Business environment is always in a dynamic state and several interrelated factors influence it. Understanding the changing business environment is not an easy task. Environmental monitoring and forecasting requires appropriate data base and good analytical skills. Business firms that are able to read early warning signals contained in environmental change and make appropriate adjustments in their policies and practices reduce risk and uncertainty. They can gain competitive advantage over the rivals. Failure to do can profitability, reduce market share and even lead to industrial sickness.
Environmental analysis is the process through which an organization monitors and comprehends various environmental forces so as to determine the opportunities and threats that lie ahead. This process is also known as ‘environmental appraisal’ or ‘environmental search or monitoring the environment. Second is environmental diagnosis or identifying opportunities and threats. Environmental search leads to the identification of various forces that may influence the enterprise. Environmental diagnosis, on the other hand, judges these forces for their positive and negative impact.
Environmental analysis in an exploratory process undertaken to ascertain what could happen in future. It is a holistic exercise in which total view of the environment is taken rather than viewing the environmental forces in a piecemeal manner. This is necessary because different elements of business environment are interrelated and interdependent. Environmental analysis has to be a continuous process so that the enterprise can pick up signals in time and is not caught unaware.