Business firms wishing to adopt an open system of management approach, find it difficult to define the business environment. The management has to limit its consideration of the environment, only to those aspects of the outside world which are of major importance to the success of an organization. The concept of business environment is too broad and it would be hopelessly confusing to consider each and every aspect in it. Customers, competitors, government units, suppliers, financial institutions and labor pool are part and parcel of the external environment, and available resources, be it physical or human, behavior, synergy, strengths and weaknesses and distinctive competence determine the nature of the internal environment of a business firm.
Further, you can divide the business environment into two categories, the direct-action environment, that has an immediate effect and influence on the organisation’s decisions, say, government regulations, labor unions, suppliers, customers and competitors. The other category, namely, the indirect environment does not have a direct effect, but nevertheless influence the operations of a firm. These would include factors such as, technological, economical, socio-cultural and political, to name a few.
Each and every organization is bound to form its own strategies to define the scope or network of operations, in a business environment. What is a general environmental factor, may be specific for another. Precisely speaking, a firm has to consider both the macro and micro environments, that affect its life and development. Corporate strategists must be aware of the fundamental features of the current environment to plan accordingly.
SWOT analysis or environmental scanning, is the basic monitoring system, that helps a firm to compile, process and forecast the necessary information gathered from the external environment. This is also helpful in determining the opportunities available for the success of the firm in the market, and gives a clear picture about the threats to be handled. As the business environment is highly dynamic and volatile, it is inevitable for a business organization to visualize and perceive the opportunities and constraints in store for it.
While swot analysis is a tool that helps in scanning the external environment, using the value chain in internal analysis, proves to be an useful approach to determine the organisation’s strength and weaknesses. It is equally important, that a firm must be competent both externally and internally. Adoption of a disintegrated view of the firm helps in diagnosing a company’s key strengths and weaknesses. The value chain is a framework that disintegrates a firm into its strategically relevant activities, to understand the behavior of the company’s cost and potential sources of differentiation.
A firm gains competitive advantage by performing these key internal factors or strategically important activities, in an efficient manner than its competitors. Identifying the primary activities of a firm such as, inbound logistics, operations, outbound logistics, marketing and sales, followed by service denote the distinct activities that are performed to design, produce, market, deliver and support its product. The support activities such as procurement, technology development, human resource management and the infrastructure of the firm should not be overlooked, since they are the ones that are essential throughout the entire chain of operations.
It is therefore an indispensable fact that, the management should attempt to predict changes in different environmental forces and discern the opportunities and threats emanating from the environment.