BASICS IN STRATEGY – SESSION 2

External Analysis – The macro-environment

This first synchronous online session will be dedicated to starting our external analysis
dealing more precisely with the microenvironment notion

Who belongs to a company’s environment?

The environment creates both opportunities and threats for organizations. Although
the future can never really be predicted it's important that entrepreneurs and
managers try to analyze their environments as carefully as they can in order to
anticipate and if possible take advantage of such environmental changes. But who can
belong to a company's environment?

Environment actors can be of huge variety we can have:

 banks
 states
 social agencies
 local communities or authorities
 consumer advocacy groups
 trade unions
 competitors
 suppliers
 customers
 shareholders
 stakeholders;

So you see that a company environment can be really dense and complex, our key
objective here is to try to figure out how to analyze such a potentially chaotic situation
The three levels of external diagnosis

Environments can be considered in terms of a

series of layers as you can see in the picture in
the slide. The three layers are:
 Macro-environment
 Industry level
 Competition environment also called
the sector level

First of all the macro environment consists of

broad environmental factors that impact to a
greater or lesser extent many organizations
industries and sectors. For example the effects
of macro environmental factors such as the
Internet, economic growth rates, climate
change and aging populations go far beyond
one industry or sector impacting a wide range
of activities from tourism to agriculture.

If we narrow down a bit the level of analysis, we have the industry layer. This layer
consists of organizations producing the same sorts of products or services such as for
example the automobile industry or the healthcare industry. We will see that to
analyze such a notion we will also tend to analyze the associated organizations to
producers of the same products and services.

If we narrowed down again the level of analysis if we focus more on more specific
competitors, we have the competition environment which is the third layer of the
external diagnosis. This third layer is that of specific competitors and markets
immediately surrounding organizations and the aim of this layer is to really understand
what is the strategic positioning of our competitors.

Today, let’s focus on the macro-environment

This chapter is dedicated to the macro environment which consists as previously said
of broad environmental factors that impact to a greater or lesser extent many
organisations. Macro environmental changes can often seem really big complex or
even unpredictable for managers to grasp. Why managers are always liable to
somebody's inertia we would like to introduce a specific strategic management tool
that can help organizations to keep alert to macro environmental changes. Several
strategic management tool exists to study the macro environment but for this basic
strategy course we decided to focus on what we call the Pestel model.
The Macro-environment framework: PESTEL

The Pestel model highlights 6 environmental factors in particular:

 Political
 Economic
 Social
 Technological
 Environmental/Ecological
 Legal factors

This list underlines that the environment includes not only the economics of markets
but also non markets factors. The market environment consists mainly of suppliers,
customers and competitors. These are environmental participants with whom
interactions are primarily economic. The non market environment involves primarily
the social, political, legal and ecological factors. Key participants in the nonmarket
environment are not just businesses but non governmental organizations, politicians,
government departments, regulators, company groups etc… Both market and non
market factors can be very important for business organizations.

The Macro-environment framework: PESTEL - Details

Political element - highlights the role of the

state and other political factors in the macro
environment. We first need to understand
the role of the state. In many countries and
sectors the state is often important as a
direct economic actor for instance as a
customer, supplier, owner or regulator of
businesses. Another important element is the
exposure to see the society organizations
see the society comprises a whole range of
organizations that are reliable to raise
political issues including political lobbyists,
campaign groups, social media or traditional
media. Finally elements such as
governmental state, democracy or
dictatorship, government stability, social
protections all important things to consider
as political factors. For example the defense
industry faces a highly politicized
environment, defense company typically
have direct and high direct state involvement
national Armed Services are of course key
customers while states are often owners of their own National Defense companies and
at the same time defense companies are often highly exposed to groups of cedar
society for instance campaigners against the international arm strength.

Economics- the macro environment is also influenced by macro economic factors such
as currency, exchange rates, interest rates and fluctuating economic growth rates
around the world. It's important for an organization to understand how its markets are
affected by the prosperity of the economy as a whole. Managers should have a view
on how changing exchange rates may affect viability in export markets and
vunerlability to import. To analyse these factors we can include economic cycles or
economic trends, the evolution of GDP, monetary policy, inflation rates,
unemployment rates, disposable incomes and other things like that.

Social factors - take into account demography, social mobility, social habits,
consumption habits, level of education, leisure and other things like that. You need to
have in mind that the social elements of the macro environment have a variety of
profiles in the economic as a whole. For instance demographics are important, the
aging population in many western societies create opportunities and threats for both
private and public sectors and the social mobility, social habits, consumption habits
and things like that underlying is the notion of culture. Changing cultural attitudes can
raise strategic challenges. For instance new ethical attitudes are challenging previously
taken for granted strategies in the financial services industry this is also connected to
demographics. The rise of digital natives for instance is changing expectations about
media, consumption and education.

Technology - Generally speaking it is important to carry out the macro environmental

analysis of technology in order to identify areas of potential innovative activities. R&D
budgets, private investment on technology and patterns, innovation ability among
other things are important to analyze:
• R&D budgests - we can see that innovative firms sectors of countries can be
identified by the extent of spending research typically reported in company
annual reports and government statistics.
o Patterns - firm active in patenting new technologies can be identified on
national patent registers the most important being the USPTO, the
United states patents and trademarks office.

Ecological factors/Environmental factors - They consumed the protection on flora and

fauna, they also concern reprocessing energy consumption and policy. More generally
speaking ecological stands for green macro environmental issues including pollution,
waste and climate change. In addition the notion of sustainable development is an
important element to analyze. It refers not simply to reducing environmental damage
but to whether the product or service can be produced indefinitely into the future.
This sustainability criterion sets constraints on countries related to potential offer
exploitation of particular sources of raw materials. Although these factors are usually
seen as constraints they are potentially strong organizational motives to respond.

Legal factors - These can cover a wide range of topics for example labor,
environmental and consumer regulation, taxation and reporting requirements, rules
of ownership, competition, corporate governments but also knows on monopoly,
employment laws, security norms, among other things. Basically it corresponds to
everything that is related to laws, norms and regulations.

In conclusion of this presentation of the Pestel model we can see that there are six
important types of factors that needs to be analyzed in order to understand a
company's macro environment. It is also important to mention that it is preferable to
run a Pestel model related to one specific country as the situation might vary
depending on the geographic zone which is studied.

How to use the Pestel framework?

Now that we have a clear picture of what the Pestel framework corresponds to we can
have a look at how to mobilize it and apply it in a concrete situation. Strategists usually
use two steps.
 First Step- The first one identifies all the factors included in the Pestel
 Second Step- goes further than a simple list and identifies the impact of each
factor on the organization. The final objective of this step is to identify what we
call key drivers for change.

Step 1: identification and classification of environmental

components

The first step of the Pestel model is here to

identify and classify the environmental
components also called factors so we have the six
dimensions related to Pestel model (Political,
Economic, Social, Technological, Environmental
or Ecological and Legal Factors). Based on the
gathering a variety of serious documents one can
identify some political factors and economic
factors and social technological etc profiles of
factors that need to be not only identified but
also classified. In the documents you can find it is
not necessarily mentioned that these or that
factor is rather political or economic you will
have to classify each factor that you encounter.

What I usually do during this step is that I try to categorize each factor in one
dimension I don't try to position one factor in both dimensions for instance on political
and economic I always try to choose because it eases the process of analyzing the
impact of each factor on your organization.
Step 2: Assement of the impact of components over the
company’s strategy

When you have identified and classified the variety

of factors it is now the time to turn to step two
and to try to assess the impact of each factor on
your company strategy. To do so what I usually do
(this is really an advised, it's not mandatory to use
the scale the same scale as me) but I usually use a
scale from 1 to 5 to assess each factor. On this
scale:
1 - corresponds to a very negative impact off this
factor on your company strategy
2- corresponds to a quite negative impact of
these factors on your company
4- corresponds to quite positive impact of these
factors on your company
5- corresponds to a very positive impact of this factor on your company strategy
3- is used when we don't know exactly how to position or to incense the factor which
is studied sometimes you might need more information in order to be able to really
assess the impact of this or that factor.

So by using this scale we can actually analyze for example the political factor 1 as a
very negative. So political factor 2 as positive for your company. Related to economic
factor 1 we can say that it's rather negative. Economic factor 2 can be assessed as
really negative. So at the end of the day by filling in all the boxes of such a table you
can have a general picture of the impacts of all the factors from the Pestel model of
your company strategy.

The finality of the Pestel model: identify key drivers for change

Thanks to this assessment we can identify what we call the key drivers for change. Key
drivers for change correspond to factors likely to have a high impact on company
strategy and industry.
The finality of the Pestel model: identify key drivers for change

If we go back to the assessment table we

can identify the key drivers for change by
checking the factors that are scored 1-very
negative or 5- very positive. These key
drivers for change might help us analyze or
have at least general picture of the situation
under studding, potentially stating that the
environment under study is kind of
challenging seeing that there are three
negative key driver for change.