Exploring Strategy

11th edition
Text and Cases

Part 1
The Strategic Position
Chapter 2
Macro-environment analysis

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The focus of Part I: The Strategic Position

• How to analyse an organisation’s position in the

external environment – both macro-environment and
industry or sector environment.
• How to analyse the determinants of strategic
capability – resources, competences and the linkages
between them.
• How to understand an organisation’s purposes, taking
into account corporate governance, stakeholder
expectations and business ethics.
• How to address the role of history and culture in
determining an organisation’s position.
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Strategic position

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Slide 2.4

Layers of the business environment

The condition that exist in the
economy as a whole, rather than
in a particular sector or region. In
general, the macro environment
will include trends in gross
domestic product (GDP), inflation,
employment, spending, and
monetary and fiscal policy.
Sector refers to a large segment
of the economy, while the term
industry describes a much more
specific group of companies or
businesses.

Micro environment
elements.
Micro environment
elements.

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 Understand how these factors impact
on one another.

Scenarios

Key Drivers

Macro
Factors

5
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 PESTEL Framework

Political Economic

Social Technological

Environmental Legal
Johnson et al 2010

Purpose of the Framework

To conduct an Environmental or Impact Audit and Analysis.

The objective is to understand and assess the impact of the various
external factors (individually and collectively) upon a business and
equally an industry both within and across borders.

6
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Analysing the macro-environment

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 The PESTEL framework (1 of 2)
PESTEL analysis highlights six environmental factors in
particular: political, economic, social, technological,
ecological and legal.
Organisations need to consider:

• The market environment (e.g. suppliers,

customers and competitors).

• The non-market environment (e.g. NGOs,

Government, media and campaign groups).

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 The PESTEL framework (2 of 2)
The PESTEL framework categorises environmental factors
into six key types:

Political Economic
Social Technological
Ecological Legal

PESTEL helps to provide a list of potentially important

issues influencing strategy. It is important to assess the
impact of each factor.

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 Political factors (1 of 3)
Political factors include:
• The role of the state e.g. as an owner, customer or
supplier of businesses.
• Government policies.
• Taxation changes.
• Foreign trade regulations.
• Political risk in foreign markets.
• Changes in trade blocks (e.g. BREXIT).
• Exposure to civil society organisations
(e.g. lobbyists, campaign groups, social media).

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 Political factors (3 of 3)
Political risk analysis is the analysis of threats and
opportunities arising from potential political
change. There are two key dimensions to political
risk analysis:
• The macro–micro dimension – assessment of the
macro risk is that which attaches to whole
countries (e.g. middle east countries assessed as
high risk.) Micro risk is that which attaches to the
specific organisation.
• The internal–external dimension – internal
factors relate to issues within a country (e.g.
government change); external factors arise
outside a country but have an impact within it
(e.g. OPEC oil prices).
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 Economic factors (1 of 3)
Economic factors include:
• Business cycles.
• Interest rates.
• Personal disposable income.
• Exchange rates.
• Unemployment rates.
• Differential growth rates around the world.

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 Social factors (1 of 2)

Social factors include:

• Changing cultures and demographics (e.g. ageing
population in Western societies).
• Income distribution.
• Lifestyle changes.
• Consumerism.
• Changes in culture and fashion.
• Social networks within an organisational field
(e.g. with regulators, campaign groups, trade unions).

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 Technological factors (1 of 2)

Technological factors include:

New discoveries and technology developments.
Examples include developments on the
internet, nano-technology or the rise of new
composite materials.

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 Technological factors (2 of 2)
There are five primary indicators of innovative
activity:
• Research and development budgets.
• Patenting activity.
• Citation analysis.
• New product announcements.
• Media coverage.

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 Ecological factors (1 of 2)
Ecological factors: This refers to ‘green’ or
environmental issues, such as pollution, waste
and climate change.
Examples are environmental protection
regulations, energy problems, global warming,
waste disposal and recycling.

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 Ecological factors (2 of 2)
Three sorts of ecological challenges that organisations
may need to meet:
• Direct pollution obligations– minimising the
production of pollutants; cleaning up and disposing
of waste.
• Product stewardship – managing ecological issues
throughout the organisation’s entire value chain and
the whole life cycle of the firm’s products.
• Sustainable development – whether the product or
service can be produced indefinitely into the future.

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 Legal factors (1 of 3)

Legal factors include:

• Labour, environmental and consumer
regulations.
• Taxation and reporting requirements.
• Rules on ownership.
• Competition regulations.
• Regulation of corporate governance.

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 Key drivers for change

Key drivers for change:

• Key drivers for change are environmental factors that
are likely to have a high impact on industries and
sectors, and impact on the success or failure of
strategies within them.
• Typically key drivers vary by industry or market.
• For example, retailers are concerned with social
changes and customer behaviour which have driven a
move to ‘out-of-town’ shopping. Personal disposable
income also drives demand for retailers.

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 Using the PESTEL framework
• Apply selectively – identify specific factors which
impact on the industry, market and organisation in
question.
• Identify factors which are important currently but also
consider which will become more important in the
next few years.
• Use data to support the points and analyse trends
using up-to-date information.
• Identify opportunities and threats – the main point of
the exercise.

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PESTEL opportunities and threats for
the oil industry

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 Forecasting
• All strategic decisions involve forecasts about
future conditions and outcomes.
• PESTEL factors will feed into these forecasts.
• Accurate forecasting is notoriously difficult as
organisations are frequently trying to surprise
their competitors.
• Forecasting takes three fundamental approaches
based on varying degrees of certainty:
─ Single-point.
─ Range.
─ Multiple-futures forecasting.

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Forecasting under conditions
of uncertainty

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 Directions of change
• Megatrends – large-scale changes that are slow to form but
influence many other activities over decades to come.
Examples include ageing populations and global warming.
• Inflexion points – when trends shift sharply upwards or
downwards. E.g. sub-Saharan Africa may have reached an
inflexion point after decades of stagnation (and may embark
on a period of rapid growth).
• Weak signals – advanced signs of future trends that may
help to identify inflexion points – often unstructured and
fragmented bits of information. E.g. mortgage failures in
California in 2007 were a weak signal for the financial crisis
that hit the global economy in 2008.

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 Scenarios
Scenarios are plausible views of how the environment of
an organisation might develop in the future based on key
drivers of change about which there is a high level of
uncertainty.
• Build on PESTEL analysis and drivers for change.
• Offer more than a single view. An organisation will
typically develop a few alternative scenarios (2–4) to
explore and evaluate future strategic options.
• Scenario analysis is used in industries with long
planning horizons, for example, the oil industry or
airlines industry.
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The scenario cube

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 Carrying out scenario analysis (1 of 2)

• Identify the most relevant scope of the study –

the relevant product/market and time span.
• Identify key drivers of change – PESTEL factors
which will have the most impact in the future
but which have uncertain outcomes and are
mutually independent.
• For each key driver select opposing outcomes
where each leads to very different
consequences.

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 Carrying out scenario analysis (2 of 2)

• Develop scenario ‘stories’: That is, coherent and

plausible descriptions of the environment that
result from opposing outcomes.
• Identify the impact of each scenario on the
organisation and evaluate future strategies in the
light of the anticipated scenarios.
• Monitor progress: Identify indicators that might
give an early warning of the way the environment
is changing and monitor such indicators.

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The scenario process

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 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
need to addressed in strategy. Alternative scenarios can be
constructed around key drivers.
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 Next Week

• We will examine industry lifecycles and Porter’s 5 Forces

framework.
• Read the Case: Global Forces and the Advertising Industry (pp: 92
– 95) in Johnson et al (2017) and answer Questions 1 and 2.

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 Unit 2 Seminar

• In your teams you will analyse the macro environment of

Alibaba (pp 58 – 60 in the core text)
• Be prepared to present your findings to the rest of the class.

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