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Chapter 2

Macro-environment analysis

Key terms Learning outcomes

forecasting 50 After reading this chapter, you should be able to:
key drivers for change 49 • Analyse the broad macro-environment of organisations in
macro-environment 35 terms of political, economic, social, technological, ecological
nonmarket environment 37 and legal factors (PESTEL).

organisational field 41 • Evaluate different approaches to environmental forecasting.

PESTEL analysis 36 • Construct alternative scenarios in order to address possible

environmental changes.
scenarios 52
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

Macro-
environment

Industry I Stakeholders
Strategic
position

Resources Culture

Whittington, Richard, et al. Exploring Strategy, Text and Cases, Pearson Higher Education & Professional Group, 2019. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/corvinus/detail.action?docID=5987036.
Created from corvinus on 2024-02-27 11:41:19.
2.1 Introduction

2.1 Introduction
Organisations depend upon their environments for their survival. Here environments are being
understood in their widest sense – to include political, economic, social, technological and
legal factors as well as ecological ones. These environmental factors supply both opportunities
and threats. Political factors helped knock 20 per cent off Facebook’s share price when it was
revealed in 2018 that it had allowed Russian meddling in the American presidential elections
two years earlier. The clustering of millennials as a social group in high-rent cities has prompted
the emergence of new co-living businesses, such as Roomi and Bedly, offering cheap and flex-
ible accommodation. Drone technologies are creating opportunities ranging from audit for
accounting firms such as Deloitte and Ernst & Young to wildlife protection in Africa. It is clearly
important that entrepreneurs and managers analyse their environments as carefully as they
can in order to anticipate and – if possible – take advantage of such environmental changes.
Environments can be considered in terms of a series of ‘layers’, as summarised in
Figure 2.1. This chapter focuses on organisations’ macro-environments, the outermost layer.
The macro-environment consists of broad environmental factors that impact to a greater
or lesser extent many organisations, industries and sectors. For example, the effects of
macro-environmental factors such as the Internet, economic growth rates, climate change
and aging populations go far beyond one industry or sector, impacting a wide-range of
activities from tourism to agriculture. The industry, or sector, makes up the next layer within
this broad macro-environment. This layer consists of organisations producing the same sorts
of products or services, for example the automobile industry or the healthcare sector. The
third layer is that of specific competitors and markets immediately surrounding organisa-
tions. For a car company like Nissan, this layer would include competitors such as Ford and
Volkswagen; for a hospital, competitors would include other hospitals and markets would
be types of patients. Whereas this chapter focuses on the macro-environment, Chapter 3 will
analyse industries and sectors and competitors and markets. Chapters 4 and 5 examine the
individual organisations at the heart of Figure 2.1.

Figure 2.1 Layers of the business environment

cro-environme
The ma nt
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Industry (or sector)

Competitors

The
organisation

Markets

Figure 2.2 Analysing the macro-environment

•
•
PESTEL analysis •
Prediction-emphasis
•
•

Learning-emphasis

Macro-environmental changes can often seem too big, complex or unpredictable for
managers to grasp. The result is that changes can creep up on them until it is too late to
avoid threats or take advantage of opportunities. Thus many traditional retailers, banks and
newspapers were slow to seize the opportunities of the Internet; many oil and steel producers
underestimated the potential impact of China’s slowing economic growth. While managers
are always liable to some biases and inertia (see Chapter 5), this chapter introduces a number
of analytical tools and concepts that can help keep organisations alert to macro-environmental
change. The point is to minimize threats and to seize opportunities. The chapter is organised
in three main sections:

• PESTEL factors examine macro-environmental factors according to six key types: political,
economic, social, technological, ecological and legal. These factors include both market
and nonmarket aspects.
• Forecasting, which aims to predict, with varying degrees of precision or certainty.
Macro-environmental forecasting draws on PESTEL analysis and often makes use of three
conceptual tools: megatrends, inflexion points and weak signals.
• Scenario analysis – a technique that develops plausible alternative views of how the
environment might develop in the future. Scenario analysis differs from forecasting
because it avoids predictions about the future; it is more about learning different possi-
bilities for environmental change.
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

The structure of this chapter is summarised in Figure 2.2.

2.2 PESTEL analysis

This section introduces a key tool for analysing the broad macro-environment of an organ-
isation: PESTEL analysis. Providing a wide overview, PESTEL is likely to feed into both envi-
ronmental forecasts and scenario analyses.
The PESTEL framework is one of several frameworks (including the similar ‘PEST’ and
‘STEEPLE’ frameworks) which categorise environmental factors into key types.1 PESTEL
analysis highlights six environmental factors in particular: political, economic, social,
technological, ecological and legal. This list underlines that the environment includes not
only the economics of markets, but also nonmarket factors. Organisations need to consider
both market and nonmarket aspects of strategy:2

• The market environment consists mainly of suppliers, customers and competitors. These
are environmental participants with whom interactions are primarily economic. Here

companies typically compete for resources, revenues and profits. Pricing and innova-
tion are often key strategies here. The market environment is discussed extensively
in Chapter 3, but issues such as economic cycle are also considered in this chapter
(Section 2.2.2).
• the nonmarket environment relates primarily to social, political, legal, and ecological
factors, but can also be impacted by economic factors. The nonmarket environment
typically involves interactions with non-governmental organisations (NGOs), polit-
icians, government departments, regulators, political activists, campaign groups
and the media. In the nonmarket environment, organisations need to build reputation,
connections, influence and legitimacy. Lobbying, public relations, networking and collab-
oration are key nonmarket strategies.

Nonmarket factors are obviously important for government and similar organisations
reliant on grants or subsidies, for example schools, hospitals and charities. However,
nonmarket factors can be very important for business organisations too. For example,
nonmarket factors are particularly important where the government or regulators are
powerful (for instance in the defence and healthcare sectors); where consumer sensitivities
are high (for instance in the food business); or in societies where political, business and
media elites are closely interconnected (typically smaller countries, or countries where the
state is powerful).
The following sections consider each of the PESTEL elements in turn, providing key analyt-
ical concepts and frameworks for each. Meanwhile, Illustration 2.1 on the so-called FANGs
provides examples of various PESTEL factors, showing how in practice they often interrelate.

2.2.1 Politics
The political element of PESTEL highlights the role of the state and other political factors in
the macro-environment. There are two important steps in political analysis: first, identifying
the importance of political factors; second, carrying out political risk analysis.
Figure 2.3 is a matrix that distinguishes two variables helpful to identifying the importance
of political factors:

• The role of the state: in many countries and sectors the state is often important as
a direct economic actor, for instance as a customer, supplier, owner or regulator of
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

businesses.
• Exposure to civil society organisations: civil society comprises a whole range of organisa-
tions that are liable to raise political issues, including political lobbyists, campaign groups,
social media or traditional media.

To take an example from Figure 2.3, the defence industry faces a highly politicised
environment. Defence companies typically have high direct state involvement: national
armed services are of course key customers, while states are often owners of their national
defence companies. At the same time, defence companies are often highly exposed to
groups from civil society, for instance campaigners against the international arms trade.
By contrast, food companies face less direct state involvement: most food companies are
privately owned and operate in private-sector markets. However, the political environ-
ment is still important for food companies, as they are typically exposed to pressures from
civil society in the form of fair trade campaigners, labour rights organisations and health
lobbying groups. Pressures from civil society organisations can increase state involvement
by demanding additional regulation, for instance buyer health standards for food products.
Canals are often state-owned but nowadays are not highly exposed to political pressures
from civil society organisations. Industries can rapidly change positions: thus revelations

Illustration 2.1 A PESTEL for the FANGs

In 2018, US technology giants were facing a toughening macro-environment.

Opportunities Threats
High High
Governmental partnerships P Political hostility

New growth regions; diversification E Developed world saturation

S Digital detox

New technologies T Substitutes

E Energy fears

L Online taxation and data constraints

During mid-2018, the so-called FANG+ stock market index usage in Europe, is diversifying into new activities such as
(including Facebook, Amazon, Netflix and Alphabet/ digital dating.
Google) fell by more than 10 per cent. A PESTEL analysis • Social: growing awareness of internet addiction has
helps to explain why. increased consumer willingness to undertake digital
PESTEL analyses can be done using published sources detoxes. In 2018, Google launched a ‘Digital Wellbeing’
(e.g. company annual reports, media articles and consult- app, with user-friendly dashboards giving a detailed view
ants’ reports) or more extensively by direct discussion with on how users spend their time.
managers, customers, suppliers, consultants, academics, • Technological: autonomous planes and balloons are being
government officials and financial analysts. It is important developed by Facebook and Alphabet to deliver internet
not to rely just on an organisation’s managers, who may access to large populations in the developing world. New
have limited views. A PESTEL analysis of the four main FANG technologies may provide substitutes, as Telegram and Sig-
companies based on published sources shows a growing nal provide encrypted alternatives to Facebook Messenger.
preponderance of macro-environmental threats over • Ecological: the FANGs are big energy consumers, with
opportunities (specific industry analysis will be dealt with in cloud computing accounting for 2 per cent of energy con-
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

Chapter 3). In the figure above, the scale of Opportunities sumption in the USA, and Google using as much power as
and Threats on each of the PESTEL dimensions is indicated San Francisco.
by the relative extent of the bars. Just taking some issues for • Legal: Amazon alone accounts for nearly half of US retail
illustration, the figure shows more and longer bars on the spending, and 80 million Americans are part of its Prime
Threats side than the Opportunities side. Thus: membership programme. Both in the US and Europe,
there is an increasing threat of legal regulation to curb the
• Political: FANG companies face increasing political hostil-
market power of Amazon and other FANG companies.
ity. India has banned Facebook’s Free Basics, a free but re-
stricted internet service. The United Kingdom is planning
specific taxes for online retailers such as Amazon.
• Economic: FANG companies are now facing market sat-
Questions
uration in developed markets. In 2018, Netflix missed 1 Taking one of the FANG companies, what do you think
its subscriber growth targets by one million, and in the is its greatest macro-environmental threat, and what is
USA, the costs required to acquire each new subscriber its greatest macro-environmental opportunity?
have doubled from $60 to $120 (€105; £90.00). Netflix 2 Have the opportunities and threats changed since
is spending big now on producing new content specific- 2018? How would you update this analysis?
ally for international markets. Facebook, facing declining

Figure 2.3 The political environment

Direct state involvement

High

e.g. Defence industry e.g. Canal industry

Political exposure

High Low

e.g. Food industry e.g. Hotel industry

Low

about Internet monitoring by national security agencies has placed companies such as
Amazon and Facebook much more under scrutiny by governments, civil liberties groups
and consumers (see Illustration 2.1).
Organisations that face politicised environments need to carry out political risk analysis,
the analysis of threats and opportunities arising from potential political change. There are
two key dimensions to political risk analysis:3

• the macro–micro dimension. The macro dimension of political risk refers to the risks
associated with whole countries: for instance Nigeria, Russia or Venezuela. Many
specialist organisations publish relative rankings of countries’ macro political risks.
Western European countries are typically ranked low in terms of macro political risk,
as even changes of government following elections do not bring fundamental change.
On the other hand, some Middle Eastern countries rank high in terms of macro polit-
ical risk, because changes of government there can be sudden and radical.4 However,
there is also an important micro dimension of political risk, relating to the specific risk
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

of particular organisations or sectors within a country. It is important to distinguish

between macro political risk and specific micro-level risk. China is typically ranked
medium political risk on the macro dimension, but for some Japanese companies oper-
ating there the micro dimension is higher and variable. For many Chinese consumers,
resentment of Japan is strong and Japanese car companies are from time to time
targeted by nationalist boycotts.
• the internal–external dimension. The internal dimension of political risk relates to factors
originating within the countries, for example government change or pressure from local
campaigning groups. These can be relatively easy to monitor, requiring attention to elec-
tion dates and opinion polls for example. However, there are also external political risks,
the knock-on effects of events occurring outside particular countries’ national boundaries.
For example, a fall in oil prices driven by the internal politics of Saudi Arabia is liable to
have negative economic and political impacts on other big oil-producing countries such
as Russia and Venezuela. On the other hand, oil price falls can produce political benefits in
energy importing countries such as India or Japan. External political risk analysis involves
careful analysis of economic, political and other linkages between countries around
the world.

2.2.2 Economics
The macro-environment is also influenced by macro-economic factors such as currency exchange
rates, interest rates and fluctuating economic growth rates around the world. It is important for
an organisation to understand how its markets are affected by the prosperity of the economy
as a whole. Managers should have a view on how changing exchange rates may affect viability
in export markets and vulnerability to imports. They should have an eye to changing interest
rates over time, especially if they have to borrow to fund strategic investments. They should
understand how economic growth rates rise or fall over time. There are many public sources
of economic forecasts that can help in predicting the movement of key economic indicators,
though these are often prone to error because of unexpected economic shocks.5
A key concept for analysing macro-economic trends is the economic cycle. Despite the poss-
ibility of unexpected shocks, economic growth rates have an underlying tendency to rise and
fall in cycles: several years of good growth are likely to be followed by a couple of years or so
of lower or even negative growth. These cycles link to other important economic variables. For
example, rises in interest rates are likely to decrease economic growth rates as consumers cut
back on credit cards and businesses borrow less for investment. Awareness of cycles reinforces
an important pattern in the macro-environment: good economic times do not last forever, while
bad economic times lead eventually to recovery. The key is to identify cyclical turning points.
Managers making long-term strategic decisions should assess where they stand in the
overall economic cycle. For example, after several years of rapid growth a company might
be tempted to launch major investments in new capacity: in Figure 2.4, this would be year
202x. However, any new facilities might not be needed in the subsequent slowdown, leaving
the company with expensive over-capacity which still needs to be paid for at a time of low
growth. On the other hand, two or three years of slowing growth might make a company
over-cautious about new investment. But after the cyclical turning point of year 202y in Figure 2.4,
the company might face under-capacity and be unable to match recovering demand. Rivals who
had invested in extra capacity (or new products) would be able to seize the advantage, leaving
the over-cautious company struggling to catch up. In assessing the economic environment,
therefore, it is crucial not to assume that current economic growth rates will continue. Before
making any strategic investment, you should ask where you are in the current economic cycle.
Some industries are particularly vulnerable to economic cycles, for example:

• Discretionary spend industries: where purchasers can easily put off their spending for a
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

year or so, there tend to be strong cyclical effects. Thus demand for furniture, restaurants
and cars tends be highly cyclical because people can easily delay or curtail spending on

Figure 2.4 Economic cycles and strategic investments

Economic
growth rate
(%)

Over-capacity

Under-capacity

202x 202y
Years

these for a while. After a period of reduced spending, there is liable to be a strong upturn
as pent-up demand is finally released into the market.
• High fixed cost industries: industries such as airlines, hotels and steel suffer from economic
downturns because high fixed costs in plant, equipment or labour tend to encourage
competitive price-cutting to ensure maximum capacity utilisation when demand is low.
For example, an airline might try to fill its seats in the face of falling demand simply by
offering cheap tickets. If its competitors do the same, the resulting price-war will result in
low profits for all the airlines.

2.2.3 Social
The social elements of the macro-environment have at least two impacts upon organisa-
tions. First, they can influence the specific nature of demand and supply, within the overall
economic growth rate. Second, they can shape the innovativeness, power and effectiveness
of organisations.
In the first place, there are a number of key aspects of the social environment that can
shape demand and supply. These can be analysed under the following four headings:

• Demographics. For example, the ageing populations in many Western societies create
opportunities and threats for both private and public sectors. There is increasing demand
for services for the elderly, but diminishing supplies of young labour to look after them.
• Distribution. Changes in wealth distribution influence the relative sizes of markets. Thus
the concentration of wealth in the hands of elites over the last 20 years has constrained
some categories of ‘middle-class’ consumption, while enlarging markets for certain luxury
goods.
• Geography. Industries and markets can be concentrated in particular locations. In the
United Kingdom, economic growth has in recent decades been much faster in the London
area than in the rest of the country. Similarly, industries often form ‘clusters’ in particular
locations: thus there are high concentrations of scientists and engineers in California’s
Silicon Valley (see also Chapter 10).6
• Culture. Changing cultural attitudes can also raise strategic challenges. For example, new
ethical attitudes are challenging profit-maximising investment strategies in the financial
services industry. Changing cultural attitudes can be linked to changing demographics.
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Thus the rise of ‘digital natives’ (generations born after the 1980s, and thus from child-
hood immersed in digital technologies) is changing expectations about media, consump-
tion and education.

A second important social aspect of the macro-environment is organisational networks,

with significant implications for innovativeness, power and effectiveness. These networks are
frequently described as ‘organisational fields’.7 An organisational field is a community of
organisations that interact more frequently with one another than with those outside
the field. These organisational fields are partly economic as they include competing organ-
isations within the industry or sector, as well as customers and suppliers in the marketplace
(see Chapter 3). However, the concept of organisational fields also emphasises social inter-
actions with other organisations. Such social interactions may be with other businesses, for
instance via managers who are members of the same industry associations or sporting clubs,
or via non-executive directors who sit on several company boards. There may also be noneco-
nomic interactions with political organisations such as governments and campaign groups,
legal entities such as regulators, and other social groups, such as professions and trade
unions. Sometimes key actors in the field might even be particularly influential individuals,

for example politicians. The organisational field is therefore much broader than just indus-
tries or markets. Because of the importance of social networks, managers need to analyse the
influence of a wide range of organisational field members, not just competitors, customers
and suppliers.
Networks and organisational fields can be analysed by means of sociograms, maps of
potentially important social (or economic) connections.8 For a new hi-technology enterprise,
important network connections might be links to leading universities, other innovative firms
or respected venture capitalists, for example. Sociograms can help assess the effectiveness of
networks and identify who is likely to be most powerful and innovative within them. Three
concepts help to understand effectiveness, innovativeness and power:

• Network density typically increases network effectiveness. Density refers to the number
of interconnections between members in the network map. Effectiveness is increased by
density because the more interconnections there are, the better the sharing of new ideas
between network members. Everybody is talking to each other, and nobody with poten-
tially useful information is isolated. It is easier to mobilise the whole network in support
of new initiatives. In Figure 2.5, the network on the right (organisation C’s network) is
denser than the network on the left (A’s network).
• Broker positions, which connect otherwise separate groups of organisations, are
often associated with innovativeness. Brokers’ innovation advantage stems from their
ability to link valuable information from one group of organisations with valuable infor-
mation from the other group. Because they provide the connection between the two
groups, they are able to exploit this combination of information before anybody else.
In Figure 2.5, organisation B is a broker, connecting the two networks on the right- and
left-hand sides.
• Central hub positions typically provide power within networks. A central hub connects
many organisations. Hubs have power because network members rely on them for inter-
connection with other members. Hubs are also potentially innovative because they can
collect ideas from the whole network, and they hear about what is going on in one part
of the network before most other parts. In Figure 2.5, both A and C are hubs. However,
organisation A is more central in its immediate network than organisation C (all network
members must pass through A), and to this extent is more powerful relative to its network
members.
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Figure 2.5 Sociogram of networks within an organisational field

Organisational field

E D

A B C

C’s immediate network is denser than A’s; B is a broker; A is a more central

hub than C.

Sociograms can have clear implications for strategic action. For example, organisation A
could gain an advantage over organisation B by establishing direct interaction with organ-
isation C, undermining B’s exclusive broker position. On the other hand, organisation E could
increase its innovativeness and improve its power relative to organisation A by making a
direct connection to organisation D in the right-hand network.
Sociograms can be drawn for key people as well as organisations: individuals are often the
link between organisations anyway. Personal networks are important in many societies, for
example the network of former consultants at the elite McKinsey & Co. consulting firm, or
networks of company directors, or the interpersonal guanxi networks that prevail in China.
Illustration 2.2 describes the network that has emerged from the armed service backgrounds
of many Israeli entrepreneurs. The crucial issue in analysing social networks is how hub posi-
tions, brokering roles and network density are likely to affect a particular organisation’s
power, innovativeness and overall effectiveness.
Some organisational fields can be characterised as ‘small worlds’.9 Small worlds exist
where the large majority of a network’s members is closely connected, either just one step
away (as C is from A in Figure 2.5) or perhaps a couple of steps away (as E is from B). Small
worlds typically give members a good deal of protection and effectiveness, due to their
density. However, outsider organisations (for example foreign firms) will have difficulty
penetrating small world networks on their own, and will typically require the help of insiders.
Small worlds are particularly likely in societies where economic activity is geographically
concentrated or where social elites share common backgrounds (for example, the French
elite is often characterised as living in the same exclusive parts of Paris and as graduating
from a small group of higher education institutions, especially the Grandes Ecoles). Thus an
important aspect of social analysis is the extent of small worlds in the macro-environment.

2.2.4 Technology
Further important elements within the macro-environment are technologies such as the
Internet, nanotechnology or new composite materials, whose impacts can spread far
beyond single industries. As in the case of internet streaming, new technologies can open
up opportunities for some organisations (e.g. Spotify and YouTube), while challenging others
(traditional music and broadcasting companies). Chapter 10 will discuss specific strategies
surrounding innovative new technologies in more detail.
Meanwhile, it is important to carry out the macro-environmental analysis of technology
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

in order to identify areas of potential innovative activity. There are five primary indicators
of innovative activity:10

• Research and development budgets: innovative firms, sectors or countries can be identi-
fied by the extent of spending on research, typically reported in company annual reports
and government statistics.
• Patenting activity: firms active in patenting new technologies can be identified on national
patent registers, the most important being the United States Patents and Trademarks
Office.
• Citation analysis: the potential impact of patents and scientific papers on technology can
be measured by the extent to which they are widely cited by other organisations, with
data available from Google Scholar for instance.
• New product announcements: organisations typically publicise their new product plans
through press releases and similar media.
• Media coverage: specialist technology and industry media will cover stories of the latest
or impending technologies, as will various social media.

Illustration 2.2 Intelligence Unit 8200 and the Small World

of Israeli Hi-Tech
Israel, a nation of just 8 million people, exports more than startup, Unit 8200 is a fantastic school. . . . The unit encour-
$6bn worth of cybersecurity products a year, accounting ages independent thought. It’s something that was adopted
for about 10 per cent of the global cybersecurity market. later by many companies, a little like the culture in Google,
At the heart of this success is Unit 8200, the largest unit of in which good ideas can come from anywhere.’
the Israeli Defence Forces and the equivalent of America’s Because recruitment in hi-tech tends to favour a ‘buddy-system’,
National Security Agency. alumni are often sought out for employment by other alumni.
Unit 8200’s alumni have produced more hi-tech start-ups Experience of this intense, elitist organisation in the formative
per capita than the University of Stanford. Some of the years of youth creates strong social bonds. The 8200 alumni asso-
successful companies originating with Unit 8200 include ciation has more than 15,000 members, and hosts networking
Check Point, with 2,900 employees and a pioneer in Virtual events and community outreach programmes, including start-up
Private Networks; NICE Systems, with 2,700 employees and accelerators.
a pioneer in telephone recording technology; and Palo By 2020, Unit 8200 is due to move adjacent to the
Alto Networks, with 3,000 employees and a pioneer in Advanced Technology Park at Be’er Sheva in southern
computer firewall technology. Unit 8200 recruits are drawn Israel’s Negev Desert. In 2013, Israel’s President Benjamin
from young Israelis doing their national military service. Netanyahu had declared that Be’er Sheva would become the
Recruitment into Unit 8200 is highly selective (in the Israeli ‘cybercenter of the Western hemisphere’. Be’er Sheva already
Defence Force, only pilot training is harder to enter) and had the advantage of the local Ben-Gurion University and its
favours skilled computer science students and linguists. Cyber Security Research Centre. The National Cyber Bureau,
Recruits come disproportionately from the richer and more a newly created agency advising the government on cyber
highly educated Tel Aviv area of Israel, and from elite schools policies, moved to Be’er Sheva in 2015. Companies already
such as Leyada, the semi-private Hebrew University High with operations in the Advanced Technology Park included
School in Jerusalem (where the founder of Check Point was many leading foreign firms such as Deutsche Telecom, IBM,
a student). Alumni of Unit 8200 go not only into hi-tech Lockheed Martin, Oracle, PayPal and EMC. Venture capital
business; many pursue successful careers in politics, the firm JVP, with more than $1bn funding available, was also
judiciary, the media and academia. For example, the former running a local ‘cyberincubator’ for start-ups. One of its first
CEO of NICE Systems became director general of the Israeli ventures was sold to PayPal.
Ministry of Finance. Sources: Haaretz, 18 April and 24 April 2015; Financial Times, 10 July
Unit 8200’s young recruits are intensively trained and 2015; TechCrunch, 18 March 2015
work long hours in small groups applying the latest tech-
nology to security matters that might involve life and death.
To maximise security, Unit 8200’s technology systems – from
analytics to data mining, intercept and intelligence manage-
Questions
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

ment – are designed and built in-house. This experience 1 Identify at least one important hub and one important
prepares Unit 8200 alumni well for futures in hi-tech busi- broker in the Unit 8200 network.
ness. Avi Hasson, Chief Scientist at the Israeli Economy 2 If you were a foreign cybersecurity company, what
Ministry and himself an alumnus of Unit 8200, describes would you do to access Israel’s expertise?
the working environment: ‘When it comes to managing a

Although there is some variation between firms, sectors and countries in how far their inno-
vative activity is reflected by these kinds of indicators, generally they will help to identify areas
of rapid technological change and locate centres of technological leadership. For example,
the number of patent applications for the new material graphene (a material just one atom
thick, but both strong and highly flexible) increased from less than 100 a year in 2006 to 4,000
a year a decade later. China alone accounts for 58 per cent of the world’s graphene patent
applications and, while 76 applicants that have at least 60 applications each in the sector, 49
of them are Chinese organisations.11 For any organisation seeking a strong position in the
fast-developing graphene industry, links with China will plainly be important.
Many organisations also publish technology roadmaps for their sectors going forward.12
Technology roadmaps project into the future various product or service demands, identify
technology alternatives to meet these demands, select the most promising alternatives and
then offer a timeline for their development. Thus they provide good indicators of future tech-
nological developments. Figure 2.6 provides a simplified technology roadmap for the Internet
of Things, providing connectivity for devices from fridges to heart monitors: in the period to
2033, this roadmap forecasts rapid progress in the number of Central Processing Units (CPUs)
and sensors per device, but less progress in CPU frequency, a measure of processing speed.
This kind of roadmap has implications for product design strategies in industries far beyond
the electronics industry, for instance architecture, domestic appliances and healthcare.

2.2.5 Ecological
Within the PESTEL framework, ecological stands specifically for ‘green’ macro-environmental
issues, such as pollution, waste and climate change. Environmental regulations can impose
additional costs, for example pollution controls, but they can also be a source of opportunity,
for example the new businesses that emerged around mobile phone recycling.

Figure 2.6 Technology roadmap for the Internet of Things

18
CPUs per device
16
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14 Max CPU frequency

(MHz x 0.01)
12 Sensors per device

0
2019 2021 2024 2027 2030 2033

Source: Drawn from data extracted from the International Roadmap for Devices and Systems, 2018 edition, Institute
for Electronics and Electrical Engineers.

When considering ecological issues in the macro-environment, there are three sorts of
challenges that organisations may need to meet:13

• Direct pollution obligations are an obvious challenge, and nowadays typically involve not
just cleaning up ‘at the end of the pipe’ (for example, disposing of waste by-products
safely), but also minimising the production of pollutants in the first place. Having clean
processes for supply, production and distribution is generally better than managing the
consequences of polluting after the fact.
• Product stewardship refers to managing ecological issues through both the organisation’s
entire value chain and the whole life cycle of the firm’s products. Stewardship here might
involve responsibility for the ecological impact of external suppliers or final end-users.
It will also involve responsibility for what happens to products at ‘end of life’, in other
words how they are disposed of when consumers have no more use for them. Thus car
manufacturers are increasingly responsible for the recycling and safe disposal of old cars.
• Sustainable development is a criterion of increasing importance and refers not simply
to reducing environmental damage, but to whether the product or service can be
produced indefinitely into the future. This sustainability criterion sets constraints on the
over-exploitation of particular sources of raw materials, for instance in developing countries,
and often raises issues regarding the economic and social well-being of local communities.

In assessing the macro-environment from an ecological point of view, all three criteria of
pollution, stewardship and sustainability need typically to be considered.
The extent to which these ecological criteria are important to organisations relies on three
contextual sources of pressure, the first two arising directly from the macro-environment:

• Ecological. Clearly ecological issues are more likely to be pressing the more impactful
they are: a chemical company may have more to worry about than a school. However,
there are three less obvious characteristics to assess. First, ecological issues become more
salient the more certain they are. For example, as doubts have reduced about the facts of
global warming, so the pressures on organisations to act on it have increased. Pressures
are also likely to be greater the more visible ecological issues are: aircraft pollution is more
salient as an issue than shipping pollution because aircraft are more obvious to ordinary
citizens than pollution done far out to sea. Similarly, the emotivity of the issue is liable to
be a factor: threats to polar bears generally get more attention than threats to hyenas.
Ecological analysis therefore requires assessing certainty, visibility and emotivity.
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

• Organisational field. Ecological issues do not become salient just because of their inherent
characteristics. The extent of pressure is influenced by how ecological issues interact with
the nature of the organisational field. An organisational field with highly active regulators
or campaign groups will clearly give saliency to ecological issues. However, high levels
of field interconnectedness will also increase the importance of ecological issues: within
densely interconnected networks, it is harder to hide damaging behaviour and peer pres-
sure to conform to ecological standards is greater.
• Internal organisation. The personal values of an organisation’s leadership will clearly influ-
ence the desire to respond to ecological issues. Actual responsiveness will rely on the
effectiveness of managerial systems that promote and monitor behaviours consistent with
ecological obligations.

Although ecological issues can exercise unwelcome pressure, there are potentially strong
organisational motives to respond. As in Figure 2.7, the three kinds of contextual pressure can
satisfy a variety of motives. Fundamentally, there is of course a sense of ecological responsi-
bility: thus the personal values of the organisation’s leaders might stimulate ecological initia-
tives, or routine production systems might reduce pollution. However, another outcome can

Figure 2.7 Contexts and motives for ecological issues

Contexts Organisational motives

Ecological:
•
•
•

•
•

Substantially adapted from: Bansal, P. and Roth, K. (2000), ‘Why companies go green: a model of ecological
responsiveness’, Academy of Management Journal, 43(4), 717–36 (Figure 2, p. 729.)

be legitimacy, as reflected in regulatory compliance and a good reputation with consumers.

Finally, responding to ecological issues can even enhance competitiveness. For example, mini-
mising waste in production processes for pollution reasons can reduce costs. Green products
are attractive in the marketplace and often command a price premium.

2.2.6 Legal
The final element in a PESTEL analysis of the macro-environment refers to legal aspects.
These can cover a wide range of topics: for example, labour, environmental and consumer
regulation; taxation and reporting requirements; and rules on ownership, competition
and corporate governance. In recent years, the relaxation of legal constraints through
deregulation has created many new business opportunities, for example for low cost
airlines and ‘free schools’ in various countries. However, regulations can also handicap
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organisations: Illustration 2.3 shows how the e-cigarette company Juul ran into important
legal issues as it entered new markets and regulators struggled to keep up with the new
technology.
Legal issues form an important part of the institutional environment of organisations,
by which is meant the formal and informal ‘rules of the game’. 14 This concept of insti-
tutional environment suggests that it can be useful in a PESTEL analysis to consider not
only formal laws and regulations but also more informal norms: the ‘L’ can be stretched
to cover all types of rule, formal and informal. Informal rules are patterns of expected
(ŉormal’) behaviour that are hard to ignore. Thus, regardless of the law, there are fairly
explicit norms regarding proper respect for the ecological environment. Organisations
ignoring these norms would risk outrage among consumers or employees, whatever the
legal situation.
Formal and informal rules vary sufficiently between countries to define very different
institutional environments, sometimes known as ‘varieties of capitalism’.15 These vari-
eties of capitalism have implications for the ways in which business and management
are done in those environments and the prospects for success, both for insiders and for
outsiders. Although every country differs in detail, three broad varieties of capitalism

Illustration 2.3 Juul duels with the rules

The fashionable e-cigarette company addresses regulatory environments
internationally.

Adam Bowen and James Monsees launched their distinctive media code underlining that its products were not appro-
Juul e-cigarette in 2015. The product’s sleek style led to the priate for young people, switched to using only models
Juul becoming known as the ‘iPhone of e-cigarettes’. Juul aged over 35, restricted the availability of sweet flavours,
became the most popular e-cigarette in the United States and made increasing use of traditional television rather than
by the end of 2017, and by the end of 2018 commanded a social media channels. At the same time, it began exploring
market share of over 70 per cent. In November 2018, the markets overseas.
Altria Group (a traditional tobacco company) bought one Juul’s first overseas market was Israel, which it entered
third of the company for $12.8bn, making the two founders early in 2018. At the time, Israel had no regulations on
billionaires. e-cigarettes. However, the Israeli government responded
Bowen and Monsees dreamt up their colourful e-cigarettes within two months, banning Juul on the grounds that its
while pursuing their master’s degrees at Stanford Univer- 5 per cent nicotine concentration was two and a half times
sity. They were smokers themselves, wanting to free them- the level required by the European Union, a norm that Israel
selves of a dirty and dangerous habit. The Juul design uses freely adopted. Juul next launched in the United Kingdom,
a patented form of nicotine salts, at 5 per cent strength, still in the European Union, using a formulation with less
to deliver the quick nicotine peak associated with trad- than 2 per cent nicotine. In late 2018, Juul launched in
itional cigarettes. The website for their company declares Canada, where a relaxed legal regime allowed it to offer
its mission as to ‘improve the lives of the world’s one billion both 3 and 5 per cent formulations plus a range of flavours
adult smokers by eliminating cigarettes’. Juul claims that it larger than the recently restricted ones in the US.
has converted one million adult smokers to Juul products, At the same time, Juul was revealed to be considering
allegedly a safer product. expansion into Asia. Indonesia was one potential target
Traditional tobacco companies typically rely on television market, given its fast-growing population of nearly 270
advertising, but Juul initially focused on powerful social million. Indonesia is also one of a handful of countries
marketing campaigns featuring attractive young models which has not signed the World Health Organization’s
and singers on Instagram, Twitter and YouTube. Campaigns global treaty on tobacco control: two thirds of Indonesian
went viral, with celebrities such as Bella Hadid posting men smoke tobacco daily. Other markets Juul was reportedly
about Juul. The result was a surge of use among teenagers, considering were Malaysia, Singapore, India, South Korea
attracted also by Juul’s sweet flavours and by the fact that its and the Philippines.
small size and low odours help concealment. In 2018, it was Main sources: Fast Company, December/January 2018/19; Reuters
estimated that 3.6 million American schoolchildren were Business News, 18 November 2018; Forbes, 16 November 2018; www
using e-cigarettes, presumptively mostly Juuls. .juul.com.
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

However, Juul faced increasing criticism from the media,

health professionals and regulators over its marketing. Nico-
tine addiction can cause substantial damage to the devel-
oping brain, including lasting impairment to memory and
Questions
attention span, and increased psychiatric conditions such as 1 Assess the relative importance of formal laws and
depression and anxiety. Four lawsuits were filed in 2018 in informal norms for the development of Juul’s strategy
the United Sates against Juul by parents, underage users and in the United States.
others, attacking its marketing strategy and safety claims. 2 How do you think the different institutional environ-
Monsees declared: ‘Any underage consumers using this ments internationally have influenced Juul’s overseas
product are absolutely a negative for our business. We strategy so far and what kinds of countries do you think
don’t want them. We will never market to them. We never it should prioritise?
have.’ The company launched a new marketing and social

have been identified, whose formal and informal rules lead to different ways of
doing business:

• Liberal market economies are institutional environments where both formal and informal
rules favour competition between companies, aggressive acquisitions of one company
by another and free bargaining between management and labour. Companies in these
liberal market economies tend to raise funds from the financial markets and company
ownership is either entrepreneurial or, for older companies, widely dispersed among
many shareholders. These economies tend to support radical innovation and are recep-
tive to foreign firms. Although neither is perfectly representative, the United States and
the United Kingdom correspond broadly to this type of institutional environment.
• Coordinated market economies encourage more coordination between companies, often
supported by industry associations or similar frameworks. There are legal and normative
constraints on hostile acquisitions on the one hand, and various supports for consensual
and collective arrangements between management and labour on the other. Companies
in these coordinated market economies tend to rely on banks for funding, while family
ownership is often common. These economies support steady innovation over the
long-run and, because of coordination networks, are typically less easy for foreign firms to
penetrate. Again, neither is perfectly representative, but Germany and Japan correspond
broadly to this type of institutional environment.
• Developmental market economies tend to have strong roles for the state, which will either
own or heavily influence companies that are important for national economic devel-
opment. Formally or informally, the state will often encourage private-sector firms to
coordinate between themselves and with national economic policy-makers. Labour rela-
tions may be highly regulated. Banks, often state-owned, will be a key source of funding.
Long-term, infrastructural and capital-intensive projects may be favoured, but foreign
firms will often be at a disadvantage. Although each is very different in its own way, Brazil,
China and India all have aspects of this developmental market economy environment.

A macro-environmental analysis of any particular country should therefore include an assess-

ment of the local variety of capitalism and the extent to which it favours particular kinds of
firm and strategy.

2.2.7 Key drivers for change

The previous sections have introduced a variety of concepts and frameworks for analysing
each of the PESTEL factors, particularly at a macro-level. As can be imagined, analysing these
factors, together with their interrelationships, can produce long and complex lists of issues.
Rather than getting overwhelmed by a multitude of details, it is necessary to step back to
identify the key drivers for change in a particular context.16 Key drivers for change are the
environmental factors likely to have a high impact on industries and sectors, and the
success or failure of strategies within them.
Key drivers thus translate macro-environmental factors to the level of the specific industry
or sector. Thus social and legislative changes discouraging car use might have different and
greater effects on supermarkets than, for example, retail banks. Identifying key drivers for
change in an industry or sector helps managers to focus on the PESTEL factors that are most
important and which must be addressed most urgently. Without a clear sense of the key
drivers for change, managers will not be able to take the strategic decisions that allow for
effective responses: to return to the example above, the supermarket chain might address
reduced car use by cutting the number of out-of-town stores and investing in smaller urban
and suburban sites. It is important that an organisation’s strategists consider each of the
key drivers for change, looking to minimise threats and, where possible, seize opportunities.

2.3 Forecasting
In a sense, all strategic decisions involve forecasts about future conditions and outcomes. Thus
a manager may decide to invest in new capacity because of a forecast of growing demand
(condition), with the expectation that the investment will help capture increased sales
(outcome). PESTEL factors will feed into these forecasts, for example in tracking economic
cycles or mapping future technologies. However, accurate forecasting is notoriously diffi-
cult. After all, in strategy, organisations are frequently trying to surprise their competitors.
Consequently, forecasting takes three fundamental approaches to the future based on
varying degrees of certainty: single-point, range and multiple-futures forecasting. This
section explains these three approaches and also introduces some key concepts that help
explore the direction of future change.

2.3.1 Forecast approaches

The three approaches to forecasting are explored in the following and illustrated in
Figure 2.8:17

• Single-point forecasting is where organisations have such confidence about the future
that they will provide just one forecast number (as in Figure 2.8 i). For instance, an
organisation might predict that the population in a market will grow by 5 per cent in the
next two years. This kind of single-point forecasting implies a great degree of certainty.
Demographic trends (for instance the increase in the elderly within a particular popula-
tion) lend themselves to these kinds of forecasting, at least in the short term. They are
also often attractive to organisations because they are easy to translate into budgets:
a single sales forecast figure is useful for motivating managers and for holding them
accountable.
• Range forecasting is where organisations have less certainty, suggesting a range of
possible outcomes. These different outcomes may be expressed with different degrees
of probability, with a central projection identified as the most probable (the darkest
shaded area in Figure 2.8 ii), and then a range of more remote outcomes given decreasing
degrees of likelihood (the more lightly shaded areas). These forecasts are often called
‘fan charts’, because the range of outcomes ‘fans out’ more widely over time, reflecting
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

growing uncertainty over the longer term. These ‘fan charts’ are often used in economic
forecasting, for example economic growth rates or inflation.

Figure 2.8 Forecasting under conditions of uncertainty

Outcomes Outcomes Outcomes

Unlikely
A
Possible
Probable
B
Possible
C
Unlikely

Time Time Time

(i) Single-point forecast (ii) Range forecast (iii) Alternative futures

Low Uncertainty High

• Alternative futures forecasting typically involves even less certainty, focusing on a set of
possible yet distinct futures. Instead of a continuously graduated range of likelihoods,
alternative futures are discontinuous: they happen or they do not, with radically different
outcomes (see Figure 2.8 iii). These alternatives might result from fundamental policy deci-
sions. For example, for a country facing possible exit from a currency union (for instance
the Euro), outcome A might reflect the consequences for growth or unemployment of
staying in the union; outcome B might reflect the consequences of exiting the union;
and outcome C would be a further alternative outcome, consequent on a decision that
followed the initial decision pointing towards outcome B (for instance, to adopt trade
barriers as well as to exit the currency union). For a business, outcome A might represent
expected sales if a competitor business did not invest in a new machine or similar capacity;
outcome B is a consequence of the competitor making that investment; and outcome
C is a consequence of the competitor both making that investment and then slashing
prices to make full use of the new capacity. It is possible to put probabilities to each of
these outcomes too: for example, outcome A might have a 40 per cent probability, while
outcomes B and C would be 30 per cent each. These kinds of alternative futures are often
fed into scenario analyses (see Section 2.4), though not as simple forecasts.

2.3.2 Directions of change

It is helpful in forecasting to keep an eye on the fundamental directions of likely change.
Managers need to check their forecasts are consistent with major trends and to be alert to
possible turning points. Three concepts help focus both on major trends and on possible
turning points that might invalidate existing forecasts:

• Megatrends are large-scale political, economic, social, technological, ecological or legal

movements that are typically slow to form, but which influence many areas of activity,
possibly over decades.18 A megatrend typically sets the direction for other factors. Thus
the social megatrend towards ageing populations in the West influences other trends in
social care, retail spending and housing. The megatrend towards global warming affects
agriculture, tourism and, with more extreme climatic events, insurance. It is important to
identify major megatrends because they influence so many other things. Forecasts should
be checked for consistency with such trends.
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• Inflexion points are moments when trends shift in direction, for instance turning sharply
upwards or downwards.19 For example, after decades of stagnation and worse, in the
early twenty-first century sub-Saharan Africa may have reached an inflexion point in
its economic growth, with the promise of substantial gains in the coming decade or so.
Internet retailing may also have put urban shopping on a path to significant decline in
advanced economies. Inflexion points are likely to invalidate forecasts that extrapolate
existing trends. Clearly it is valuable to grasp the inflexion point at the moment when
trends just start to turn, in order either to take advantage of new opportunities early or
to act against escalating decline as soon as possible.
• Weak signals are advanced signs of future trends and are particularly helpful in identi-
fying inflexion points.20 Typically these weak signals are unstructured and fragmented
bits of information, often perceived by observers as ‘weird’. A weak signal for the world-
wide financial crisis that began in 2008 was the rise in mortgage failures in California the
previous year. An early weak signal foreshadowing the current success of Asian business
schools was the first entry of the Hong Kong University of Science and Technology into the

Financial Times’ ranking of the top 50 international business schools in the early 2000s. It is
important to be alert to weak signals, but it is also easy to be overwhelmed by ŉoise’, the
constant stream of isolated and random bits of information without strategic importance.
Some signs of truly significant weak signals (as opposed to mere noise) include: the repe-
tition of the signal and the emergence of some kind of pattern; vehement disagreement
among experts about the signal’s significance; and an unexpected failure in something
that had previously worked very reliably.

2.4 Scenario analysis

Scenarios offer plausible alternative views of how the macro-environment might develop
in the future, typically in the long term. Thus scenarios are not strategies in themselves,
but alternative possible environments which strategies have to deal with. Scenario analysis is
typically used in conditions of high uncertainty, for example where the environment could go
in several highly distinct directions.21 However, scenario analyses can be differentiated from
alternative futures forecasting (Section 2.3.1), as scenario planners usually avoid presenting
alternatives in terms of finely calculated probabilities. Scenarios tend to extend too far into
the future to allow probability calculations and besides, assigning probabilities directs atten-
tion to the most likely scenario rather than to the whole range. The point of scenarios is
more to learn than to predict. Scenarios are used to explore the way in which environmental
factors inter-relate and to help keep managers’ minds open to alternatives possibilities in
the future. A scenario with a very low likelihood may be valuable in deepening managers’
understanding even if it never occurs.
Illustration 2.4 shows an example of scenario planning for the world of work to 2030,
published by the international advisory firm PwC. The scenarios start from five megatrends
covering a range of factors from technology to natural resources. PwC then identifies two
drivers which are clearly differentiated on the dimensions of the scenario cube in terms of
having (i) high potential impact; (ii) high uncertainty; (iii) high independence from each other
(see Figure 2.9 and below). The first of these two drivers is political, i.e. collectivism versus indi-
vidualism, referring to the roles of government. The second of these key drivers addresses the
nature of business, i.e. integration versus fragmentation, pointing to the relative importance
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Figure 2.9 The scenario cube: selection matrix for scenario key drivers

Low
Independence
High

High

Uncertainty

Low

Impact
Low High
Select key drivers in the high-impact, high-uncertainty, high-independence box

Illustration 2.4 Colouring the World

In 2018, PwC’s People and Organisation’s consulting practice published a major report
on four scenarios for the world of work in 2030.

Fragmentation

Yellow World Red World

– humans come first – innovation rules

Collectivism Individualism

Green World Blue World

– companies care – corporate is king

Integration

Adapted from: PWC US (2018), ‘The competing forces shaping 2030’, https://www.pwc.com/us/en/services/hr-management/workforce-of-the-
future.html

Wanting to provide its clients with long-term advice about the These two axes yielded four scenario stories, as summarised
future evolution of work, PwC cooperated with researchers at in the figure above:
the James Martin Institute for Science and Civilisation at the Saïd Briefly, the four scenarios for 2030 were as follows:
Business School, University of Oxford, to produce four scenarios
1. Yellow World, in which social enterprises and community
each named after a distinct colour. The researchers drew on
businesses flourish. Crowdfunded capital flows towards eth-
a specially commissioned survey of 10,000 people in China,
ical brands. Meaningful work is important. Artisans and craft
India, Germany, the UK and the US and built on the concept of
production thrive. Human values have priority.
megatrends.
2. Red World, in which consumers are dominant, and organisations
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The five megatrends underpinning all the scenarios were:

and individuals race to serve them. Regulation cannot keep up with
1. Rapid advances in technological innovation, particularly au- innovation. Competition tends towards ‘winner takes all’ results.
tomation, robotics and artificial intelligence. However, specialists and niche businesses do well.
2. Demographic shifts, especially aging populations and work- 3. Green World, in which social responsibility and trust are cru-
forces. cial for large corporations and demographic and climate
3. Rapid urbanisation, from about 5bn people to 8bn by 2030. changes are key drivers for business.
4. Shifts in global economic power, with today’s rapidly devel- 4. Blue World, in which big business dominates, and individual
oping nations such as China gaining particularly, while within wants have priority over social responsibilities.
nations new technologies will threaten employment for the
Source: ‘Workforce of the future: The competing forces shaping 2030’,
traditional middle classes. PwC, 2018: www.pwc.com/us/en/hr-management/pwc-workforce-
5. Resource scarcity, as demand for energy and water will in- of-the-future-the-competing-forces-shaping-2030.pdf
crease respectively by 50 per cent and 40 per cent by 2030.
On this basis, the PwC-Oxford team developed two main axes
upon which to differentiate their scenarios: collectivism versus
Questions
individualism and fragmentation versus integration. Collectivism 1 What other megatrends might have been considered
implies a strong role for governments in society, individualism beyond the five considered here?
more self-reliance. Integration implies an advantage for big busi- 2 What are the different implications of these scenarios
nesses able to integrate and coordinate many activities; fragmen- for an international consulting firm such as PwC? Which
tation implies an important role for small firms and organisations. scenario would it like best; which would it like least?

Figure 2.10 The scenario process

Define Identify Develop Identify Monitor

scope key drivers distinct impacts progress
(industry, (PESTEL, scenario (check and (early
region, forecasts, ‘stories’ adapt warning
years) cube) (name strategies) indicators)
scenarios)

of big and small firms. Both of these drivers may produce very different futures, which can be
combined to create four internally consistent scenarios for the next decade or so. The various
scenarios draw in distinct ways on the megatrends: for example, Green World assumes a
different response to resource scarcity than Blue World; Red World is less optimistic than
Green World about the capacity of government regulators to keep up with technological
change. PwC does not predict that one scenario will prevail over the others, nor do they
allocate relative probabilities. Prediction would close managers’ minds to alternatives, while
probabilities would imply a spurious kind of accuracy over this period of time.
While there are many ways to carry out scenario analyses, the process often follows five
basic steps (summarised in Figure 2.10):22

• Defining scenario scope is an important first step in the process. Scope refers to the subject
of the scenario analysis and the time span. For example, scenario analyses can be carried
out for a whole industry globally, or for particular geographical regions and markets.
While businesses typically produce scenarios for industries or markets, governments often
conduct scenario analyses for countries, regions or sectors (such as the future of healthcare
or higher education). Scenario time spans can be either a decade or so (as in Illustration
2.4) or perhaps just five years ahead. The appropriate time span is determined partly by
the expected life of investments. In the energy business, where oil fields might have a life
span of several decades, scenarios often cover 20 years or more.
• Identifying the key drivers for change comes next. Here PESTEL analysis can be used to
uncover issues likely to have a major impact upon the future of the industry, region or
market. In the information technology, key drivers range from regulation to innovation.
The scenario cube (Figure 2.9) helps identify the most significant key drivers. As well as
the size of impact, the scenario cube underlines two additional criteria for key drivers:
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uncertainty, in order to make different scenarios worthwhile (there’s no point in devel-

oping alternative scenarios when only one outcome is likely); and mutual independence,
so that the drivers are capable of producing significantly divergent or opposing outcomes
(there’s no point in considering factors individually if they lead to the same outcome
anyway). In the oil industry, for example, political stability in the oil-producing regions
is one major uncertainty; another is the development of new exploration technologies,
enabling the quick and efficient identification of new oil fields. These could be selected
as key drivers for scenario analysis because both are uncertain and regional stability is not
closely correlated with technological advance.
• Developing scenario ‘stories’. As in films, scenarios are basically stories. Having selected
opposing key drivers for change, it is necessary to knit together plausible stories that incor-
porate both key drivers and other factors into a coherent whole. These stories are often
encapsulated with striking titles: for example, oil company Shell launched two opposing
scenarios entitled simply ‘Oceans’ and ‘Mountains’, the first describing a more free-market
world with solar power important, the second a more government-led world, with gas
power important.23 Striking titles help to communicate scenarios and embed them in
strategic discussions (see also Illustration 2.4).

• Identifying impacts of alternative scenarios on organisations is the next key stage of

scenario building. For example, in Illustration 2.4, a Blue World would pose major
challenges for small and ethical businesses. It is important for an organisation to carry
out robustness checks in the face of each plausible scenario and to adapt strategies that
appear vulnerable and develop contingency plans in case they happen.
• Monitor progress. Once the various scenarios are drawn up, organisations should
monitor progress over time, to alert themselves to whether and how developments
actually fit scenario expectations. Here it is important to identify indicators that might
give early warning about the final direction of environmental change, and at the same
time set up systems to monitor these. Effective monitoring of well-chosen indicators
should facilitate prompt and appropriate responses. In Illustration 2.4, the diminishing
likelihood of a Red World would be growing regulation of technology firms such as Uber
and airbnb.

Because debating and learning are so valuable in the scenario-building process, and they
deal with such high uncertainty, some scenario experts advise managers to avoid producing
just three scenarios. Three scenarios tend to fall into a range of ‘optimistic’, ‘middling’ and
‘pessimistic’. Managers naturally focus on the middling scenario and neglect the other two,
reducing the amount of organisational learning and contingency planning. It is therefore
typically better to have two or four scenarios, avoiding an easy mid-point. It does not matter
if the scenarios do not come to pass: the value lies in the process of exploration and contin-
gency planning that the scenarios set off.

Thinking differently The crowdsourced forecast

Do we need experts to forecast anymore?

We usually think of forecasts (Section 2.3) as the product prepared to bet on their success, then probably the new
of small groups of experts. But there is a different way. products will indeed turn out well. The bets of many
Forecasts can be ‘crowdsourced’, using the collective employees may be more reliable than the self-interested
judgement of many different kinds of people, not just forecasts of the product’s own developers.
experts. There are two principal ways of using the Internet media such as Twitter and Google can also
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

wisdom of crowds in forecasting: prediction markets and provide forecasts, drawing on the inputs of many thou-
internet media analysis. sands of users. For example, Google Trends analyses the
Prediction markets are markets designed specifically frequency with which people search about flu symptoms
to combine the scattered information of many partici- to predict the onset of flu epidemics. Others analyse the
pants into values (for instance, market prices or betting mix of positive and negative sentiments expressed by
odds) that can be used to make predictions about specific ordinary people in Twitter feeds to forecast the direc-
future events.24 An example is the Iowa Electronic Market tion of financial markets, up or down.25 Data about what
(IEM) for betting on the outcome of American Presiden- people are interested in, or how they feel, provides valu-
tial elections. Market participants buy a contract that able clues to what will happen next.
pays a dollar if, for instance, a Democrat wins the elec-
tion. The more money participants are prepared to pay
for that contract, the more likely it appears that a Demo- Question
crat will indeed win that election. Google uses similar Why might experts make bad forecasters in the case of
prediction markets to forecast the success of possible i. Presidential elections; ii. new product developments?
new products: if many people within the company are

Summary
• Environmental influences can be thought of as layers around an organisation, with the
outer layer making up the macro-environment, the middle layer making up the industry
or sector and the inner layer strategic groups and market segments.
• The macro-environment can be analysed in terms of the PESTEL factors – political, economic,
social, technological, ecological and legal.
• Macro-environmental trends can be forecast according to different levels of uncertainty,
from single-point, through ranges to multiple-futures.
• A PESTEL analysis helps identify key drivers of change, which managers need to address in
their strategic choices. Alternative scenarios about the future can be constructed according
to how the key drivers develop.

Work assignments
✱ Denotes more advanced work assignments.
* Refers to a case study in the Text and Cases edition.

2.1 For an organisation of your choice, carry out a PESTEL analysis and identify key
opportunities and threats. Use Illustration 2.1 as a model. For simplicity, choose an
organisation that is focused on a limited number of industries.
2.2 For your own country, or any other country with which you are familiar, look up the
political risk as assessed by Aon, the Economist Intelligence Unit or similar (see refer-
ences in endnote 4). How far do you agree with this assessment?
2.3 For the last year or two, review the forecasts for national or global economic growth
made by key forecasting organisations such as the OECD or the World Bank (see
references in endnote 5). How accurate were they? What accounts for any difference
between forecast and outcomes?
2.4✱ For the same organisation as in assignment 2.1, and using Illustration 2.4 or Siemens
A as a model, construct four scenarios for the evolution of its macro-environment
(or main industry or sector). What implications are there for the organisation’s strategy?
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

Integrative assignment
2.5 Carry out a full analysis of an industry or sector of your choice (using for example
PESTEL and scenarios). Draw also on the five forces and strategic groups analyses of
Chapter 3. Consider explicitly how the industry or sector is affected by globalisation
(see Chapter 9, particularly Figure 9.2 on drivers) and innovation (see Chapter 10,
particularly Figure 10.2 on product and process innovation).

Table 1 Key statistics

2010 2012 2014 2015 2016 2017 2018

Alibaba Group Sales Yuan bn 6.7 20.0 52.5 76.2 101.1 158.3 250.3

Chinese GDP Yuan Tr. 40.4 53.4 64.4 68.9 74.4 82.7 90.0

Chinese online retail sales Yuan Tr. 0.5 1.3 2.8 3.9 5.2 7.2 n.a.

Per cent of Chinese using Internet 34.3 41.0 46.0 50.3 52.2 55.8 n.a.

Sources: Statistical Report on Internet Development in China; InternetLiveStats.com; Statista.com. One Yuan = €0.13; $0.15; £0.11.

proclaimed at a staff rally. ‘We will still follow the principle has also allied with several so-called ‘princelings’, children
of customers first, employees second and investors third!’ of important political leaders. Princeling investors include
Strictly, overseas investors do not directly own stakes Winston Wen, son of a former Chinese premier; Alvin
in the Alibaba Group, instead owning shares in a shell Jiang, grandson of a former Chinese President; He Jinlei,
company – a so-called variable interest entity (VIE) – that son of a former Politburo member and a senior manager
has a contractual claim on Alibaba’s profits. This VIE struc- of the state Chinese Development Bank; and Jeffrey Zang,
ture is a common way for Western-listed Chinese firms to get son of a former vice premier and a senior manager at
around Beĳing’s foreign-ownership rules. But the Chinese China’s state sovereign wealth fund, Citic Capital.
government could close the loophole at any time, and it Given Chinese President Xi Jinping’s sweeping political
gives foreign shareholders limited recourse against abuses and economic reform campaign, there are no guarantees
by Chinese companies’ managers. Ironically, the most notor- of Alibaba’s position domestically. In 2015, princeling
ious VIE controversy so far involved Alibaba’s Jack Ma, who investor He Jinlei’s older brother was placed under house
in 2011 separated Alipay from the rest of the Group without arrest because of accusations of corruption. 2015 had also
board approval. Ma said new Chinese regulations forced him seen the publication of an investigation by China’s State
to make the move. Yahoo was only told about the spin-off Administration for Industry and Commerce into counter-
five weeks after it had happened. A fundraising round for feit goods and fake listings on the Group’s Taobao site,
Alipay’s new parent company valued Alipay at nearly $50bn. leading to a 10 per cent fall in Alibaba’s share price. Jack
Jack Ma cultivated important relationships within China Ma commented on his relations with Chinese regulators:
as well as abroad. Early on he socialised with a group of ‘Over the past two years, not only was I a very controver-
businessmen known as the Zhejiang Gang, because of sial figure, but also these days, the disputes are bigger
their common roots in the province whose capital was and bigger.’ He continued, ‘I, too, felt puzzled, sometimes
Ma’s home city of Hangzhou. Prominent members of this wronged – how did things become this way?’ Nonetheless,
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

group included some of China’s most successful entrepren- Ma promised to clean up the site. In 2018, in an apparent
eurs: for example, Guo Guangchang of the huge divers- reproof, Chinese state media let out the news, previously
ified Fosun Group; Shen Guojun of China Yintai Holdings, withheld, that Jack Ma was a longstanding member of the
a retail property developer; and Shi Yuzhu, of the online Chinese Communist Party.
gaming company Giant Interactive. President Xi Jinping’s reform campaigns were partly
Alibaba’s relationship with the Chinese government is in response to changing economic conditions in China.
hard to read. Jack Ma insists that he has never taken loans After three decades of double-digit growth, China’s
or investment from the Chinese government or its banks: growth rate has slowed to around 7 per cent a year more
he had gone to overseas investors instead. However, given recently (see Table 1). Such growth is very respectable
that a third of Chinese business activity is carried out by world standards. Besides, faced with rising domestic
within state-owned enterprises, the government is bound concern about the environment, President Xi was happy
to be in close liaison with the dominant national player in to restrain the expansion of high polluting industries such
e-commerce. Ma explained his philosophy as: ‘Always try to as cement, coal and steel. At the same time, the Chinese
stay in love with the government, but don’t marry them.’ government was promoting e-commerce as a key area for
The Alibaba Group has built up its political connections. future economic growth. However, there were causes for
Tung Chee-hwa, Hong Kong’s first chief executive after its concern. Many local authorities and firms had borrowed
return to China, served on its board of directors. Alibaba heavily on expectations of higher growth, and there

were fears that financial institutions had over-lent. Some codes with their smartphone cameras to make instant
warned of a consequent crash. Moreover, it was hard to purchases through JD.com. Mobile commerce is increas-
see China’s growth rate picking up again, on account of ingly important in China, with 788 million people being
an aging population and the drying up of the traditional mobile users, 98 per cent of the country’s total user base
supply of young labour from rural villages: the Chinese in 2017. Mobile has been a challenge for Alibaba’s tradi-
labour force participation rate has dropped from a high tional PC-based retail model, but the company has been
of 79 per cent in 1990 to 69 per cent by 2017. Although catching up with about 80 per cent of its e-commerce
the government relaxed the famous one-child per family business on mobile devices by 2017.
rule in 2013, Chinese parents are still reluctant to have In a context of slower Chinese growth and increased
more children because of the cost of housing and good domestic competition, the internationalisation strategy
education in the main urban centres. It is predicted that by of Alibaba’s new Chairman Daniel Zhang seemed to make
the early 2030s, about a quarter of China’s population will sense. However, Zhang faced one major challenge: resist-
be over 65 (against 17 per cent in the United Kingdom). ance in the world’s second largest e-commerce market,
Slower economic growth in China overall is being the United States. In January 2017, the first month of the
matched by a slowing in the rate of growth of the Chinese new American Presidency, Jack Ma had met Donald Trump
e-commerce market (see Table 1). in New York and promised that Alibaba’s investment
At the same time, Alibaba faces greater competition in the United States would bring one million new jobs
in its home market. A decade ago, Alibaba had seen off to America. Alibaba invested in two large data centres
an attack by American rival eBay in the Chinese market for its expanding cloud computing business. However,
with a fierce price-war. Jack Ma had proclaimed: ‘EBay is the United States was the home of Amazon, Micro-
a shark in the ocean; we are a crocodile in the Yangtze soft and Google, all with vast cloud businesses of their
River. If we fight in the ocean, we will lose, but if we own. Besides, nationalist Donald Trump was imposing
fight in the river, we will win.’ A combination of cultural, boycotts on Chinese technology companies and threat-
linguistic and government policy factors kept Western ening tariffs. At the end of 2018, Alibaba announced the
internet companies at arm’s length in the Chinese winding down of its cloud computing operations in the
market: Google has been reduced to a market share of United States. For the Yangtze River crocodile, attacking
about 1 per cent, while Amazon eventually chose to list the ocean sharks in their home seas may have been a step
on Alibaba’s TMall site after a decade pushing its own too far.
venture in China. Main case sources: China Daily, 8 and 13 May 2015; Financial Times,
But now Alibaba’s home-market dominance is facing 9 September 2014 and 14 September 2018; South China Morning Post,
a local challenge from the aggressive JD.com. JD.Com’s 12 February 2015; Washington Post, 23 November 2014; Wall Street
Journal, 4 December 2018.
founder and chief executive Richard Liu has declared a
goal of beating Alibaba to the top position: ‘The compe-
tition makes the two companies stronger. I’m actually
enjoying competing.’ While Alibaba depended for a long
Copyright © 2019. Pearson Higher Education & Professional Group. All rights reserved.

time on China’s unreliable postal service to get its goods Questions

to customers’ doors, JD.com has been more like Amazon 1 Carry out a PESTEL analysis of Alibaba at the time of the
in investing heavily in its own distribution centres and case. Evaluate the balance of opportunities and threats,
delivery services. By 2018, JD.com had 16.3 per cent of using the same kind of figure as in Illustration 2.1.
China’s e-commerce market. Tencent, China’s largest 2 Draw a basic sociogram of Alibaba’s network (see
social networking and online games company, has taken Section 2.2.3 and Figure 2.5): some simplification may
a 15 per cent stake in JD.com, giving the challenger access be necessary. Explain why Alibaba’s network might be
to more than 890 million users of its WeChat phone useful.
messaging app. WeChat allows users to scan product bar

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1 Exploring Strategy Text and Cases - (2 Macro-Environment Analysis)

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Chapter 2

Key terms Learning outcomes

organisational field 41 • Evaluate different approaches to environmental forecasting.

PESTEL analysis 36 • Construct alternative scenarios in order to address possible

Figure 2.1 Layers of the business environment

Industry (or sector)

Figure 2.2 Analysing the macro-environment

The structure of this chapter is summarised in Figure 2.2.

2.2 PESTEL analysis

Illustration 2.1 A PESTEL for the FANGs

New growth regions; diversification E Developed world saturation

New technologies T Substitutes

L Online taxation and data constraints

Figure 2.3 The political environment

Direct state involvement

e.g. Defence industry e.g. Canal industry

e.g. Food industry e.g. Hotel industry

of particular organisations or sectors within a country. It is important to distinguish

Figure 2.4 Economic cycles and strategic investments

A second important social aspect of the macro-environment is organisational networks,

Figure 2.5 Sociogram of networks within an organisational field

C’s immediate network is denser than A’s; B is a broker; A is a more central

Illustration 2.2 Intelligence Unit 8200 and the Small World

Figure 2.6 Technology roadmap for the Internet of Things

14 Max CPU frequency

Figure 2.7 Contexts and motives for ecological issues

Contexts Organisational motives

be legitimacy, as reflected in regulatory compliance and a good reputation with consumers.

Illustration 2.3 Juul duels with the rules

However, Juul faced increasing criticism from the media,

A macro-environmental analysis of any particular country should therefore include an assess-

2.2.7 Key drivers for change

2.3.1 Forecast approaches

Figure 2.8 Forecasting under conditions of uncertainty

Outcomes Outcomes Outcomes

Time Time Time

Low Uncertainty High

2.3.2 Directions of change

• Megatrends are large-scale political, economic, social, technological, ecological or legal

2.4 Scenario analysis

Illustration 2.4 Colouring the World

Yellow World Red World

Green World Blue World

The five megatrends underpinning all the scenarios were:

Figure 2.10 The scenario process

Define Identify Develop Identify Monitor

uncertainty, in order to make different scenarios worthwhile (there’s no point in devel-

• Identifying impacts of alternative scenarios on organisations is the next key stage of

Thinking differently The crowdsourced forecast

Recommended key readings

Table 1 Key statistics

2010 2012 2014 2015 2016 2017 2018

time on China’s unreliable postal service to get its goods Questions

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