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Environmental Analysis

February 20, 2012 | Comments: 0 | Views: 162

Before you start any business, you just don't look at your capabilities and your resources, you have to analyze the environment in which you are going to start your business. Environment is something in which organization exist and is influenced by the changes therein. If you do not analyze your environment, you are going to kill your precious resources, efforts and your motivational level. If you are innovative in your business thoughts, you have to look for the right environment where your innovative product or services would be valued.

But the question arises how to analyze the environment. Fortunately we have two main important models which help a lot in environmental analysis. One is the Five Forces Model and the other is PEST model. We will look at both of them one by one.

Porter's Five Forces Model

Porter presented the Five Forces Model. According to him, environment in which company wants to operate should consider following five factors:

1. Rivalry among existing firms - This will enable the company to evaluate is there any niche of the market where it can compete better than other companies,

2. Bargaining power of buyer - If this is strong, then company has to offer most cost effective or differentiated product to buyers,

3. Bargaining power of supplier, if there are few suppliers, they could sell the raw materials to the company at a high price. This will decrease company profit,

4. Threat of substitute product - cheaper substitute products could reduce demand of the company's product,

5. Threat of new entrants - if barrier to entry into the market are low, more and more new rivals into the market and market will become saturated soon. This will reduce the profits of the company.

PEST Model

PEST is an acronym of:

P: Political ( The government actions that affects the economy like environmental laws, taxation policies )

E: Economical ( Inflation rates, interest rates, foreign exchange rates )

S: Social ( The factors such as average income level of the population, education level of the population )

T: Technological ( The condition of technological factors like internet infrastructure, Research and development )

This model has been updated by adding Ethics and Demographic factors to STEEPLE and STEEPLED.

If you are aware about SWOT ( Strength, Weaknesses, Opportunity, Threats ) analysis, PEST falls in Opportunities & Threats section.

My advice is that please don't analyze your business environment using a single model, instead analyze using two or more models like Five Forces and PEST models.

Salman loves to read and write human resource, business and Business Finance Decisions related articles. He runs in partnership a Jobs in Pakistan blog.

Source: EzineArticles
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