Environmental analysis will help the firm to understand what is happening both inside and outside the organization and to increase the probability that the organisational strategies developed will appropriately reflect the organizational environment.
Environmental scanning is necessary because there are rapid changes taking place in the environment that have significant impact on business activities. Analysis of business environment helps to identify strength, weakness, opportunities and threats. SWOT analysis is necessary for the survival and growth of every business enterprise.
The following are the the importance of environmental scanning:
1. Identification of strength:
Strength of the business firm means capacity of the firm to gain advantage over its competitors. Analysis of internal business environment helps to identify strength of the firm. After identifying the strength, the firm must try to consolidate or maximise its strength by further improvement in its existing plans, policies and resources.
2. Identification of weakness:
Weakness of the firm means limitations of the firm. Monitoring internal environment helps to identify not only the strength but also the weakness of the firm. A firm may be strong in certain areas but may be weak in some other areas. For further growth and expansion, the weakness should be identified so as to correct them as soon as possible.
3. Identification of opportunities:
Environmental analyses helps to identify the opportunities in the market. The firm should make every possible effort to grab the opportunities as and when they come.
4. Identification of threat:
Business is subject to threat from competitors and various factors. Environmental analyses help them to identify threat from the external environment. Early identification of threat is always beneficial as it helps to diffuse off some threat.
5. Optimum use of resources:
Proper environmental assessment helps to make optimum utilisation of scare human, natural and capital resources. Systematic analyses of business environment helps the firm to reduce wastage and make optimum use of available resources, without understanding the internal and external environment resources cannot be used in an effective manner.
6. Survival and growth:
Systematic analyses of business environment help the firm to maximise their strength, minimise the weakness, grab the opportunities and diffuse threats. This enables the firm to survive and grow in the competitive business world.
7. To plan long-term business strategy:
A business organisation has short term and long-term objectives. Proper analyses of environmental factors help the business firm to frame plans and policies that could help in easy accomplishment of those organisational objectives. Without undertaking environmental scanning, the firm cannot develop a strategy for business success.
8. Environmental scanning aids decision-making:
Decision-making is a process of selecting the best alternative from among various available alternatives. An environmental analysis is an extremely important tool for understanding macro and micro factors that influence decision-making across various business segments/divisions at all time. Success of the firm depends upon the precise decision-making ability based on the knowledge of these factors. Study of environmental analyses therefore enables the firm to select the best option in certain situations to achieve sustainable growth.