Chapter 3: Macro-environmental analysis

Question 1

What is the P in Pestel?

Answer 1

P for political.

Two important factors:

1: the role of the state
- government policies
- taxation changes
- foreign trade regulations
- political risk in foreign markets
- changes in trade blocks (Brexit)

2. exposure to civil society organizations:
   civil society comprises a whole range of non-state organizations that are liable to raise political issues, including political lobbyists, campaign groups, social media or traditional media.

Question 2

What is the first E in PESTEL?

Answer 2

Economic.
Where are we in the economic cycle of growth? Recession or not? How long will it last? How does it influence us?

It is important for an organization to understand how its markets are affected by the prosperity of the economy as a whole

• business cycles
• unemployment rates
• currency exchange rates
• interest rates
• fluctuating economic growth rates

The key is to identify cyclical turning points. Managers making long-term strategic decisions should assess where they stand in the overall economic cycle.

Question 3

What is the S in PESTEL?

Answer 3

S for Social.

Impacts on org in two ways:

1. How does the nature of demand and supply look like?

There are several key aspects of the social environment that can shape demand and supply. These can be analyzed under the following four headings:

• demographics
• wealth distribution
• geopgrahy
• culture

2. How does the social factors shape the innovativeness, power and effectiveness of organizations?

Organizational networks has significant implications for innovativeness, power and effectiveness. These networks are described as organizational fields.

Question 4

What is the T in PESTEL?

Answer 4

T for Technology.

Identify areas of potential innovative activity and of rapid technological change and locate centers of technological leadership.

New technologies can open up opportunities (Spotify & Netflix), and also challenge others (traditional music and broadcasting companies).

Question 5

Which are the five primary indicators for innovative activity (T in PESTEL)?

Answer 5

There are five primary indicators of innovative activity:

1. Research & development budgets
   Innovative firms can be identified by the extent of spending on research, typically reported in an annual report
2. Patenting activity
   Firms active in patenting new technologies can be identified on public national patent registers
3. Citation analysis
   How much they are cited on google scholar for instance
4. New product announcements
   Through press releases or social media
5. Media coverage

Question 6

What is the second E in PESTEL?

Answer 6

E for Ecological.

Refers to green or environmental issues such as pollution and waste.

Environmental issues can make governments impose environmental regulations or additional costs, such as pollution control. But it might also be an opportunity for firms that wants to become niche within sustainability.

Question 7

What are the three sorts of environmental challenges that organizations may need to consider?

Answer 7

1. Direct pollution obligations
   Not just about cleaning up, but also minimizing the production of pollutants in the first place. Having clean processes for supply, production and distribution.
2. Product stewardship
   Refers to managing ecological issues through both the organizations entire value chain and the whole life cycle of the firms products
3. Sustainable development
   Not only about reducing environmental damage, but if the product or service can be provided in the future
   This sets constraints on the over-exploitation of raw material

Question 8

What is the L in PESTEL?

Answer 8

Legal, both informal and formal. These can cover a wide range of topics.

• labour, environmental and consumer regulation
• taxation and reporting requirements…
  regulations can however also handicap organizations
• rules on ownership
• competition regulations
• regulation of corporate governance

Legal issues are an important part of the institutional environment of organisations; “the formal and informal rules of the game”. the concept of institutional environment suggests that it can be useful in a PESTEL analysis to consider not only formal laws and regulations but also more informal norms; the L in legal can be stretched to cover all types of rules, informal and formal

informal rules - patterns of expected (normal) behavior that are hard to ignore.

Question 9

What is the definition of key drivers of change?

Answer 9

The environmental factors likely to have a high impact on industries and sectors

Question 10

What is forecasting?

Answer 10

All strategic decisions involve forecasts about future conditions and outcomes.

• a manager may decide to invest in new capacity because of a forecast of growing demand (condition) with the expectation that the investment will help capture increased sales (outcome)
• PESTEL factors will feed into these forecasts, in ie tracking economic cycles or mapping future technologies

Question 11

Forecasts should be checked with major trends to be alert to possible turning points. Which are these?

Answer 11

1. Megatrends
   large-scale political, economic, social, technological, ecological or legal movements that are typically slow to form.
   A mega trend usually sets the direction for other factors
2. Inflexion points
   Moments when trends shift in direction, turning sharply up or down. (covid)
3. Weak signals
   advanced signs of future trends
   gangam style in 2012 —> success of Korean cultural products (and squid game)
   it is important to be alert on weak signals, but it is also easy to be overwhelmed by the noise; the constant stream of isolated and random bits of information without strategic importance
   no rulebook in how to identify this

Question 12

What are the three types of forecasting?

Answer 12

Forecasting takes three fundamental approaches based on varying degrees of certainty:

1. single-point forecasting
   
   1. where organisations have such confidence about the future that they will provide just one forecast number. one point to another. statistical view over demographics; how many retire, easy to predict
2. range
   
   1. where organizations have less certainty, suggesting a range of possible outcomes
3. multiple/alternative-futures forecasting
   
   1. less certainty, focusing on a set of possible yet distinct features. different directions. election in US. if trump wins, it could be A, B or C future.

Question 13

What is scenario analysis?

Answer 13

Scenarios offer plausible alternative views of how the macro-environment might develop in the future, typically in the long term based on key drivers of change about which there is a high level of uncertainty.

• Scenarios are not strategies but alternative possible environments that strategies have to deal with
• Scenario analysis is typically used in conditions of high uncertainty, when the environment could go in several highly distinct directions
• Scenario analysis is not the same as alternatives futures forecasting, since scenario planners avoid presenting alternatives in terms of finely calculated probabilities. Scenarios tend to extend too far in the future to allow probability calculations
• The point of scenarios is more to learn than to predict
• if there is uncertainty in the environment; as what plausible and useful alternatives scenarios there are and how they differ from the organisations existing ghost scenario
• Ghost scenario = the scenarios that unconsciously influence decisions making without much conscious thought. ghost scenarios just assume business as usual going into the future

Scenario analysis can be a complement to PESTEL since PESTEL can be too generic.

Question 14

What is varieties of capitalism?

Answer 14

Varieties of capitalism (what is an informal/formal rule varies across countries and regions, because of different institutional environments)

Formal and informal rules vary between countries to define very different institutional environments, aka varieties of capitalism. These varieties of capitalism have implications for the ways in which businesss and management are done in those environments and the prospects for success.

Question 15

What is an organisational field?

Answer 15

An organisational field = a community of organizations that interact more frequently with one another than with those outside the field.

• These organizational fields are partly economic as they may include competing organizations within the industry or sector, as well as customers and suppliers in the marketplace.
• However, the concept of organizational fields also emphasizes non-economic or social interactions with other organizations. such social interactions may be with other businesses, ie via managers who are members of the same industry or via non-executive directors who sit on several company boards. Networks and organizational fields can be analyzed by means of sociograms. Sociograms can help assess the effectiveness of networks and identify who is likely to be most powerful and innovative within them.
• Three concepts to understand effectiveness, innovativeness and power:
  
  • Network density - the number of interconnections between members
  • Broker positions - an organization that connects otherwise separate groups/organisations
  • Central hub positions - when a particular organization interacts with many other members

Question 16

How can you define the macro-environment?

Answer 16

The macro environment refers to the broad, external factors and forces that influence an organization but are largely outside of its control. The macro environment is analyzed using tools like PESTEL.

Question 17

What is a political risk analysis?

Answer 17

A political risk analysis is the analysis of threats and opportunities arising from POTENTIAL political change.

Question 18

Which two industries are specifically vulnerable to fluctuating economic cycles?

Answer 18

Some industries are vulnerable to economic cycles, for example:

• Discretionary (optional) spend industries: there tend to be strong cyclical effects where purchasers can easily put off their spending for a year or so. Thus, demand for furniture, restaurants and cars tend to be highly cyclical because people can easily delay or curtail spending on these for a while. People buy it if you afford it.
• High fixed costs industries: such as airlines, hotels suffer from economic down turns because high fixed costs in plant, equipment or labour tends to encourage competitive price-cutting to ensure maximum capacity utilization when demand is low. For example: an airline might try to fill its seats in the face of falling demand by offering cheap tickets. If its competitiors do the same, the resulting price-war will result in low profits for all the airlines.

Question 19

What are the strong organisational motives to respond to contextual pressures for ecological issues?

Answer 19

The three kinds of contextual pressures can satisfy three motives.

1. a sense of Responsibility to change
2. Legitimacy (regulatory compliance and good reputation)
3. Competitiveness can be enhanced thanks to the pressure. Green products are attractive and can allow a price premium.

Question 20

The extent to which the ecological criteria are important to organisations relies on three contextual sources of pressure. Which are they?

Answer 20

1. Ecological (certainty, visibility, emotivity)
2. Organisational field (activism, interconnection)
3. Internal organization (leader values, systems)

Question 21

What is the critique of PESTEL? (3)

Answer 21

Burt et al. Scenario planning

1. No Connection Between Factors
PESTEL looks at factors (like politics, economics, technology) separately, but in reality, these factors often affect each other. For example, a political decision might change the economy or technology. PESTEL doesn’t show how these things are connected.

2. Environment Seen as Static
Simplified: PESTEL treats the external environment like it stays the same, but the world is constantly changing. It doesn’t consider that things like the economy, technology, or laws can shift quickly and frequently.

3. Only Focus on the Present
Simplified: PESTEL is good at analyzing the current situation, but it doesn’t help much in predicting future trends. It’s important to think about how factors might change over time, but PESTEL doesn’t do that well.

Question 22

Describe the five steps of the scenario process

Answer 22

1. Define scope
2. Identify key drivers
3. Develop distinct scenarios
4. Identify impacts
5. Monitor progress

Question 23

Which are the three varieties of capitalism? (different institutional environments) L in PESTEL.

Answer 23

Three broad varieties of capitalism have been identified, whose formal and informal rules lead to different ways of doing business:

1. Liberal market economies
   institutional environment where both formal and informal rules favor competition between companies. US, UK.
2. Coordinated market economies
   encourages more coordination between companies, often supported by industry associations or similar frameworks. Sweden, Germany
3. Development market economies
   strong roles for the state, which own or influence companies that are important for economic development. China, India

Question 24

Which are the actors in the non-market environment and why are they important?

Answer 24

NGOs, government, media and campaign groups.

Important for building reputation, connections, legitimacy and influence with key groups such as politicians, regulators and the media; Lobbying, public
relations, networking, philanthropy and collaboration are key non-market strategies.

Question 25

How can the environment be understood from a sensemaking perspective?

Answer 25

Sensemaking is a notion coined by Karl Weick. Thea idea is not that the environment is objective and given, instead he argue that it is more appropriate to think of the environment in terms of “our environment,” emphasizing its socially negotiated nature. Environment can, therefore, be understood as an outcome of thinking”.

Question 26

What is the intra-organizational relationships?

Answer 26

Organizations are composed of interrelated sub-systems and like organisms are made of interrelated parts and organs

Question 27

What is the inter-organizational relationship?

Answer 27

Emphasis the ”flow” between the organization and its environment: customers, competitors, suppliers, labor unions, and governmental agencies