You cannot just launch a product without first knowing anything about the world at large. In fact, you need quite a bit of information before you can even begin to roll out your product idea: information about competitors’ products and strategies, the market and its behaviors, government regulations regarding your proposed product; alternative options, economic trends, distributors and their behaviors, and much, much more.

In short, the first thing that you must do in marketing is your homework.

The problem, however, is that the world is pretty complex—with so many things to scan and monitor. It does take time and effort to analyze each and every element in it. How would you know which aspects of the environment are worthy of your attention? This lesson will be all about how you can simplify the process of environmental scanning by focusing on the most essential areas for assessment.

We first begin with a breakdown of the primary elements that make up our business environment:

The Internal Environment

The internal environment refers to the business itself: what are you selling, how your organization is set up, what your organization’s strengths and weaknesses are, what your resources happen to be, what your company’s core values and mission are, and essentially anything about your company that matters.

Why would you need to know all of this? It is because you would want to determine what resources you will have at your disposal in order to properly select a fitting strategy for selling your products. For instance, if an assessment of your company’s internal environment yields the realization that it has poor working relations with retail distributors but happens to have a strong workforce, then you may decide to simply sell your products directly to customers rather than going through retail establishments.

Here is a checklist of things that you may want to assess in your company’s internal environment:

• Company cash flow. How much money does it have and how much does it expect to flow in over time?
• Organizational structure. What personnel are available and who is accountable for marketing initiatives?
• Assets and other resources. What property and equipment would it have access to?
• Strategic alliance. What organizations (or even influential individuals) do the business currently have good working relations with?
• Products and services. What are already being offered, if any?

The Competitive Environment

The competitive environment, on the other hand, refers to the immediate industry in which your company is doing business. If you are running a bank, for instance, then your competitive environment may consists of all the competing bank branches in your territory and possibly even substitutes such as pawnshops and even sketchy loan sharks who lend money to small entrepreneurs in your area.

Here is a checklist of what to look out for in your competitive environment:

• Competitors. Who they are and what their respective strengths and weaknesses may be.
• Competing products and services. What these are, what their target markets are, and what their respective strengths and weaknesses are.
• Substitutes. What alternative products or services your markets might be considering rather than your core product.

It should be noted that while competitors tend to get the bulk of our attention, history shows that it is often the substitutes that end up doing the most damage in an industry. Here are some examples:

• It was not competition that decimated the newspaper publishing business but the Internet which became a preferred source for getting information.
• It was not competition that brought down the demand for beer but rather the mass market’s shift toward cheaper hard liquors such as gin and whisky.
• The local music publishing industry was ravaged by the shift toward digital formats such as MP3s and followed by music streaming services.

Michael Porter’s classic 5 Forces Model (Porter, 1979) is a popularly used framework for understanding the competitive structure of an industry.

The above model implies that it is not just rivalry from competitors that threaten a firm’s existence, but even its suppliers, buyers, new players, and product substitutes. In fact, Porter notes that the buyers and the suppliers can be potential entrants themselves.

The risk faced by a firm due to its competitors is the most obvious form of operational risk. Competitors can spend sums of money to steal market share from the firm or even alter the market’s perceptions about the firm’s products.

A firm also faces risks from new entrants possibly joining the industry, especially if the industry offers attractive growth prospects.

A firm also faces risks due to substitutes that threaten to steal market share from its industry.

The firm’s own suppliers can pose a threat as well if the firm is too dependent on these suppliers and the suppliers know it. The suppliers can decide to increase their prices or to even become potential entrants to the industry as well.

If the firm is too dependent on its buyers, the buyers may sense this. They might band together and threaten the firm through additional demands. Buyers may also become potential entrants into the industry if they feel that entering the industry is a simple matter after all.

The internal and the competitive environments form what is often referred to as the micro environment of a business. But looming even larger would be the macro environment, which is composed of environmental variables that are typically beyond the control of any organization.

There are far too many elements in the macro environment. That is why there are mnemonics which can help break down this complexity into more digestible parts. One of the most popular mnemonics is PEST, which stands for:

• Political. What are the different pieces of legislation, including tax rates, that affect the business? How likely is it for the government to intervene in the industry? How stable is the working environment in terms of political stability and overall predictability?
• Economic. Is the market growing or shrinking? What is the savings rate of the population, and how is the employment situation? Is the consumer spending increasing or decreasing? Do people feel that their quality of life is improving?’How volatile is the exchange rate, the interest rate, and other essential indicators?
• Social. Is the population growing or shrinking? Is it aging or the broad demographic is getting younger? What are their interests? What are the lifestyles that they lead? How do the markets behave, especially in terms of assessing and consuming your industry’s products?
• Technological. What are the new technologies that are changing • the business landscape? What new ideas are gaining momentum? What new products and practices could threaten to make your current business obsolete?

Going through the different elements above is what is called a PEST analysis. It manages to cover quite- a lot of what is essential to monitor in the macro environment. In the end, environmental scanning is all about identifying important trends in the environment. Why trends? It is because trends become the reality of the near future. Since it also takes time to mobilize a new product concept, you would want your product concept to be viable in the near future where it belongs.

Sample trends:

• The continuing growth of smartphone penetration.
• The continuing growth in credit card usage.
• The movement toward higher-value information-oriented jobs.
• The growing presence of multinational franchises even in non-food industries.

When the do-it-yourself home improvement craze hits the United States, Armstrong World Industries, a manufacturer of tiles, decided to take advantage of the trend. From simply manufacturing tiles and shipping these to hardware shops and installers, it created a more retail-friendly product in the form of boxed tiles that came with friendly instructions and all-in installation kits. (“Armstrong reinvents company, changes distribution scheme” 1994)

Of course, certain trends may be irrelevant to certain industries. For instance, smartphone ownership may not mean much to tree farmers, but it will be a pretty significant indicator for the banking industry that is concerned with ramping up mobile access to its services.

Knowledge of relevant trends can lead to insights into possible opportunities and threats to a firm’s operations. What are the trends that your business can take advantage of? What are the trends that can eventually threaten its operations?

The external environment, however, includes the matter of cultural and socio-cultural factors that play a key part in determining the tastes and preferences of consumers and to which companies need to cater to.

Why has not mouthwash taken off in India? Mouthwash manufacturers, including big brands such as Listerine, have tried to penetrate the Indian market but to little avail. It turns out that Indians perceive mouthwash to be a therapeutic product rather than a preventive one—if you used a mouthwash, then maybe it was because you had some oral health problem. This perception was so pervasive that most sales for mouthwash were via doctors’ prescriptions while over-the-counter sales languished. To make matters worse, gel toothpastes and mint candies already owned the “fresh breath” benefit category, thereby making mouthwash further irrelevant to the average Indian consumer.

This is an example of how a macro-environmental factor, like perceptions about mouthwash and oral care in general, can severely constrain the workings of an entire industry.