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Exploring Strategy
Twelfth Edition
Part I
The strategic position
Chapter 2
Macro-environment analysis
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
The focus of Part I:
The Strategic Position
• How to analyse an organisation’s position in the external
environment – both macro-environment and industry
or sector environment.
• How to analyse the determinants of superior
performance – resources, capabilities and the linkages
between them.
• How to understand an organisation’s purposes, taking
into account corporate governance, stakeholder
expectations and business ethics.
• How to address the role of history and culture in
determining an organisation’s position.
Strategic position
Layers of the business environment
Analysing the macro-environment
The PESTEL framework (1 of 2)
PESTEL analysis highlights six environmental

factors in particular: political, economic, social,
technological, ecological and legal.
Organisations need to consider:
• The market environment (e.g. suppliers,
customers and competitors).
• The nonmarket environment (e.g. NGOs,
Government, media and campaign groups).
The PESTEL framework (2 of 2)
The PESTEL framework categorises environmental

factors into six key types:
Political Economic
Social Technological
Ecological Legal
PESTEL helps to provide a list of potentially

important issues influencing strategy. It is
important to assess the impact of each factor.
Political factors (1 of 3)
Political factors include:

• The role of the state, for example, as an owner,
customer or supplier of businesses.
• Government policies.
• Taxation changes.
• Foreign trade regulations.
• Political risk in foreign markets.
• Changes in trade blocks (e.g. BREXIT).
• Exposure to civil society organisations
(e.g. lobbyists, campaign groups,
social media).
Political risk analysis is the analysis of threats and

opportunities arising from potential political change. There
are two key dimensions to political risk analysis:
•The macro–micro dimension – assessment of the 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 the specific organisation.
•The 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 (e.g. OPEC oil prices).
Economic factors (1 of 3)
Economic factors include:

•Business cycles.
•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.
Some industries are particularly vulnerable to

economic cycles:
• Discretionary spend industries (e.g. housing,
cars).
• High fixed cost industries (e.g. airlines,
hotels).
Social factors (1 of 2)
Social factors include:

• Demographics
• Wealth distribution
• Geography
• Culture
• Social networks within an ‘organisational
field’ (the community of organisations that
interact more frequently with one another
than with those outside the field, including
e.g. regulators, campaign groups, media).
Social factors (2 of 2)
Sociograms are maps of potentially important social (or

economic) connections within an organisational field.
Maps can help assess the effectiveness of networks and
identify who is the most powerful and innovative within them.
Power and innovation increase with:
•Network density – the number of interconnections between
members.
•Central hub positions – when a particular
organisation interacts with many other members.
•Broker positions – an organisation that connects otherwise
separate groups/organisations.
Sociogram of social networks within
an organisational field
Technological factors (1 of 2)
Technological factors include:

New discoveries and technology developments.
Examples include developments on the Internet,
nano-technology or the rise of new composite
materials.
Technological factors (2 of 2)
There are five primary indicators of innovative activity:

•Research and development budgets.
•Patenting activity.
•Citation analysis.
•New product announcements.
•Media coverage.
Technology roadmap for graphene
technology in electronics
Source: Drawn from data extracted from the International Roadmap for Devices and Systems, 2018 edition, Institute for Electronics and Electrical Engineers.
Ecological factors (1 of 2)
Ecological factors: This refers to ‘green’ or

environmental issues, such as pollution, waste and
climate change.
Examples are environmental protection regulations,

energy problems, global warming, waste disposal and
recycling.
Ecological factors (2 of 2)
Three sorts of ecological challenges that organisations may

need to meet:
•Direct pollution obligations – minimising the production of

pollutants; cleaning up and disposing of waste.
•Product stewardship – managing ecological issues throughout
the organisation’s entire value chain and the whole life cycle of
the firm’s products.
•Sustainable development – whether the product or service
can be produced indefinitely into the future.
Contexts and motives for
ecological issues
Substantially adapted from: Bansal, P. and Roth, K. (2000), ‘Why companies go green: a model of ecological responsiveness’,
Academy of Management Journal, 43(4), 717–36 (Figure 2, p. 729.)
Legal factors (1 of 3)
Legal factors include:

• Labour, environmental and consumer
regulations.
• Taxation and reporting requirements.
• Rules on ownership.
• Competition regulations.
• Regulation of corporate governance.
PESTEL analysis should consider not only formal

laws and regulations but also more informal norms:
Informal rules are patterns of expected (‘normal’)
behaviour that are hard to ignore (e.g. proper respect
for the ecological environment).
Varieties of capitalism. Formal and informal rules vary

sufficiently between countries to define very different
institutional environments:
•Liberal market economies – formal & informal rules
favour competition between companies (US, UK).
•Coordinated market economies – encourage more
coordination between companies, supported by industry
associations or similar frameworks (Germany, Japan).
•Developmental market economies – strong roles
for the state, which own or influence companies
that are important for economic development
(China, India).
Key drivers for change
Key drivers for change:

• Key drivers for change are environmental factors
that are likely to have a high impact on industries
and sectors, and impact on the success or failure
of strategies within them.
• Typically key drivers vary by industry or market.
• For example, retailers are concerned with social
changes and customer behaviour which
have driven a move to ‘out-of-town’
shopping. Personal disposable income
also drives demand for retailers.
Using the PESTEL framework
• 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.
A PESTEL for the FANGS
Forecasting
• All strategic decisions involve forecasts about future
conditions and outcomes.
• PESTEL 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:
‒ Single-point.
‒ Range.
‒ Multiple-futures forecasting.
Forecasting under conditions
of uncertainty
Forecast approaches
• Single-point forecasting is where organisations have
such confidence about the future that they will provide
just one forecast number (as in Figure 2.8(i)).
• Range forecasting is where organisations have less
certainty, suggesting a range of possible outcomes with
different degrees of probability and a central projection
identified as the most probable (Figure 2.8(ii)).
• Alternative futures forecasting typically involves even
less certainty, focusing on a set of possible yet
distinct futures with radically different outcomes
(see Figure 2.8(iii)). Alternative futures can be
fed into scenario analyses though not as simple
forecasts.
Directions of change
• 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. For example, sub-Saharan 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.
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 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.
Figure for Illustration 2.4
Adapted from: PWC US (2018), ‘The competing forces shaping 2030’, https://www.pwc.com/us/en/services/hr-management/workforce-of-the-future.html
The scenario cube
Carrying out scenario analysis (1 of 2)
• Identify the most relevant scope of the study –

the relevant product/market and time span.
• Identify key drivers of change – PESTEL factors
which will have the most impact in the future but
which have uncertain outcomes and are mutually
independent.
• For each key driver select opposing outcomes
where each leads to very different
consequences.
Carrying out scenario analysis (2 of 2)
• Develop scenario ‘stories’: That is, coherent

and plausible descriptions of the environment
that result from opposing outcomes.
• Identify the impact of each scenario on the
organisation and evaluate future strategies in
the light of the anticipated scenarios.
• Monitor progress: Identify indicators that
might give an early warning of the way the
environment is changing and monitor such
indicators.
The scenario process
Summary
• Environmental influences can be thought of as layers around an

organisation, with the outer layer making up the macro-
environment, the middle layer making up the industry or sector
and the inner layer strategic groups and market segments.
• The macro-environment can be analysed in terms of the PESTEL
factors – political, economic, social, technological, ecological and
legal.
• Macro-environmental trends can be forecast according to different
levels of uncertainty, from single-point, through ranges to multiple-
futures.
• A PESTEL analysis helps identify key drivers of change,
which need to addressed in strategy. Alternative scenarios
can be constructed around key drivers.

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Exploring Strategy

PESTEL analysis highlights six environmental

The PESTEL framework categorises environmental

PESTEL helps to provide a list of potentially

Political factors include:

Political risk analysis is the analysis of threats and

Economic factors include:

Some industries are particularly vulnerable to

Social factors include:

Sociograms are maps of potentially important social (or

Technological factors include:

There are five primary indicators of innovative activity:

Ecological factors: This refers to ‘green’ or

Examples are environmental protection regulations,

Three sorts of ecological challenges that organisations may

•Direct pollution obligations – minimising the production of

Legal factors include:

PESTEL analysis should consider not only formal

Varieties of capitalism. Formal and informal rules vary

Key drivers for change:

• Apply selectively – identify specific factors which

Scenarios are plausible views of how the environment of an

• Identify the most relevant scope of the study –

• Develop scenario ‘stories’: That is, coherent

• Environmental influences can be thought of as layers around an

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