A firm operates in a dynamic environment, and it evaluates its internal and external environments searching for opportunities to leverage and threats to avoid. In this article, I want to highlight issues and tips useful for assessing an enterprise.
Analyzing the internal environment
Firms usually use the SWOT analysis to evaluate their internal situation, and it includes financial and non-financial performances. Analyzing financial performance comprises financial records, such as balance sheet, income statement, cash flow statement and investment decisions. While analysing the non-financial performance consists of sales and marketing, operation and human resources. The significance of evaluating the balance sheet is that it provides information about the liquidity and net worth of a firm, and the income statement shows the profitability of the business. While the cash flow analysis describes the cashflow surpluses and deficits over a particular term. Firms use ratios to evaluate financial performance, including liquidity, profitability, solvency and efficiency ratios. In investment appraisal, a firm uses formulas like the payback period, the average rate of return, internal rate of return and the net present value, to evaluate investment performances. To calculate these formulas, you need to have information about any investment costs and the projected cash flows of investments.
Non-financial activities include the marketing, operational and human achievements of any business. Firms usually assess their business performances according to set metrics or objectives and by collecting actual performance data and comparing them with established targets and benchmarks. The importance of such analysis is that it identifies the core competencies of a firm, level of productivity and efficiency, sales and growth and staff capabilities. Besides, it provides a reasonable judgement about the strengths and weaknesses that a firm is experiencing.
Analyzing the external environment
Firms usually use the PESTLE tool to evaluate the external situation. PESTLE stands for political, economics, social, technology, legal and environment. Such analysis provides vital information about opportunities and threats that may incur due to any reforms of external factors.
For the political and legal change, it includes studying any changes that have occurred or may occur to the political environment and legislation affecting business activities. Firms need to evaluate these changes and how they influence the performance of their business. For example, in the UK, studying the business-related acts and agreements, including anti-competitive agreements, merger control, fair trading act, competition act of 1998, enterprise act of 2002 and employment act of 2008.
For the economic changes, it involves studying any economic reforms and their influence on business performance. It includes GDP, taxation, exchange rates, inflation, fiscal and monetary policy and trade.
Social change involves studying social reforms and their influence on business performance. It includes urbanization, migration, consumer lifestyle, buying behaviour or the growth of the online business.
The environmental change involves studying ecological changes and their influence on business performance. It includes how a business deals with environmental changes and green issues which include protecting the environment and conserving natural resources. People are increasingly aware of these issues, and firms should avoid any harm to the environment.
When firms assess their internal and external environments, many opportunities and threats are spotted out. Besides, any market is dynamic, and firms pay special attention to any market changes to protect their market shares. Such changes include market mix, competition, market growth or contraction, product substitution, new entrants and more. Firms run such situational analysis frequently and benefit from the outcomes to pursue effective plans. For example, a firm may invest in specific market due to its success or invest in developing new products, or instead, a firm may alter its market positioning and mix to increase market share and sales. Firms take these decisions based on collected information and solid pieces of evidence, which can be obtained by assessing enterprise performance and the external environment. In conclusion, evaluating the environment always emerges opportunities and threats, and firms are accordingly making decisions to protect and grow their businesses.
This article is extracted from my new book- Mastering Enterprise Skills for Potential Entrepreneurs, which can be found on www.amazon.co.uk. If you want to receive more information about the book and our activities, you can register in our newsletter by using this link.
Prepared by Munther Al Dawood
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