2.1 INTRODUCTION
The environment is what gives organisations their means of survival. It creates
opportunities and it presents threats. For example, the success of Apple’s iPhone created
rich market opportunities for the writers of mobile phone apps. On the other hand, the rise of
electronic encyclopaedias such as Microsoft’s Encarta and online Wikipedia nearly destroyed
the market for the traditional print market-leader, Encyclopaedia Britannica, after two hundred
years of existence. Although the future can never be predicted perfectly, it is clearly important
that entrepreneurs and managers try to analyse their environments as carefully as they can in
order to anticipate and – if possible – influence environmental change.
This chapter therefore provides frameworks for analysing changing and complex environments.
These frameworks are organised in a series of ‘layers’ briefly introduced here and
summarised in Figure 2.1.
● The macro-environment is the highest-level layer. This consists of broad environmental
factors that impact to a greater or lesser extent on almost all organisations. Here, the
PESTEL framework can be used to identify how future issues in the political, economic, social,
technological, environmental (‘green’) and legal environments might affect organisations. This
PESTEL analysis provides the broad ‘data’ from which to identify key drivers of change. These
key drivers can be used to construct scenarios of alternative possible futures.
● Industry, or sector, forms the next layer within this broad general environment. This is made
up of organisations producing the same products or services. Here the five forces frameworkis
particularly useful in understanding the attractiveness of particular industries or sectors
and potential threats from outside the present set of competitors. The Key Debate at the end
of this chapter addresses the importance of industry factors, rather than business-specific
factors, in determining success.
● Competitors and markets are the most immediate layer surrounding organisations. Here
the concept of strategic groups can help identify different kinds of competitors. Similarly,
in the marketplace, customers’ expectations are not all the same. They have a range of
different requirements the importance of which can be understood through the concepts
of market segments and critical success factors.
This chapter works through these three layers in turn, starting with the macro-environment.
, 2.2.1 The PESTEL framework
The PESTEL framework categorises environmental influences into six main types: political,
economic, social, technological, environmental and legal. Thus PESTEL provides a comprehensive
list of influences on the possible success or failure of particular strategies.1 In particular,
Politics highlights the role of governments; Economics refers to macro-economic factors such
as exchange rates, business cycles and differential economic growth rates around the world;
Social influences include changing cultures and demographics, for example ageing populations
in many Western societies; Technological influences refer to innovations such as the internet,
nano-technology or the rise of new composite materials; Environmental stands specifically for
‘green’ issues, such as pollution and waste; and finally Legal embraces legislative constraints
or changes, such as health and safety legislation or restrictions on company mergers and
acquisitions. Illustration 2.1 provides examples of PESTEL factors for the airline industry.
For managers, it is important to analyse how these factors are changing, drawing out
implications for their organisations. Many of these factors are linked together. For example,
technology developments may simultaneously change economic factors (for example, creating
new jobs), social factors (facilitating more leisure) and environmental factors (reducing
pollution). As can be imagined, analysing these factors and their interrelationships can produce
long and complex lists.
Rather than getting overwhelmed by a multitude of details, it is necessary to step back
eventually to identify the key drivers for change.
Key drivers for change are the environmental factors likely to have a high impact on the success or
failure of strategy.
Typical key drivers will vary by industry or sector. Thus a retailer may be primarily concerned with
social
changes driving customer tastes and behaviour, for example forces encouraging out-of-town
shopping, and economic changes, for example rates of economic growth and employment.
Public-sector managers are likely to be especially concerned with social change (for example,
, an ageing population), political change (changing government funding and policies) and
legislative change (introducing new requirements). Identifying key drivers for change helps
managers to focus on the PESTEL factors that are most important and which must be
addressed as the highest priority. Many other changes will depend on these key drivers anyway
(for example, an ageing population will drive changes in public policy and funding). Without
a clear sense of the key drivers for change, managers will not be able to take the decisions
that allow for effective action…
2.2.2 Building scenarios
When the business environment has high levels of uncertainty arising from either complexity
or rapid change (or both), it is impossible to develop a single view of how environmental
influences might affect an organisation’s strategies – indeed it would be dangerous to do so.
Scenario analyses are carried out to allow for different possibilities and help prevent managers
from closing their minds about alternatives. Thus scenarios offer plausible alternative views of
how the business environment might develop in the future, based on key drivers for change
about which there is a high level of uncertainty.2 Scenarios typically build on PESTEL analyses
and key drivers for change, but do not offer a single forecast of how the environment will
change. The point is not to predict, but to encourage managers to be alert to a range of
possible futures.
Illustration 2.2 shows an example of scenario planning for the global financial system to
2020. Rather than incorporating a multitude of factors, the authors focus on two key
drivers which (i) have high potential impact and (ii) are uncertain: geo-economic power shifts
and international coordination on financial policy. Both of these drivers may produce very
different futures, which can be combined to create four internally consistent scenarios for
the next decade. The authors do not predict that one will prevail over the others, nor do they
allocate relative probabilities. Prediction would close managers’ minds to alternatives, while
probabilities would imply a spurious kind of accuracy.
Scenario analyses can be carried out as follows:3
● Identifying the scope is an important first step. Scope refers to the subject of the scenario
analysis and the time span. For example, scenario analyses can be carried out for a whole
industry globally, or for particular geographical regions and markets. They can be for a
decade or so (as in Illustration 2.2) or for just three to five years ahead.
● Identifying key drivers for change comes next. Here PESTEL analysis can be used to uncover
issues likely to have a major impact upon the future of the industry, region or market.
● Selecting opposing key drivers is crucial in order to generate a range of different but plausible
scenarios. Typically scenario analyses select from the various key drivers for change
two key drivers which both have high uncertainty and have the potential for producing
significantly divergent or opposing outcomes. In the oil industry, for example, political
stability in the oil-producing regions is one major uncertainty; another is the capacity to
develop major new oilfields, thanks to new extraction technologies or oilfield discoveries.
● Developing scenario ‘stories’: as in films, scenarios are basically stories. Having selected opposing
key drivers for change, it is necessary to knit together plausible ‘stories’ that incorporate
both key drivers and other factors into a coherent whole. Thus in Illustration 2.2, the
Fragmented protectionism scenario brings together in a consistent way failure to achieve
international coordination and a slow rate of geo-economic shift: nationalistic protectionist
measures in the West would prevent coordination at the same time as delaying the rise of
the Asian economies. But completing the ‘story’ of Fragmented protectionism would also
involve incorporating other consistent factors: for example, slow economic growth resulting
from barriers to trade; possible military conflicts due to lack of international cooperation;
and illiberal domestic politics associated with nationalism.
● Identifying impacts of alternative scenarios on organisations is the final key stage of scenario
