as product differentiation, cost leadership and focus (Porter, 1985) or certain strategic stances such as prospector, analyser, or defender (Miles and Snow, 1978) also affect the way firms scan their environment.
Information is then collected from selected personal and impersonal sources (Daft et al., 1988). These can be further categorised into human sources (e.g., employees, staff, customers, and suppliers), textual sources (e.g., newspapers, periodicals, television, reports) and online sources (e.g., Internet, CD-ROMs) (Choo, 1998). Environmental scanning has evolved into more organised and coordinated efforts (Klein and Linneman, 1984). Recent studies also show an indication of a trend toward formalised scanning procedures, and increased sophistication and specialisation in the type of systems used for scanning (Diffenbach, 1983; Subramanian, et al., 1993).
The next stage of the model is interpretation. During interpretation, the meaning and significance of each change, event and trend noticed during scanning are assessed (Jackson and Dutton, 1987). Which parts of the firm’s environment gets noticed depends on the managers’ belief about what is relevant (Weick, 1995). Managers put the information into sensemaking frameworks (Starbuck and Milliken, 1988), which enables them to “comprehend, understand, explain, attribute, extrapolate and predict”, (Starbuck and Milliken 1988, pp 51). Key environmental threats and opportunities are then identified. According to Starbuck and Milliken (1988), managers can never be certain that the environment has been interpreted correctly until after an accumulation of experience in the changed environment clarifies the correctness or incorrectness of their interpretations.
The last stage of Daft and Weick’s model is learning. It refers to the strategic responses or actions that organisations make based on the interpretations (Choo, 1998). For example, if a firm perceives a new labour policy set by the government as a potential threat to its operations, it might respond by changing the firm’s employee hiring practices. Conversely, if a firm identifies a perceived opportunity of a gap in its market, it may attempt to fill it by producing new products or services.
Objective and impartial environmental analyses : An illusion?
Many organisations today have formal and organised environmental analysis procedures and systems (Diffenbach, 1983; Klein and Linneman, 1984; Subramanian et al., 1993a). Formalised scientific techniques such as Delphi projections, cross-impact analysis, morphological analysis and exponential forecasting (Diffenbach, 1983) suggest that the analyses could be objective and impartial. It must not be forgotten however, that these techniques and systems were designed by organisations, which are human institutions, and that the analyses are mostly conducted by the employees of these organisations.
Human behaviour is ruled by cognition, which is the process and ability to get knowledge (de Wit and Meyer, 1999). Knowledge is then stored in cognitive maps, also referred to as cognitive schemata (Lenz and Lyles, 1985). According to de Wit and Meyer (1999) the cognition ability of humans are limited, and are confronted by problems such as biasness and rigidities, so humans can “never be as perfectly rational as computers” de Wit and Meyer (1999, pp 64). Due to the inherent human element, it can be argued that an objective and impartial environmental analysis is by definition unattainable.
There are many factors that influence the environmental analysis process. Choo (1998) highlights the issue when he asks “How do managers know what information they need about the environment? How do they deal with the multiple sources that provide information on the same topic? How do they interpret ambiguous messages about environmental change? How do they detect, recognize, and frame problems from within a stream of environmental information?”, Choo (1998, pp 91). Influences that affect the environmental analysis process can be broadly classified into 2 general levels: organisational and individual. The factors in these 2 levels are interlinked.
At the organisational level, Johnson and Scholes (1999) provides an insight as to how companies’ culture and strategies that are developed can dictate the extent of analyses done by managers. According to Johnson and Scholes (1999), the cultural web or paradigm represents the taken-for-granted assumptions or beliefs of an organisation shared by its members. The paradigm consists of elements such as rituals and routines (e.g., company norms, “the way we do things around here”), control systems (e.g., rewards system), organisational structures (e.g., “old boys network”, power structures (where the power lies – similar to organisational structures). Culture is difficult to change, and if the organisation’s top-level management harbour a “‘we have been successful without it’ attitude” Diffenbach (1983, pp 114), environmental analysis may not even be accepted in the company (Diffenbach, 1983).
Even when environmental analysis is used, the organisational paradigm also creates a constrained environment where managers prefer to keep to the familiar. Johnson and Scholes(1999, pp 79) provides an example “…managers may seek to extend the market for their business, but assume it will be similar to their existing market, and therefore set about managing the new venture in much the same way as they have been used to.” The scanning scope of the environmental analysis is thereby considerably reduced. It is also because of the unique cultures of firms that even different organisations within the same industry will interpret differently the same set of information in a particular market condition (Brownlie, 1994).
Organisational strategies that are developed can determine the scanning approaches used by companies to collect information from their environment, as has been shown earlier in this essay. Hrebiniak and Joyce (1985) suggest that different strategies involve different scanning approaches. For example, firms with a proactive strategy would scan markets for opportunities, whereas firms with a reactive strategy would scan their markets for problems (Ansoff, 1975; Brownlie, 1995). This view has been echoed in a study of the relationship between the environmental scanning activities of chief executives in and their organisations’ strategies by Jennings and Lumpkin (1992), but it cannot be ascertained whether or not causation runs from strategy to scanning techniques, from scanning techniques to strategy, or both.
The next level of influence is the individual cognition of managers. Diffenbach (1983) states interpretation as one of the major deterrents to effective environmental analysis. He found that many managers had difficulty in “interpreting the results of environmental analysis into specific impacts on the company’s businesses and into specific responses to be made by the business.” Diffenbach (1983, pp 113). He attributed this to the “education” of the managers, where objective interpretation if data can be difficult due to ingrained attitudes and prejudices of managers. This was further developed in Dutton’s (1993) study of automatic strategic issue diagnosis, where it was suggested that managers involved in environmental analysis “interpret issues differently based on their level of experience with an issue type, the self-relevance of the issue, and their issue evaluation.”
Dutton (1993, pp 343). The degree of familiarity with an issue type tends to result in managers looking at the issue “in a particular way” and that “…familiarity with a particular domain of issues engages an automatic processing… [with] …little conscious thought of the issue.” Dutton (1983, pp 343). When an issue is relevant to the managers, they interpret the issue more automatically because it “affects them personally.” Dutton (1983, pp 344). Finally, the strength of the issue evaluation is linked to the experience of the managers. For example, environmental trends that imply a loss to the organisation may call up strong negative evaluations (Dutton, 1983).
As mentioned earlier, the factors in the 2 levels can also be interlinked: In the organisational context, the paradigm and “the way we do things around here” is “in some respects, the ‘formula for success’, which is taken for granted and likely to have grown up over the years.” Johnson and Scholes (1999, pp 77). This has implications on the interpretation ability of managers in environmental analysis. Dutton (1993) states that “Where performance record is strong…decision makers are likely to feel more confident in their views of the causes and solutions for issues, and consequently, to rely heavily on past issue interpretations.” Dutton (1993, pp 349).
While managers’ cognitive behaviour are apparent in all aspects of environmental analyses, that does not necessarily mean they should be reduced. Choo (1998) notes that it is precisely because of the many years of experience and learning that managers can develop intuition; and hone their unique skills in “making sense of ambiguous developments, detecting weak signals of change, catching the significance of subtly nuanced messages, drawing connections between disparate events” Choo (1998, pp 134). It would seem that to be truly effective, environmental analysis needs the marriage of formal, scientific techniques and procedures with the intangible forces of experience and intuition.
This essay has shown how organisational and individual level factors can influence the analysis process. From the assessment and evaluation done throughout this essay, it can be concluded that environmental analysis can never be considered objective or impartial. Although formalised techniques have been developed, environmental analysis cannot function without the “human” element of cognitive interpretation which is impossible to define in absolute terms. It seems therefore that environmental analysis would remain much more of an art than a science.