CHAPTER 3 ASSESSING THE EXTERNAL ENVIRONMENT

3.1. Introduction: Aims and Learning Outcomes

In this chapter we will be examining some of the techniques used by organizations to explore the complex and uncertain external environment over the short, medium and long term. So, by the end of this chapter you will be able to identify a number of techniques for assessing the external environment facing an organisation. undertake a STEEPLE analysis carry out a 5 forces analysis scenario planning demonstrate awareness of the complexities involved in assessing dynamic environments.

3.2. Viewing the environment

It is important to understand the nature of the external environment facing the organisation. The environment refers to those political, economic, social, technological, environmental and legal forces that come to bear on organisations through time. These forces create complexity in our understanding of the current world in which the organisation finds itself. These forces also have a momentum that breeds uncertainty for decision takers.

3.2. Viewing the environment

For example, who could have predicted the collapse of Communism in the late 1980s and early 1990s and the impact it would have on global institutions and organisations? What impacts will demographic changes have on consumer demand for public, private and charitable sector goods and services? How will the internet develop? What will be the response of governments and citizens to environmental damage?

3.2. Viewing the environment

These are what strategic managers might refer to as long term drivers of change but the long term is also made up of a series of short terms for which organisations have to plan.

For example, what impact will a rising trend in interest rates have on resource allocation within the organisation and what are the implications of this for medium term strategy?

3.2. Viewing the environment

In recognising the dynamic complexity of the organisations position a better understanding of what the economist Robin Marris termed the super-environment can be obtained.

Adaptation to the environment is crucial for organisational survival and development. Adaptation will involve some painful changes and so must be carefully managed.

3.2. Viewing the environment

In this chapter we concentrate on some of the techniques for scanning and monitoring the environment. Such boundary spanning provides a means of buffering for the organisation that has to survive in environments of varying rates of change and degrees of complexity.

3.2. Viewing the environment

Ginter and Duncan (1990) suggest that such macro environmental analysis involves scanning monitoring forecasting as well as assessing current and future trends

3.2. Viewing the environment

Bryson (1995) notes that external analysis helps to provide information on emerging issues and trends. to develop networks and partnerships among the scanners and their organisations. to educate the participants about the scanning function and about specific issues and trends. to provide useful information for the strategy process.

3.2. Viewing the environment

However, some pragmatism is required. Thus, it is important that

a record of events is kept. the organisation focuses on key issues. organisations understand the issues cycle. That is, they know when the environment affects an organisations

mandate, mission and values; product or service level mix; relationship with customers, clients, users, payers or partners; costs, financing, management or organisational design.

3.3. Techniques for the short to medium term

What techniques could be employed? The answer seems to lie in blending traditional, quantitative, techniques with qualitative, judgmental, assessments. To look to the future as well as understand the present. It is in this respect that whole rafts of techniques appear, including experience and learning.

3.3. Techniques for the short to medium term

PEST
Managers could use a PEST (sometimes called STEP, or STEEPLE to include educational, environmental and legal as well as Political, Economic, Social and Technological factors) analysis to assess the super-environment.

3.3. Techniques for the short to medium term (PEST Analysis)

Political Factors Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate. Some examples include: tax policy employment laws environmental regulations trade restrictions and tariffs political stability

3.3. Techniques for the short to medium term (PEST Analysis)

Economic Factors Economic factors affect the purchasing power of potential customers and the firm's cost of capital. The following are examples of factors in the macroeconomy: economic growth interest rates exchange rates inflation rate

3.3. Techniques for the short to medium term (PEST Analysis)

Social Factors Social factors include the demographic and cultural aspects of the external macro environment. These factors affect customer needs and the size of potential markets. Some social factors include: health consciousness population growth rate age distribution career attitudes emphasis on safety

3.3. Techniques for the short to medium term (PEST Analysis)

Technological Factors Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. Some technological factors include: R&D activity automation rate of technological change

3.3. Techniques for the short to medium term

Broadly speaking it involves a first look at events. However, if done properly it can provide valuable information. External consultants can undertake PEST analysis but it can be a valuable internal communication tool. Managers might be put into workshops to discuss particular elements of the environment.

3.3. Techniques for the short to medium term

By analyzing the impact of the external environment managers can have a greater understanding of the constraints that face organizations in the implementation of strategy.

Further, PEST analysis can be useful if Scenarios of the future are required or if SWOT analysis (next chapter) is to be carried out.

3.3. Techniques for the short to medium term

Porter's Five Forces Model

There are other typologies for analysing the super-environment. It is often used to examine the private sector. However, there is no reason why certain public service functions could not be examined in a similar way.

3.3. Techniques for the short to medium term ( Porter's Five Forces Model ) Porter explains that there are five forces that determine industry attractiveness and longrun industry profitability. These five "competitive forces" are The threat of entry of new competitors (new entrants) The threat of substitutes The bargaining power of buyers The bargaining power of suppliers The degree of rivalry between existing competitors

3.3. Techniques for the short to medium term ( Porter's Five Forces Model ) Threat of New Entrants New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include Economies of scale Capital / investment requirements The likelihood of retaliation from existing industry players.

3.3. Techniques for the short to medium term ( Porter's Five Forces Model )

Threat of Substitutes The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on: Buyers' willingness to substitute The relative price and performance of substitutes The costs of switching to substitutes

3.3. Techniques for the short to medium term ( Porter's Five Forces Model ) Bargaining Power of Suppliers Suppliers are the businesses that supply materials & other products into the industry. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when: There are many buyers and few dominant suppliers Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets)

3.3. Techniques for the short to medium term ( Porter's Five Forces Model ) Bargaining Power of Buyers Buyers are the people / organizations who create demand in an industry The bargaining power of buyers is greater when There are few dominant buyers and many sellers in the industry Products are standardized The industry is not a key supplying group for buyers

3.3. Techniques for the short to medium term ( Porter's Five Forces Model ) Intensity of Rivalry

The intensity of rivalry between competitors in an industry will depend on: The structure of competition - for example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down factories) then competitors tend to exhibit greater rivalry

3.4. Auditing the Future Most analysis focuses on analysing the environment over the next year or few years. However, many organisations are looking even further into the future.

Here we analyse the Delphi Method and Scenario Planning. These approaches are attempts to assess where the organisation might be in 10 to 20 years time.

3.4. Auditing the Future The Delphi method This long range forecasting technique relies upon a panel of experts answering questions about the future. It was developed by the Rand Corporation in Santa Monica in the 1950s to predict future opportunities in the defence industry. The Delphi method is a systematic, interactive forecasting method which relies on a panel of experts. The experts answer questionnaires in two or more rounds.

3.4. Auditing the Future

The Delphi method After each round, a facilitator provides an anonymous summary of the experts forecasts from the previous round as well as the reasons they provided for their judgments. Thus, experts are encouraged to revise their earlier answers in light of the replies of other members of their panel. It is believed that during this process the range of the answers will decrease and the group will converge towards the "correct" answer.

3.4. Auditing the Future

The Delphi method

Finally, the process is stopped after a pre-defined stop criterion (e.g. number of rounds, achievement of consensus, stability of results) and the mean or median scores of the final rounds determine the results. Figure on next slide reflects the processes involved. In doing so this method may exclude key internal groups who have to be committed to any organisational changes that develop. It may be seen then as extenuating divisions within the organisation as to the ownership of the strategy process.

3.4. Auditing the Future

Scenario Planning

Scenario planning, also called scenario thinking or scenario analysis, is a strategic planning method that some organizations use to make flexible longterm plans. The oil company, Shell, is probably the most famous user of this technique. However, it is now extensively used in both public and private sector organisations. The technique encompasses internal as well as external stake holding groups as well as independent experts.

3.4. Auditing the Future

Scenario Planning

The technique attempts to develop a small number of scenarios about an uncertain world based on a set of internally agreed facts and likely possibilities. It is part of an on-going process within organisations and should not be construed as crystal ball gazing. In simple words, Scenario analysis is a process of analyzing possible future events by considering alternative possible outcomes (scenarios).

3.4. Auditing the Future

Scenario Planning

For example, in economics and finance, a financial institution might attempt to forecast several possible scenarios for the economy (e.g. rapid growth, moderate growth, slow growth) and it might also attempt to forecast financial market returns (for bonds, stocks and cash) in each of those scenarios.

3.4. Auditing the Future

Some Examples: Johnson and Scholes (1999, p.112) consider 3 possible future states for book publishing - no great change; electronic chaos (one where consumers are confused by IT developments) and an information society. Hadfield (1991) reports 2 scenarios being developed in Shell in the late 1980s. - response to global warming would lead to a reconstruction of the world energy industry, lower energy consumption and a switch to cleaner fuels.

3.5. Summary
In this chapter we have reviewed various methods for assessing the external environment over the short and the long term. We have noted that analysis involves an understanding of dynamic forces that we need to constantly re-visit. In a later chapter we will look at the concept of Chaos and Complexity theory as applied to the management of change and it will show that strategic managers have to be aware of subtle changes in the environment along with internal issues if they are to achieve success.

Key Reading
1. Bryson JM (1995) Strategic Planning for Public and Non-profit Organisations, Prentice Hall, Hemel Hempstead. 2. Ginter P & Duncan J (1990) Macroenvironmental Analysis, Long Range Planning. 3. Hadfield P (1991) Corporate Strategies for a changing environment, Utilities Policy, pp. 381-385. 4. Johnson G & Scholes K (1999) Exploring Corporate Strategy Text and Cases, 5th ed., Prentice Hall, London. Chapter 3. 5. Porter M (1985), Competitive Strategy: Techniques for Analysing Industry and Competitors, Free Press, New York