External Environment – Scenario

Planning and Industry Analysis

• Dr M.K. Nandakumar

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 External Environment:
General, Industry and Competitor
• Three External Environments include:
• General
• Industry
• Competitor

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The External Environment
 External Environment Analysis
• Opportunity
• General environment condition that, if exploited, helps a
company achieve strategic competitiveness

• Threat
• General environment condition that may hinder a company's
efforts to achieve strategic competitiveness

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 The PESTEL framework (1)

• Political factors: The role of the state e.g. as an

owner, customer or supplier of businesses. Other
political factors include government policies,
taxation changes, foreign trade regulations,
political risk in foreign markets, changes in trade
blocks (e.g. expansion of EU).

• Economic factors: The role of macro-economic

factors. This includes business cycles, interest
rates, personal disposable income, exchange
rates, unemployment rates, differential growth
rates around the world.
 The PESTEL framework (2)

• Social factors: Including changing cultures and

demographics. Examples are the ageing
population in Western societies, income
distribution, lifestyle changes, consumerism,
changes in culture and fashion.
• Technological factors: New discoveries and
technology developments. Examples include
developments on the internet, nano-technology or
the rise of new composite materials.
 The PESTEL framework (3)

• Ecological factors: This refers to ‘green’

environmental issues, such as pollution waste and
climate change. Examples are environmental
protection regulations, energy problems, global
warming, waste disposal and re-cycling.
• Legal factors: Legislative and regulatory
constraints or changes. Examples are IPR,
competition law, health and safety law, employment
law, liberalisation of trade law.
 PESTEL Analysis
• The following framework may be adopted to present
the discussion for each of the PESTEL segments while
doing a PESTEL analysis:
• Overview
• Current Strengths
• Current Challenges
• Future Prospects
• Future Risks

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 Scenarios
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 PESTEL analysis and drivers of 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.
 Scenario Planning (cont’d)
• Scenario planning is a process that stimulates
imaginative, creative thinking to better prepare an
organisation for the future.
• This exercise is not meant for coming up with
forecasts but to draw a circle around multiple
possibilities and think about whether you are
prepared to face the range of futures that might
unfold.
 Benefits of Scenario Planning

• Strategic planning assumes that there is usually one best answer to a strategic
question. Scenario planning looks at multiple possibilities.

• Contingency planning focuses on a single uncertainty. Scenario planning

investigates several uncertainties simultaneously.

• Simulation modeling is heavily numbers-driven. Scenario planning involves

subjective interpretation as well as objective analysis.

• Scenario planning is vey useful in situations where uncertainty and change are
high, costly surprises have occurred in the past and the quality of strategic
thinking or the supply of new opportunities is low.
 Benefits of Scenario Planning (cont’d)

• Organisations use scenario planning for many purposes like

providing input to strategic planning, improving investment
decision-making and guiding thinking about competitive moves.
• Scenario planning involves several elements that together yield a
composite, multifaceted view of the future.
 Scenario Planning Components

Key Focal issue

Driving Forces

Critical
Early Warning
Uncertainties
Signals

Implications and
Scenario framework
Options

Scenarios

Narratives
Example – Decision to Initiate a Covid-19 Vaccine Development Project

High

1 2
Covid-19
infection rate

Low Success rate of High

Covid -19 vaccine

4 3

Low 14
 Key Focal Issue

• All scenario planning exercises are built around a critical choice

or key focal issue. Usually the issue is a significant, upcoming
decision or a strategic uncertainty that has important, long-range
consequences for the fortunes of the organisation. Many key focal
issues take the form of questions.
 Driving Forces
• Driving forces are the themes and trends that are likely to affect,
influence and shape the key focal issue in fundamental ways.
(e.g. social dynamics, economics, political affairs and
technology)

• Driving forces are normally identified by conducting research

involving interviews with stakeholders like customers,
competitors and suppliers as well as unconventional thinkers
who may be in fields or industries unrelated to the issue at
hand.

• Driving forces can be either predetermined or uncertain

 Critical Uncertainties
• Those uncertain driving forces that are most likely to define or
significantly change the way the future unfolds around the key focal
issue are ranked by level of uncertainty and importance to the
organisation.
• The top two that are most influential and informative are defined as
critical uncertainties.
 Scenario Framework
• Using two critical uncertainties as x and y axes a 2X2 matrix with
four different quadrants of uncertainty or futures to be explored are
created.
• The goal is to create a few clearly contrasting environments whose
differences make a difference to decision makers.
 Scenarios
• The different futures that result from the interaction of the critical,
selected uncertainties are called scenarios.
• They are plausible, alternative hypotheses about how the world
might unfold, specifically designed to highlight risks and
opportunities facing the organisation.
 Narratives

• Each scenario is then fleshed out and woven into a

narrative or story.
• These stories must be logically coherent and consistent.
• The scenarios need to be linked back to the present by
answering the question “how did the world get from
here to there?”
• This link increases the probability that scenarios will be
perceived as realistic rather than as far-fetched staff
exercises.
 Implications
• Once narratives have been created participants return to
the key focal issue, place the organisation within each of
the four scenarios and explore the implications of each
alternative future.

• This examination results in the identification of strengths

and vulnerabilities, alternative strategies and options to
address gaps in capabilities as well as further research
requirements, necessary actions and critical decisions and
choices.
Early Warning Signals

• Early warning signals are leading indicators that highlight the likely
emergence of one scenario or another
• If carefully selected, these signals can give a company a head start on
the competition when changes in the environment occur.
 Scenario Planning Methodology
• Involves 15 to 30 participants who represent a
cross-section of the company
• Often customers, suppliers, regulators, industry
experts, academics and other relevant outsiders
are also involved.
• The process involves a series of half-day or full-
day workshops and number of senior
management debriefing meetings.
• The complete exercise takes from three to nine
months.
Scenario Planning Stages
Stage1 : ORIENTATION:
Focal issue defined

Stage 2: EXPLORATION:
Driving Forces defined

Stage 3 : SCENARIO CREATION

Scenarios created with narratives

Stage 4 : OPTIONS CONSIDERATION

Strategies, actions and changes defined

Stage 5 : INTEGRATATION:
Early warning signals developed
 Stage 1: Orientation

• Background interviews and other research to determine the key

issue and associated challenges
• End product: A clear statement by senior management of the key
focal issue with specific time and place dimensions
 Stage 2: Exploration
• Extensive research and workshop sessions to
identify and deepen the team’s understanding of
the driving forces and critical uncertainties
surrounding the focal issue
• The planning team defines the many driving
forces in the macro-environment that impact the
success or failure of the key focal issue and
distinguishes those forces that are predetermined
from those that are uncertain
 Stage 2: Exploration (cont’d)

• End Product: Produces a set of driving forces and list of critical

uncertainties. The team ranks these forces to identify two critical
uncertainties that are most influential and informative to serve as the
basis for developing scenarios.
Stage 3: Scenarios and Narratives Creation

• Two steps are involved: The selection of the scenario

framework and the creation of narratives
• Creation of a 2X2 matrix from the two most critical
uncertainties resulting in four scenarios.
• Identification of key characteristics of the scenarios, their
causes and the events that occurred as the world evolved
from the present to the future point.
 Stage 3: Scenarios and Narratives Creation
(cont’d)

• Subteams create narratives for each scenario and this step

involves great deal of imagination

• End Product: A set of believable narratives that are simple to

understand yet compelling enough to stimulate new thinking.

• The real future may contain elements of all of the scenarios.

 Stage 4: Options Consideration

• This phase involves generation of implications for

presentation to senior management and review and
prioritisation of the options by senior management
• Planners should start thinking about their own
company and the impact of the scenarios on their
own strategic choices
• The team considers the focal issue across each
scenario to determine the implications in terms of
gaps, vulnerabilities and options. The scenarios
and the list of implications are packaged for senior
management discussion.
 Stage 4: Options Consideration (cont’d)
• Senior management reviews the scenarios and discusses their
implications.

• End Product: Results in a list of strategies to implement and actions

to consider as well as a sense of the robustness of different
approaches
Stage 5: Integration of Scenarios into Current
Management Processes
• Monitoring of the environment through an early
warning system and the use of scenarios to guide
strategic choices
• Developing early warning signals that indicate the
likely emergence of one scenario rather than another
• The scenarios can be used to evaluate the
effectiveness of strategic investment decisions and
other choices.
• End Product: Results in a list of early warning
signals as well as the continued use of scenarios in
the analysis of significant decisions.
The Five Forces of Competition Model

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The Threat of Entry: Barriers to Entry

Economies of Scale

Access to supply and distribution channels

Expected retaliation

Legislation or government action

Differentiation

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Factors – Threats from New Entrants
Distribution Accessible
Incumbents acquiescent
Little IP involved
Little Regulation
Low fixed costs
Low-cost switching
Market growth
Scale unimportant
Suppliers accessible
Undifferentiated product
Weak brands
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Why Are Substitutes a Threat?

Substitutes can reduce demand for a particular class of

products as customers switch to alternatives.
• Price/performance ratio
• Extra-industry effects

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 Factors - Substitutes
• Beneficial alternative
• Cheap alternative
• Low cost switching

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The Power of Buyers

Are buyers concentrated?

What are the costs of switching?

Does backward vertical integration exist?

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 ILLUSTRATIVE

Buyer Power

Industry A Industry B
Suppliers Buyers Suppliers Buyers

In industries
characterized
with many
suppliers and few
buyers, buyers
often capture a
Profits
Profits greater share of
profits

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Factors – Buyer Power
Backwards integration
Buyer independence
Buyer size
Financial muscle
Low-cost switching
Oligopsony threat
Price sensitivity
Product dispensability
Tendency to switch
Undifferentiated product

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The Power of Suppliers

Are suppliers concentrated?

What are the costs of switching?

Does forward vertical integration exist?

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 Supplier Power
Diamond
Retailers
Diamond supply
Percent

Others 50
When firms in the
supply industry can
DeBeers 50 dictate terms, they can
extract greater profits

50

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Factors – Supplier Power
Differentiated input
Forward integration
Importance of quality/cost
No substitute inputs
Oligopoly threat
Player importance
Player independence
Supplier size
Switching costs

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Degree of Competitive Rivalry

• Competitor balance
• Industry growth rate
• High exit barriers
• Low differentiation

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Interpreting Industry Analyses
Low entry barriers

Suppliers and buyers

have strong positions
Unattractive
Strong threats from Industry
substitute products

Intense rivalry
Low profit potential
among competitors

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Interpreting Industry Analyses (cont’d)
High entry barriers

Suppliers and buyers

have weak positions
Attractive
Few threats from Industry
substitute products

Moderate rivalry
among competitors High profit potential

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 Managerial Implications

• Which industries should we enter or leave?

• What influence can we exert?

• How are competitors differently affected?

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 Complementors As Another Force

Complementors Increase the Value of

the Focal Firms Product

• customers perceive more value in the focal firm’s

product when it is combined with the complementor’s
product

• complementors may be found outside the focal firm’s

industry

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Some Examples of Complementors

IRCTC SBI Platinum Card

JetPrivilege HDFC Bank World Credit Card

Hotels and themeparks

Mobile phone apps

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 Industry Life Cycle Analysis
Industry Life Cycle Model analyzes the affects of industry evolution on
competitive forces over time and is characterized by five distinct life cycle stages:

1. Embryonic / Development– industry just beginning to develop

 Rivalry based on perfecting products, educating customers, and opening up
distribution channels
2. Growth – first-time demand takes-off with new customers
 Low rivalry as focus is on keeping up with high industry growth
3. Shakeout – demand approaches saturation, replacements
 Rivalry intensifies with emergence of excess productive capacity
4. Mature – market totally saturated with low to no growth
 Industry consolidation based on market share, driving down price
5. Decline – industry growth becomes negative
 Rivalry further intensifies based on rate of decline and exit barriers

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The Industry Life Cycle

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Key Debate: How Much Does Industry
Matter?

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 What are
Strategic Groups?

Strategic groups are organisations within an industry with

similar strategic characteristics, following similar strategies
or competing on similar bases.

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Strategic Groups in the Pharmaceutical
Industry

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 Strategic groups in the Indian
pharmaceutical industry

Source: Developed from R. Chittoor and S. Ray, ‘Internationalisation paths of Indian pharmaceutical firms: a strategic group analysis’,
Journal of International Management,
vol. 13 (2009), pp. 338–55.
Characteristics for identifying strategic
groups
Uses of strategic group analysis

• Understanding competition – enables focus on direct

competitors within a strategic group, rather than the whole
industry. (E.g. Tesco will focus on Sainsburys and Asda.)
• Analysis of strategic opportunities – helps identify
attractive ‘strategic spaces’ within an industry.
• Analysis of ‘mobility barriers’ – i.e. obstacles to
movement from one strategic group to another. These
barriers can be overcome to enter more attractive groups.
Barriers can be built to defend an attractive position in a
strategic group.