1. Exploring Strategy 11th edition Text and Cases
Part 1
The Strategic Position
Chapter 2
Macro-environment analysis

2. 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.

3. Strategic position
Figure I.1 Strategic position

4. Layers of the business environment
Figure 2.1 Layers of the business environment

5. Analysing the macro-environment
Figure 2.2 Analysing the macro-environment

6. 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).

7. 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.

8. 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).

9. Political factors (2 of 3)
Figure 2.3 The political environment

10. 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).

11. 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.

12. 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).

13. Economic cycles
Figure 2.4 Economic cycles

14. 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).

15. 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).

16. 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.

17. Sociogram of social networks within an organisational field
Figure 2.5 Sociogram of social networks within an organisational field

18. 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.

19. 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.

20. Technology roadmap for graphene technology in electronics
Figure 2.6 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).

21. 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.

22. 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.

23. Contexts and motives for ecological issues
Figure 2.7 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).

24. 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.

25. 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).

26. 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).

27. 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.

28. 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.

29. PESTEL opportunities and threats for the oil industry

30. 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.

31. Forecasting under conditions
of uncertainty
Figure 2.8 Forecasting under conditions of uncertainty

32. 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.

33.  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.

34. 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.

35. 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 .

36. The scenario cube
Figure 2.9 The scenario cube: selection matrix for scenario key drivers

37. 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.

38. 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.

39. The scenario process
Figure The scenario process

40. 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.