Ch.3 Macro-environmental analysis Flashcards
Briefly describe PESTEL analysis. What does it aim to do?
Examines macro-environmental factors, 6 types. Aims at identifying key drivers for change, covering both market and non-market aspects.
PESTEL: Describe the market environment and non-market environment.
The market environment
Consists mainly of suppliers, customers and competitors = environmental participants
Interactions primarily economic, here companies compete for resources, revenues and profits.
Key strategies: Pricing, quality and innovation.
The non-market environment
concerns primarily: social, political, legal, ecological factors, but can be impacted by economic factors. Key strategies: Lobbying, public relations, networking, philanthropy and collaboration.
PESTEL: Describe the Political factor. What is political risk analysis?
Highlights the role of the state and other Political Factors in the macro-environment.
Analyses the importance of political factors and assesses political risk of both macro & micro levels.
There are 2 important steps in political analysis: 1) Evaluating the importance of political factors. 2) carrying out
political risk analysis.
Orgs that face politicized environments, esp those operating in many countries, should carry out political risk
analysis - the analysis of threats and opportunities arising from potential political change.
Two key dimensions to political risk analysis:
The analysis of threats and opportunities arising from potential political change.
1. The macro dimension: risks associated with whole countries ex Nigeria and Russia. Some middle eastern
countries rank high in terms of macro-political risk because change of gov can be sudden and radical.
2. The micro dimension: specific risk of particular organizations or sectors within a country. China is
typically ranked medium political risk on the micro dimension but for some Japanese companies in China
micro risk is higher.
PESTEL: Describe the Economic factor. What role does the economic cycle play?
Examines micro-economic factors like currency exchange rates, interest rates, fluctuating economic growth rates.
Managers must consider how these factors affect markets, export/import viability and investment decisions.
Economic cycle: Key concept for analyzing macro-economic trends.
Economic growth rates rise and fall in cycles. These cycles link to other important economic variables - ex
growing interest rates. Key is to identify cyclical turning points.
PESTEL: Describe the Social factor.
Considers how social factors impacts demand, supply innovation and organisational networks. Key aspects
include demographics, wealth distribution, geography and cultural attitudes.
Social elements of the macro-environment have at least 2 impacts upon organizations.
1. Influence the specific nature of demand and supply, within the overall economic growth rate.
2. Can shape the innovativeness, power and effectiveness of organizations.
PESTEL: Social factor: What are the fours key aspects that can shape demand and supply?
- Demographics: aging populations
- Distribution: changes in wealth distribution
- Geography: Industries and markets can be concentrated in particular locations. Ex London, Silicon Valley
- Culture: Changing cultural attitudes can raise strategic challenges. Ex ethical attitudes are challenging profit
maximizing investment strategies in the financial service industry. Can also link to changing demographics.
PESTEL: Social factor: Describe Organizational networks and Sociograms.
Organisational networks (organisational fields), a second important aspect of macro-env.
Community of orgs that interacts more frequently with one another than with those outside the field.
Fields are party economic, may include competing org within the industry sector. Also emphasis on non-economic or social interactions with other orgs.
May be interactions with political org. = The organizational is much broader than just industries or markets.
Sociograms:
Maps of potentially important social (or economic) connections within an organisational field.
1. Network density: The number of interconnections between members. Effectiveness is increased by density -
better sharing of new ideas between network members.
2. Broker positions: An org that connects otherwise separate groups/orgs. Associated with Innovativeness. Ability to
link valuable info from one group of organizations with valuable from another. Because they provide the
connection between 2 groups → able to exploit this combo of info before anybody else.
3. Central hub positions: When a particular org interacts with many other members. Provide power within networks.
Connects many orgs. Have power because network members rely on them for interconnection with other
Ch 3: Micro-environment analysis (L3) 5
members. Hubs potentially innovative because can collect ideas from the whole network.
PESTEL: Describe the Technological factor. What are the five primary indicators of innovative activity?
New technologies open up opportunities for some orgs while challenging others.
Explores the impact of technological advancements on industries and organizations. Identifies innovative
activities through indicators like:
5 primary indicators of innovative activity
1. Research and development budgets: innovative firms, sectors, countries can be identified by extent of
spending on research.
2. Patenting activity:
3. Citation analysis: Impact of patents - how much they been cited by orgs
4. New product announcements:
5. Media coverage
Indicators help to identify areas of rapid technological change and locate centers of technological leadership.
PESTEL: Describe the Ecological factor.
Refers to environmental issues like pollution, waste, and climate change. Organizations must manage direct
pollution, practice product stewardship, and promote sustainable development in their value chains.
Ex are environmental protection regulations, energy problems, recycling, waste disposal
Environmental regulations can impose additional costs but also be a source of opportunity.
PESTEL: Ecological factor: What are the three sorts of ecological challenges that organisations might need to meet?
- Direct pollution obligations: Minimising the production of pollutants; cleaning up and disposing waste.
- Product stewardship: managing ecological issus though both orgs entire value chain and the whole cycle of firms
products. Även ansvar för products at end of life - how they are disposed when consumers have no more use of them. - Sustainable development: Whether the product or service can be produced indefinitely. Constraints on over-exploitation.
To what extent these criterions matter for an organisation relies on 3 contextual sources of pressure.
PESTEL: Describe the Legal factor.
Encompasses various legal aspects, including Labours, environmental and consumer regulation; taxation and reporting requirements; and rules on ownership, competition and corporate governance.
Recognizes the significance of formal and informal rules in different institutional environments.
Relaxation of legal constraints through deregulation has created many new business opportunities. But can also handicap orgs - Juul.
PESTEL analysis should consider not only formal laws and regulation but also more informal norms. Varies
between countries - Varieties of capitalism: have implications for the ways in which business and management are done and the prospects of success,
both for insiders and outsiders.
PESTEL: Legal factor: What are the three varieties of capitalism?
- Liberal market economies:
a. Institutional environments where both formal and informal rules favour competition between companies. Supports radical innovation and receptive to foreign firms. ≈ US, UK - Coordinated market economies:
a. Encourage more coordination between companies, supported by industry associations. b. Legal and normative constraints on hostile acquisitions, and various supports for consensual and
collective arrangements between management and labor. Family ownership is common. Support steady innovation over the long run, and because of coordination networks - less easy for foreign firms to penetrate. ≈ Germany, Japan, Sweden - Developmental market economies:
a. Strong roles for the state, which own or influence companies that are important for national economic
development. b. State will often encourage private-sector firms to coordinate between themselves and with national economic policy makers. Labor relations highly regulated ish. Banks often state owned, key source of funding. India, China, Brazil.
Describe key drivers for change?
Focus on key drivers of change that are likely to have a high impact on industries & sectors, and impact on the success or failure of strategies within them.
Key drivers vary by industry or market. Ex. social and legislative changes discouraging car use, affect
supermarkets more than retail banks.
What is forecasting? What are the three fundamental approaches?
All strategic decisions involve forecasts about future conditions and outcomes.
PESTEL factors will feed into these forecasts.
Accurate forecasts: difficult as orgs are frequently trying to surprise competitors.
Forecasting: Takes 3 fundamental approaches to the future based on varying degrees of certainty.
- Single-point forecasting, 2. Range forecasting and 3. Alternative futures forecasting.
Forecast approaches: What is Single-point forecasting?
Single-point forecasting: Provides one specific forecast, indicating high confidence in the prediction. Often used for short-term, certain trends (demographic). Attractive - easy to translate into budgets. Motivation +
Accountability for managers with single sales forecast.
Forecast approaches: What is Range forecasting?
Range forecasting: Less certainty. Offers a range of possible outcomes with varying degrees of probability.
Commonly seen in economic forecasts, displaying increasing uncertainty over time. Economic growth rates, inflation rates.
Forecast approaches: What is Alternative futures forecasting?
Alternative futures forecasting: Even less certainty. Focus on a set of possible, yet distinct outcomes. Alternative feature = discontinuous: they happen or they don’t, with radically different outcomes. Influenced by significant
policy decisions. Probabilities can be assigned to each outcome. Used in scenario analyses for complex
situations.
Forecasts should be checked with major trends to be alert to possible turning points that might invalidate existing forecasts. What are the three key concepts?
- Megatrends: Large scale changes, slow-forming movements in P-E-S-T-E-L, that are slow to form but influences many areas of activity, possibly over decades. Sets direction for other factors incl. key drivers of change in particular sectors.
- Inflexion points: Movements when trends shift in direction, upwards or downwards. Likely to invalidate forecasts → important to grasp it at the movement when trends just start to turn → to take advantage of new opportunities early/act against escalating decline fast.
- Weak signals: Advanced signs of future trends that may help identifying inflexion points - often unstructured and fragmented bits of info. Important to be alert to weak signals, but easy to be overwhelmed by noise.
What is Scenario analysis?
Plausible view of how the environment of an org might develop in the future based on key drivers of
change about which there is a high level of uncertainty. Unlike forecasting, scenario analysis does not make explicit predictions but focuses on understanding different possible futures. Should raise the possibility of radical and discontinuous change. Built on PESTEL analysis and drivers of change. Offer more than a single vie: 2-3 scenarios to explore and evaluate future strategic options.
Scenario analysis: What are the five steps of scenario-building process?
- Defining Scope: Determine the subject and time span of the scenario analysis, considering investment lifespans. Industry, region, years
- Identifying Key Drivers for Change: Focus on impactful, uncertain, and mutually independent factors that drive divergent outcomes. PESTEL, megatrend, inflexions, weak signals, Focus on impactful, uncertain and mutually independent factors.
- Developing Scenario Stories: Craft coherent narratives that incorporate key drivers, often with striking titles for communication. Name scenarios, coherent narrative that incorporate key drivers.
- Identifying Impacts: Assess how scenarios affect organizations and adapt strategies accordingly. Check and adapt strategies (assess how scenarios affect org).
- Monitor Progress: Continuously track developments against scenario expectations and establish indicator
systems for early warnings. Early warning indicators.
