Role of Environmental Analysis in Strategy Formulation
A great deal must be learned about an organization so that strategy formulation decisions can be
based upon appropriate information. It almost goes without saying that strategists must understand
all there is to know about the internal operations of an organization before strategy can be
effectively formulated and implemented. The external influences acting on the firm also must be
analyzed, documented, and understood to mange and implement the strategies effectively.
The task of implementing a strategy can turns out to be more challenging as compared to
formulation of strategy (Hrebiniak, 2006). Successful implementation of formulated strategies is
the main assurance of a firm performing exemplary (Noble, 1999). Implementation of strategy
involves the process of translating strategies chosen by an organization into actions in the quest
towards achievement of organizational goals as well as objectives. It highlights ways in which an
organization goes about developing, utilizing and integrating the structure of the organization, the
company culture and also the control systems to follow strategic direction that leads to gaining a
competitive advantage thus resulting to performance that is superior. The business setting of firms
is characterized by a continuously dynamic and ever-changing environment. Alashloo, Castka and
Sharp (2005). Implementation of strategy is a process that actualizes plans and strategies in an
effort to reach desired goals. The strategic plan itself is a detailed document that outlines the
necessary or ideal steps and processes desirable to reach the set organization goals, and consists of
reports, feedback and progress to make certain the plan is on track (Loretta 2018).
Strategy Implementation
Implementation of strategy is the step in the process of strategic management which many
management scholars and practitioners regard as the activity which is most difficult, challenging
and time consuming (Barnat, 2012; Sage, 2015; Sial, Usman, Zufiqar, Satti & Khurheed,
2013).The first step being strategy formulation and control being the third step. Strategy entails
the outcome of choices senior managers make in regards to area of operation as well as ways and
methods that would ensure they win, so that the value of the organization is maximized in the long-
term. Assertions made by Beard & Dess (1981) presented strategy to be a document which clearly
articulates the direction to be pursued by a business as well as the steps to follow so as to ensure
the set goals are achieved. Implementation of strategy is considered to be a vital process that
ensures that during turbulent times, the organization survives and functions properly (Sial et al.,
2013), the step is also considered to be a crucial aspect and a principle for success in
organization(Noble,1999).
Organizations achieve superior performance and competitive advantage when robust and solid
strategies are implemented (Awino, 2013; Okwachi, Gakure & Ragui,2013).Evidence from both
practice as well as scholarly research indicate that the performance of organizations is greatly
impacted by how the implementation of strategy is done (Giles, 1991). During the formulation of
business strategy, executives pick one method out of the several to employ in analyzing an
organization’s market characteristics, available resources, existing challenges as well as
opportunities. Identification of the goals the firm intends to accomplish is the ultimate goal of
strategic analysis.
Methodologies employed to assess strategies can entail evaluation of the operating business
environment including internal as well as external, developing scenarios mimicking the
competitive environment, determination of the prevailing market forces and evaluating
competitors just to mention but a few(Beard &Dess, 1981).Arguments by Shrader, Taylor &
Dalton (1998), presented that formulating corporate policy and adopting strategic planning to be
means of facilitating improvements in regards to performance of organizations.
The argument articulated by Shrader et al., (1989) collectively represents the diverse modes
involved in strategic planning that organizations have implemented so as to achieve the goals both
in the long term as well as short. Taylor (1997) on the other hand echoed the sentiments of Shrader
et al., (1989) in conceptualizing strategic planning when he emphasized the existence the
evolutionary process of strategic planning that that was effected in numerous phases. Taylor (1997)
presents that the evolving process has progressed through the years starting with the shift from
planning in the long term to Strategic Planning in the 1960s, then the 1980s shifted to Strategic
Management which then proceeded to Strategic Leadership later in 1990s (p. 344). However the
basis of strategic planning which includes planning, organizing, and strategizing ought to be
related to various existing theoretical constructs that backs the strategy concept (Shrader et al.,
1998, Rudd, Greenly, Beatson & Lings, 2007).
External Environment
Organizations do not exist in a vacuum. Each organization operates in an environment that affects
everything. The organization’s external environment helps us to proactively take advantage of
opportunities and minimize on the threats.
In an organizational context, the external environment encompasses all existing units existing
outside the organization’s boundary, yet affects it survival and growth significantly. The following
sectors makeup the external environment; the macro- environment comprised of the Political, the
Ecological, the Economic, the Social, Technological and Legal (PESTEL) elements. The PESTEL
framework enables us to scrutinize how the external environment impacts the performance of
while implementing strategies. Included in the micro-environment is Suppliers, labor markets,
customers, creditors and also trade unions. The industry environment entails the threat of
substitutes, threat of new entrants, bargaining power of suppliers, bargaining power of customers
and also rivalry among firms (Porter, 1980).
The external environment of the firm consists of all external influences that impact a firm’s
decisions and performances (Grant, 2001). It can be described as the world around an organization.
It refers to forces or factors external to an organization that affects the organization’s operations.
Johnson, Scholes and Whittington (2008), argues that the environment is what gives organizations
their means of survival. The flow of inputs and outputs of an organization is governed by the nature
of components of its external environment such as the state of technology, government,
competitors, substitute products and customers. Organizations do not exist in a vacuum. They
operate as open systems that interact with their environment for inputs and outputs. Bateman and
Zeithaml, (1993), argued that, organizations operate and survive within an external environment
comprising competitors, the economy, suppliers, customers, technological requirements,
government and communities.
Contingency theory states that no one method can be credited as being the best in organizing a
firm or making decisions. Thompson (1994), points out that, the organizations must be flexible
enough to adapt and change as necessary in the face of external changes. Therefore managers and
organizations must adapt and respond to their situations. The assertions of Ansoff and McDonnell
(1990), point out that a major shift has been created in the economic environment due to greater
competition whereby hopes for organization to stay afloat are thwarted especially in the event
where they fail to handle issues using proper strategic responses. They argue that, a huge chunk of
managerial time in organizations is dedicated to dealing with uncertainties that have been
prompted by the environment. These uncertainties are the competitor moves, economic
fluctuations, availability of raw materials, constant changes in customer demands, technological
changes and government legislations.
The firm exists in an environment which is composed of the firm and the organizations that
compete directly with it (Bateman & Zeithaml, 1993). Forces outside the industry are significant
and usually affect all firms in the industry, the key is found in the differing abilities of the firm to
deal with them (Porter, 1980). Ansoff and McDonnell (1990), says that the changes that emanate
from the environment pose threats or opportunities to the firm such as; the firm’s technology
becoming obsolete, decrease of market share, operating cost increasing, an opportunity to get
major jump on competitors or ground floor entry into a new industry. He adds that, the pace with
which such threats or opportunities develop has been increasing and it may no longer be possible
to perceive and respond to them fast enough.
An organization’s environment consists of two parts: The industry within which it operates (for
multi-business firms, the industry is usually considered the activity’ in which the firm generates
the majority of its revenue), and other environmental dimensions–economic, political/legal, social
and technological. Very often financial analysis will bring to light several financial strengths and
weakness that are indicative of strategic or operating capabilities and problems within the various
strategy levels and within functional areas. Financial analysis is typically followed by internal
diagnosis of functional areas. This process identifies strengths and weaknesses within such areas
as marketing, personnel, research and development, and others.
Together these four analytical activities- environmental, industry, financial analysis and internal
diagnosis of functional areas–are undertaken to generate a data set consisting of strengths,
weaknesses, threats, and opportunities that comprehensively descries the internal and external
characteristics of the organization. This information is then used as input to the strategy
formulation process. It is factored with data about past strategies, mission, corporate culture, and
managers’ values, and so on to evaluate the success or failure of present strategies. As a result
present strategies can be modified, left as they are or replaced as necessary in a particular situation.
The key to effective strategic management is to make major managerial decisions that shape
actions by the firm that will correspond positively with the context within which those actions
ultimately take place. On the other hand, the action context is dictated to a great degree by
conditions external to the firm. These conditions constitute the firm’s operating “environment.”
To some extent the firm can shape the overall environment to its advantage. Henry Ford’s
introduction of mass production of automobiles stimulated the U.S. economy in a manner that
invigorated consumer markets of his products. Nonetheless, few firms enjoy a scale of impact that
allows major shaping of the overall climate in which they operate, particularly over the long run.
Instead well-managed business enterprises adapt to environmental change so that they can take
advantage of opportunities that arise and minimize the otherwise adverse impacts of environmental
threats. This involves assessment of present environmental circumstances (for reaction) and the
forecasting of future conditions (for proaction).
A data set has both present and future time frames as internal and external, positive and negative
factors are forecast into future periods. Environmental and industry analysis involves filling the
right-hand sectors of the data set with information pertinent to a particular firm. Analysis of the
internal operations of the organization results in a collection of strength and weaknesses that would
fill the left-hand cells of the data set model.
Environmental conditions affect the entire strategic management process. Management’s
perceptions of present and future operating environments and internal strengths and weaknesses
provide inputs to goal and actions plan choices. They can also affect the manner in which
implementation and internal circumstances will dictate the effectiveness of strategies as they are
implemented (including alternation in the environment itself).
Both environmental and industry analysis procedures consist of four interrelated processes:
1. Developing an assessment taxonomy to outline major environmental dimensions.
2. Defining environmental boundaries (the “relevancy envelope”)
3. Monitoring and forecasting change in key variables.
4. Assessing potential impacts on the firm (or industry) in terms of whether they are treats of
opportunities.
