Analysis of Macro Environment and its impact Flashcards
Why should firms invest in analysis of their external environment?
The need for an organisation to be a good ‘fit’ with conditions
Evolving competition, demand, technology, etc.
The potential to benefit from
An attractive industry or niche, or
A favourable position in an industry value chain
The need to adapt to environmental change
Change is often discontinuous
Change can make firm capabilities valueless
The need to overcome inertia and cognitive biases
Managers and organisations can become stuck in a ‘paradigm’ and fail to react adequately to these changes
Individuals and managers can be diverted from longer-term strategising by ‘crises’.
Strategic analysis is supposed to:
Reveal diverse contingencies, opportunities, and threats,
Correct misperceptions about trends and causal relations,
Weaken commitments to outdated strategies,
support development of cogent new strategies
But if biased towards status-quo cognition and power structure, it might:
Conceal diverse contingencies, opportunities, and threats,
Create or reinforce misperceptions about trends and causal relations,
Reinforce commitments to outdated strategies
And if biased towards undermining entrenched power structure, it might:
- result in managers exploiting ‘crises’ to push their agendas,
- be captured to present ‘burning platforms’ that are not really burning,
- hence undermine established income streams and competitive advantage.
Focus analysis on:
-Specified future times relevant to setting strategy
-Factors likely to change in ways that have significant impact (positive or negative) on the firm and its industry.
Eg PESTLE
People’s thinking is subject to various biases that can adversely affect outcomes:
E.g. Confirmation bias, resulting from
Selective information search
Reliance on initial impressions and anecdotes
Desire for social inclusion
Confirmation bias and prior hypothesis bias affect strategic decisions because:
Managers and employees have interests in the status quo.
Strategic decisions rely on uncertain projections that are easy to argue for or against.
Recency bias
Thinking is excessively dominated by current/recent events
Disease outbreaks, seismic events, financial crises.
Escalating commitment
Continuing to invest money in a venture “to recoup sunk costs” when better investments are available
- When to stop operating a loss-making coal mine?
- When to close production of a slow-selling aircraft?
- When to stop building a railway that has become excessively expensive?
Illusion of control (hubris)
CEOs may be prone to attributing success to their own actions, when it may actually contingent on circumstances largely beyond their control
Framing effects
The form of expression of a problem unduly influences the outcome
Can be from the way a CEO frames or orchestrates a strategy workshop or consultation
Can be from management tools or ideas
Anchoring effect
The number or approach first suggested biases the eventual decision outcome even if participants know it is completely wrong
Partial solution: start anew; break the proceedings
Risky in negotiations …
Awareness of potential biases can reduce their effects:
Actively seek alternative evidence-based viewpoints
Reconsider when new evidence arises
Potential recommendations from PESTEL
-Adapt to expected changes
Develop new capabilities (e.g. technological)
Develop new markets
Cannibalise existing income streams before others cannibalise them for you
-Try to influence the environment:
Lobby to influence political/legal developments
Establish industry associations
Engage with stakeholders
Scenario thinking
Develop and plan for several alternative possible futures
