Environmental Scanning

An organization’s environment is considered the physical and social aspects that play a role in the decision-making process of an organization’s management, or in other words, it is the setting in which an organization operates. Such political, environmental, governmental, social, legal, technological, and economic factors all contribute to an organization’s day-to-day business operations, its strategy, and its performance.

Every organization depends on an outside environment to stay in business (e.g. customers purchasing products, suppliers delivering raw materials, banks for financing, etc.), but it is up to the organization as to how to assess this relationship, establish itself, and adjust its structure, strategy, and systems to fit that environment and thus perform effectively and successfully. Many small businesses are restricted in their financial and human resources; consequently, it is even more important for small businesses to accurately assess their environment and plan accordingly.

Environmental scanning is the process of systematically surveying the firm’s business environment and interpreting such data in order to identify potential threats or opportunities. External and internal environmental scanning is required prior to establishing or re-evaluating the firm’s strategy. More importantly, it is an ongoing process and in order to detect changes in their environment, every firm must continue to evaluate vast amount of complex information on a regular basis. That information is used to predict potential threats, possible opportunities, and the overall characteristics of the firm’s environment.

In a fast, ever-changing environment one can no longer predict the future by extrapolating the past. Today’s changes are more complex, novel, and less predictable. What has brought you success in the past, may not bring you the same results today. Environmental scanning will help you analyze the current situation of your business environment and reveal trends and impending impactful events. In order to properly evaluate a vast amount of information, a small business owner/executive must be aware of how he processes information. Our brains can only consciously absorb about 2,000 bits of the 4 billion bits of information we are continuously bombarded with and, to do so, we delete, distort, and generalize information based on our model of the world (i.e. our beliefs and values based on our background, education, culture, etc.). Every person has their own internal representation of the information they process which does not necessarily reflect the event itself. For example: we may not see things if they do not match our beliefs/experience; we characterize information based on past experience; we are drawn to the familiar; we project our assumptions onto situations; we favor the simple over the complex; or we associate a different meaning to a situation. All that can impact how you analyze your business environment and may hinder you from seeing what is really going on.

Since our brains filter information, knowing yourself and how you perceive your environment, will help you recognize when you filter information. You can consciously eliminate certain filters that no longer serve you. This allows you to look at a situation from different angles. Allowing different perspectives (your own, your employees, etc.) will help you recognize changes and possible threats when you scan your business environment and; consequently, you can make wise strategic decisions.

Environmental Turbulence

Organizations faced different challenges over the years. During the mass production era with the Industrial Revolution, management was mainly focused on production optimization with little to no product differentiation. One of the most famous quotes from that era is Henry Ford’s response to suggestions of product differentiation to “give the Model T in any color as long as it was black”. This clearly illustrates organizations’ focus during that time. The mass marketing era followed and organizations’ focus shifted from production to marketing with a keen eye on how to best market their products to their customers. Later, called the postindustrial era, firms were faced with more unexpected and novel changes that lead to complex problems. Firms could no longer only focus on their internal challenges but had to also address external issues such as retaining customers, managing union demands, and stockholders expectations, among other problems.

People had their basic needs of food, shelter, and transportation met. Over the years, their needs evolved and desires for novel products arose. Consequently, organizations had to expand their assortment of products and services. Management’s attention was no longer solely focused on the organization, but had to also incorporate customer desires and demands, and eventually, address the firm’s social and environmental responsibility. Additionally, the competition increased due to technological advances and internationalization of the business and the level of turbulence in a firm’s environment increased dramatically especially towards the end of the 20th century.

The setting within which a firm operates (i.e. political, environmental, governmental, social, legal, technological, and economic factors) is considered its environment and environmental turbulence is the accelerated rate and complexity of change and the unpredictable, uncertain challenges an organization faces. Since every business depends on its environment for its survival (i.e. customers purchasing products, suppliers delivering raw materials, banks for financing, etc.), assessing the firm’s environmental turbulence and adjusting its structure, strategy, and system accordingly is essential for effective and successful performance. Large corporations can use their resources to better manage a turbulent environment or simply acquire their competition to make their problem go away. Small businesses do not have that luxury. A small business differentiates itself from the large corporations by its size (up to 500 employees according to the U.S. Small Business Administration), revenues, less hierarchy, centralized decision-making, and with limited financial and human resources. Therefore, it is even more important for small businesses to accurately assess their environment and plan accordingly. Past successes can no longer be extrapolated into the future due to the speed of change and unknown unknowns a firm faces in a highly turbulent environment. The higher the environmental turbulence, the more difficult to manage.

With the inauguration of a new president less than 24 hours away, one can sense the uncertainty in the air. Change is upon us and we all have to adapt to a new president with new ideas. How much that will affect the U.S. economy is yet to be determined. Nevertheless, as a small business owner/executive you must stay agile and flexible enough to manage an uncertain and unpredictable future. Despite being confronted with a vast amount of complex information, you must be able to process all that information and be able to properly perceive the firm’s environment and make smart decisions. Turbulence is the name of the game and it is here to stay. Seeing the world through rose-colored glasses might help, but it is not the solution. No matter the situation, it comes down to how you will direct your company into the future. Do you want to ride out the storm and drift around wherever the wind may take you? Or are you committed to taking the rudder into your own hands, determine the level of turbulence in your organization’s environment, and adjust the sails accordingly to create your own future?