Understanding the External Environment

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Understanding the External Environment
By Fergus McDermott, MMII, MBA - Examiner in Professional 2 Stage Strategy & Leadership If you knew everything about tomorrow, what would you do differently today? Faith Popcorn

In this time of great uncertainty, many companies and their executives are wondering which changes will have the greatest impact on their businesses in the year/years ahead. What is certain is that the threats and opportunities facing any business, which fall out of change and uncertainty in the environment, can impact directly upon the profitability and even the very survival of those businesses. Some companies will have experienced such damage from the recession that they will be unable to recover as the economy revives. It is imperative to be alert to change, recognise it and deal fittingly and decisively with important issues identified. Perhaps never has this been more important! This paper considers the analysis and understanding of the external environment within the context of the strategic process. It is useful to consider the notion that the business environment conforms to an ecosystem, very similar to that of the natural world. Scientists better understand ecosystems in nature by looking at individual elements, how they move, and how each of the elements relates to one another. “As in nature, when one element of the ecosystem dynamically changes, the effect cascades right throughout the whole environment” 1. The same dynamics apply in the business world. Figure 1: The Strategic Process

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The notion of a business ecosystem steers us to look at the strategic process (Figure 1) as something that needs to be contemplated holistically, as a whole, rather than just the individual parts, separately. The strategic process includes the external and the internal environment which interact with each other in a relatively seamless way. “There is little point in building a strategy that focuses entirely on either an external or an internal perspective, as many of the key drivers will be bypassed, leading to ineffective strategies”2. Building a strategy that focuses insufficiently on each stage of the process, in its entirety, “will lead to incomplete solutions” (ibid). Senge, the guru of systems thinking describes this as a discipline for seeing wholes and a framework for seeing interrelationships rather than things, for seeing patterns of change rather than static snapshots. The world today has become more engulfed by uncertainty and because of this, more than ever, systems thinking is required3. Environmental analysis can be described as “the study of the organisational environment to pinpoint environmental factors that can significantly influence organisational operations.4" With this type of analysis it is possible to improve understanding of the makeup and extent of uncertainty in the environment, to figure out the opportunities available worth seizing and the threats that need to be dealt with. It provides executives with a high degree of sensitivity to signals from the environment, allowing businesses to react strategically ahead of time. It enables businesses to match their capabilities to the external environment through creating and implementing relevant strategy. It allows proactive management to establish the extent to which it can increase the control of the business over its environment. It also helps provide an understanding of the key dynamics at play both inside and outside the business. It increases the chances that the strategy developed will provide an apt response to the environment. In essence, it is essential that executives rigorously analyse their environment, identify, anticipate and if possible influence environmental change5. It is important to fully understand how the environment is structured to carry out such analysis. There are three clear levels: the macro-environment; the industry (or sector) environment; and the competitive/market environment. Phase one of...
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