Week 3 - Macro- Environment

Question 1

Internal & External environment

Answer 1

• Internal Environment: the organisations capabilities which will determine what the organisation can do and how these capabilities are fitted to the external environment and the strategies employed - future weeks
  
- External Environment: the environment in which a firm operates, and the environmental constraints that may limit what an organisation might do

Question 2

Layers of the business environment


Answer 2

• the macro-environment consist of broad environmental factors that impact to a greater or less extent many organisations, industries and sectors

Question 3

Analysing the macro-environment 


Answer 3

1) PESTLE analysis (market - suppliers, customers, competitors, non-market - politics, legal aspects/legislation, social/cultural, and ecological) 

a) Forecasting (megatrends, inflection points, weak signals - prediction emphasis)

b) Scenario analysis (earning emphasis)

Question 4

PESTLE framework

Answer 4

• can be considered a strategic planning tool

• way of mapping the macro-environment and a number of different factors
  
- also used as a checklist to understand the different environmental influences in the macro-environment
  
- Highlights 6 environmental factors (political, economic, social (socio-cultural), technological, legal and ecological
• Organisations need to consider: the market environment (e.g. suppliers, customers & competitors) The non-market environment (e.g. NGOs, Government, media and campaign groups)

Question 5

Key Drivers for change

Answer 5

• PESTLE helps us to consider key driver for change in relation to the macro-environment 

• Key drivers for change are environmental factors that are likely to have a high impact on industries and sectors, and impact on the success of failure of strategies within them 

• Typical key drivers vary by industry or market - again think of the 6 key environmental factors here

Question 6

Political Factors

Answer 6

• Political factors highlight the role of the sate and other political influences 

• Political factors include: The role of the state (e.g. as an owner, customer or supplier of businesses), Government policies, Taxation changes - sugar tax coca-cola keep classic make sizes smaller sugar free big, Foreign trade regulations, political risk in foreign markets, changes in trade blocks (e.g. Brexit, Trump administration), Exposure to civil society organisations (e.g. lobbyists, campaign groups, social media)

Question 7

• There are 2 key dimensions to political risk analysis

Answer 7

1) Macro-micro dimension - assessment of 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 specific organisations
2) 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

Question 8

Economic Factors & Economic Cycles

Answer 8

• are influenced by macro-economics and associated changes (e.g. growth rates, recessions) 

• Factors include (Interest rates, personal disposable income, exchange rates, unemployment rates, differential growth rates around the world)

• 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 

  1) 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 

  2) Juglar or ‘investment’ cycle is a medium-term cycle (7-11 years) driven by surges of investment in capital equipment 

  3) Kuznets or ‘infrastructure’ cycle is the longest (15-25 years) and follows the life-spans of infrastructure investments (e.g. housing transport)
  
- Some industries are particularly vulnerable to economic cycles 1) Discretionary spend industries (e.g. cars where spending can easily ‘put off’ by consumers) 2) High fixed cost industries (e.g. airlines where costs do not often vary, differentiation)

Question 9

Social Factors

Answer 9

• consider a multitude of issues relating to social and cultural changes in the environment 

• Factors include: Changing cultures and demographics (e.g. ageing population in western societies) Income distribution (huge shift in wealth in recent years) Lifestyle Changes (healthier populations, increase in intolerances) Changes in culture (fashion technology online shopping, transport) Social networks within an organisational field (e.g. with regulators, campaign groups, trade unions - community of organisations which interact with one another more frequently)

Question 10

Sociograms

Answer 10

• maps of potential import social connections within a organisational field 

• can help asses the effectiveness of networks and identify who is the most powerful and innovative within them 
Power and innovation increase with 
1) network density - the number of interconnections between members 

  2) Central hub positions - When a particular organisation interacts with many other members 

  3) Broker positions - an organisation that connects otherwise separate groups/organisations

Question 11

Technological Factors

Answer 11

• Consider the changes in technology and innovation and their impact on organisations 

• Focus on new discoveries and technology developments (innovative activity) 

• examples include developments on the internet, nano-technology, the rise of AI. BBC business model changes have been discuss to compete with Netflix, Amazon prime Video. Technology-driven organisations mono 


Question 12

5 primary indicators of innovative activity

Answer 12

1) Research and development budgets - what are trends in spending on r&d/innovation (organisations, countries) 

2) Patenting activity - who is patenting what

3) Citation analysis - the impact of academia on new developments 

4) New product announcements - organisations publicise these in advance

5) Media coverage - coverage of technology trends in the media, on social media, word of mouth

Question 13

Legal Factors

Answer 13

• can cover a wide range of legislative issues (focus specifically of legislation aspects of politics) 

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

• PESTLE analysis should also consider informal norms. Informal rules are patterns of expected (’normal’) behaviour that are hard to ignore (e.g. proper respect for the ecological environment)

Question 14

Varieties of capitalism

Answer 14

• Formal and informal rules vary sufficiently between countries to define very different institutional environments 

  1) Liberal market economics - formal & informal rules favour competition between companies (US, UK)

  2) Coordinated market economies - encourage more coordination between companies, supported by industry associations or similar frameworks (Germany, Japan)

  3) Developmental market economies - strong roles for the sate, which own or influence companies that are important for economic development (China, India) 


Question 15

Ecological Factors

Answer 15

• refer to ‘green’ or environmental issues, such as pollution, waste and climate change
  
- Examples include environmental protection regulations, energy problems, global warming, waste disposal and recycling

Question 16

3 Types of ecological challenges that organisation may need to meet

Answer 16

1) Direct pollution obligations – minimising the production of pollutants; cleaning up and disposing of waste.
2) Product stewardship – managing ecological issues throughout the organisation’s entire value chain and the whole life cycle of the firm’s products.

3) Sustainable development – whether the product or service can be produced indefinitely into the future.

Question 17

Key points of PESTLE framework

Answer 17

• 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

Question 18

Where/when to use PESTLE framework

Answer 18

• Different levels of an organisation - C-suite, middle managers.
• Consultancy tool - practical application to help firms.
• Graduate schemes - demonstrate knowledge of the macroenvironment and problem-solving.

Question 19

Forecasting

Answer 19

• All strategic decisions involve forecasts about future conditions and outcomes. 

• PESTLE 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:
  1) Single-point.
  2) Range.
  3) Multiple (or alternative) futures forecasting.

Question 20

Directions of change

Answer 20

• 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. subSaharan 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.

Question 21

Scenarios & Process

Answer 21

• 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 PESTLE analysis and the idea of 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

  1) Define scope (industry, region, years) 2) Identify key drivers (PESTLE, forecasts, cube) 3) Develop distinct scenario ‘stories’ (name scenarios) 4) Identify impacts (check and adapt strategies) 5) monitor progress (early warning indictors)