By Greg Curtiss
No successful company can survive and grow without a well researched and clearly articulated strategy. Yet even when a company has developed a solid strategy, they must regularly evaluate its effectiveness based on changes in the external environment. A helpful market evaluation tool that helps with this oversight is known as environmental scanning. Within this process, employees and executives gather, analyze and share information for tactical and/or strategic purposes.
What is Environmental Scanning?
Environmental scanning requires members of an organization to look externally and identify prominent lessons, trends, opportunities or threats that can adversely affect the company. Once identified, the company can develop new strategies that best correspond to these external market factors. Executives must be aware of issues that not only affect the company’s direct customers or suppliers, but also competitors, regulatory changes, the overall macroeconomic environment and the ever-changing political landscape. Because of the constant introduction of new technological innovations, the business environment is always changing. As a result, organizations need to understand the entire market landscape in order to develop optimal business strategies. Constant oversight through research and learning that is shared internally can help mitigate the risk that a business is left unaware of important changes in the marketplace.
Given the number of factors that a company must watch, it is of little wonder why so many are unable to employ sound business strategies. While most organizations focus on industry and market conditions, it seems that fewer give consideration to emerging technologies, new regulations, or social changes. For an organization to survive, grow and prosper, management must master the challenges of this profoundly changing environment. To achieve this goal, leaders need to develop and implement a systematic approach to environmental scanning. One approach is a PESTLE analysis, which includes an assessment of six separate environments (Political, Economic, Social, Technological, Legal and Environment). According to Eileen Abels, formerly an Associate Dean and Professor at Drexel University in Philadelphia, environmental scanning efforts can include:
- Gathering data deliberately through market research studies;
- Having informal conversations with other executives;
- Reading secondary sources such as web articles, newspapers, magazines and journal literature;
- Monitoring demographic data; and
- Benchmarking initiatives that compare one company’s or industry’s performance, finances, etc., to another company or industry.
While some companies have succeeded in anticipating movements in the macro environment and adapted accordingly, others have not.
Environmental Scanning Examples
As the world’s second largest food and beverage company, PepsiCo realized that the increased focus on health and wellness (both societal and political) meant that the company needed to invest more heavily in this area. CEO Indra Nooyi’s “long-term strategy is to make PepsiCo’s ‘nutrition business’ a much larger part of the company’s portfolio than it is today. She wants to increase what she calls its ‘good for you’ products – snacks and drinks made of grains, fruit, nuts, vegetables, and dairy – from the ten billion dollar business it is now into a thirty billion dollar business by 2020.” The company has moved to acquire brands in the functional food and beverage space (Naked) and increased investment in R&D to formulate healthier ingredients (salt and sugar alternatives) that can be applied to products within its lucrative soft drink and chips business.
While PepsiCo has adapted to the changing environment, other companies have not fared as well.
The bookstore chain Borders filed for Chapter 11 bankruptcy in 2011 and was forced to shutter dozens of stores across the country. According to Mark Evans, former Director of Merchandise Planning & Analysis at Borders, bankruptcy was the result of “a failure to properly invest in and develop an internal internet sales channel, too sizable an investment in its CD business, and an over-investment in book inventory.” At every turn, it seemed as though Borders was too slow to react. The internet has become an immensely popular sales channels for nearly any established business; the company chose to focus on CDs despite the emergence of digital downloads in the music space; and increased emphasis on physical books as trends pointed toward an increased demand for eBooks. Borders offers a cautionary example of what can happen when a company remains oblivious to changes in its external environment and the subsequent ramifications for the organization.
The Importance of Environmental Scanning
Quarterly environmental scans that take into account the multiple factors can help an organization stay abreast of the external landscape and adapt its strategy accordingly. These scans are just as important for small and medium-sized businesses as they are for multi-national corporations. Effective environmental scanning can help companies take advantage of opportunities before competitors, address threats before they become significant problems, and align the company’s strategy to meet changing demand in the marketplace. Small and medium businesses cannot afford to only focus on short-term profits. As PepsiCo’s Nooyi reminds us, “companies have to be on a glide path that allows us to perform at a reasonable level for a long time. The only way you do it is you look around the bend constantly and say ‘What’s coming?’ and then retool the company for the new reality.”