Environmental Analysis and

Forecasting
 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 Analysis
The process of environmental analysis is divided
into 4 stage
1. Scanning the environment to detect warning
signals
2. Monitoring specific environmental threats
3. Forecasting the direction of future
environmental changes
4. 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 ) Approach

2. 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 forecast
2. Social Forecast
3. Political Forecast
4. 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 techniques
2. Trend extrapolation
3. 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 scenarios
1. Identify strategic environmental issues that
are likely to affect the industry/firm
2. Select the most important issues as focus for
scenario development
3. Prepare a preliminary description of these
issues and how they evolved
4. Draw out the implications of the issue for
organizational performance
5. Develop detailed descriptions of the future in
the form of scenarios
6. Discuss the scenarios with top level
management and refine them
7. Develop contingency plans for each scenario
 Benefits of Environmental Analysis
1. Makes one aware of the environment- organization
linkage
2. Helps identify future threats & opportunities
3. Provides picture of factors which influence the
business
4. Helps to understand the transformation of the
industry environment
5. 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 risks
8. Environmental monitoring helps suitable
modification of the strategies as and when
required
9. Environmental analysis keeps the managers
informed, alert and often dynamic
 Limitations of Environmental Forecasting
Environmental 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 in
1. The selection of the variables included in the
predictive model
2. Selection of the functional form for linking these
predictor variables to the variables being predicted
3. The estimation of correct values for the predictor
variables. Several techniques use opinions of people
and they may be affected by subjectivity.
THANK YOU