Exploring Strategy

11th edition
Text and Cases

Part 1
The Strategic Position

Chapter 2
Macro-environment analysis
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.
Strategic position
Slide 2.4

Layers of the business environment

Analysing the macro-environment
 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).
 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.
 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).
Political factors (2 of 3)
 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).
 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.
 Economic factors (2 of 3)
Economic cycles – economic growth rates have an
underlying tendency to rise and fall in regular cycles
and are made up of three principal sub-cycles:
• Kitchin or ‘stock’ cycle is the shortest cycle (3–4
years) is driven by the need to build up stocks as
economies emerge from recessions.
• Juglar or ‘investment’ cycle is a medium-term cycle
(7–11 years) driven by surges of investment in capital
equipment.
• Kuznets or ‘infrastructure’ cycle is the longest (15–25
years) and follows the life-spans of infrastructure
investments (e.g. housing, transport).
Economic cycles
 Economic factors (3 of 3)
Some industries are particularly vulnerable to
economic cycles:

• Discretionary spend industries (e.g. housing,

cars).
• High fixed cost industries (e.g. airlines,
hotels).
 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).
 Social factors (2 of 2)
Sociograms are maps of potentially important social (or
economic) connections within an organisational field.
Maps can help assess the effectiveness of networks and
identify who is the most powerful and innovative within
them.
Power and innovation increase with:
•Network density – the number of interconnections
between members.
•Central hub positions – when a particular organisation
interacts with many other members.
•Broker positions – an organisation that connects
otherwise separate groups/organisations.
Sociogram of social networks within an
organisational field
 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.
 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.
 Technology roadmap for graphene technology
in electronics

Source: Substantially simplified from A. Ferrari, ‘Science and technology roadmap for graphene’, Nanoscale, vol. 7 (2015),
pp. 4598–4810 (Figure 121, p. 4759).
 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.
 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.
Contexts and motives for ecological issues

Source: Substantially adapted from P. Bansal and K. Roth, ‘Why companies go green: a model of ecological responsiveness’,
Academy of Management Journal, vol. 43, no. 4 (2000), pp. 717–36 (Figure 2, p. 729).
 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.
 Legal factors (2 of 3)
PESTEL analysis should consider not only formal
laws and regulations but also more informal
norms:
Informal rules are patterns of expected
(‘normal’) behaviour that are hard to ignore (e.g.
proper respect for the ecological environment).
 Legal factors (3 of 3)
Varieties of capitalism. Formal and informal rules vary
sufficiently between countries to define very different
institutional environments:
• Liberal market economies – formal & informal rules
favour competition between companies (US, UK).
• Coordinated market economies – encourage more
coordination between companies, supported by
industry associations or similar frameworks (Germany,
Japan).
• Developmental market economies – strong roles for
the state, which own or influence companies that are
important for economic development (China, India).
 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.
 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.
PESTEL opportunities and threats for
the oil industry
 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.
Forecasting under conditions
of uncertainty
 Forecast approaches
• 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)).
• Range forecasting is where organisations have less
certainty, suggesting a range of possible outcomes with
different degrees of probability and a central projection
identified as the most probable (Figure 2.8(ii)).
• Alternative futures forecasting typically involves even less
certainty, focusing on a set of possible yet distinct
futures with radically different outcomes (see Figure
2.8(iii)). Alternative futures can be fed into scenario
analyses though not as simple forecasts.
  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.
 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.
 Figure for Illustration 2.4

Gartner Inc (2014), Last Call For Datatopia Boarding Now! Four Future Scenarios
On The Role of Information and Technology in Society, Business and Personal Life,
2030
Source: Adapted from Gartner Inc. (2014), p. 6 .
The scenario cube
 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.
 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.
The scenario process
 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.