Organisational Environment

2 2. 1 The General surround The General milieu 2. 2 see, Monitoring, and Forecasting Changes in the Environment place Work strategical conclusion fashioning under conditions of dubiety 2. 3 Scenario supply secernate Work strategic inflection points and their imp suffice on dodge Tools and Techniques Undertaking scenario cookery 2. 4 infestation digest 2. 5 swot depth psychology 2. 6 The General and the Competitive Environments Tools and Techniques Writing a gent compendium ? Main Reference Schoe launchr, P. J. H. (1995). Scenario think a animal for strategical hinking. Sloan Management Re gull, 36(2), 25. Learning Objectives After completing this chapter you should be competent to find step to the fore what constitutes the frequent purlieu Evaluate the role of s seat and supervise in detecting environsal thins Apply scenario think to purpose qualification in equivocal milieus Evaluate gent as a role model for analysing the macro- environs Explain the engross of SWOT analytic thinking Evaluate the relationship mingled with the everyday and the emulous surround 9780199581610_035_063_CH02. indd 36 2/1/11 110351 AM 7 Introduction 2 In the previous chapter we shadeed at what dodging is and introduced a number of different perspectives on strategy skeletonulation. We underwriteed the importance of values in determining why an establishment exists, and looked at how an transcriptions values, its vision, and its mission guide individuals demeanour by signposting what is important to the governing. We explained the importance of an fundamental law organism leave behinding to re home the assumptions that underpin its theory of the business if it is to adapt to win overs in its environs.We in the like manner introduced a strategic circumspection process which involves strategy abridgment, strategy yearulation, and strategy implementation. We no vernalorthy that this essenti wholly toldy linear approach is rec yclable for ex n wizard entirely whitethorn not always accurately replicate decisions in the business world. With this cautiousness in mind we ripe(p) nifty deal start to evaluate rough barbs of epitome that git be utilize for strategy abridgment. What happens in the usual environment is important to an establishment. This is beca role transmutes that take place in the customary environment whitethorn point to trends that fag substantially push upon an organisations agonistic environment.These diversenesss, few whiles called discontinuities, fractures, or tipping points, that fundamentally seismic disturbance on the agonistic environment bequeath be understanded in this chapter. The ray of lights of analysis an establishment screw custom to discern changes in its popular environment forget also be considered. This holds scenario readiness, which forget be assessed as an aid to systemal decision making in uncertain environments. The bene go awa ys and sterilizeations of a curse word framework, which includes form _or_ system of government-making, economic, br some otherly, and technological factors, leave be addressed.A SWOT analysis and its links with scenario cooking and pest analysis go out be briefly discussed before being taken up in detail in a subsequently chapter. The aim of the chapter is not exactly to apply these techniques but, importantly, to understand their limitations. The chapter ends with a word of the links between the habitual and warring environment. Section 2. 1 defines the oecumenical environment and explains its importance to the hawkish environment. Section 2. evaluates the role of see and observe the ecumenical environment to travail to discern discontinuities that beget the potentiality to disrupt an organizations competitive environment. In Section 2. 3 we assess the role of scenario planning in succoring organizations to deal with irresolution in their environment. T his section also includes how to initiate scenario planning. Section 2. 4 evaluates PEST analysis as a tool for analysing the macro-environment. It shows how an organization idler detect and monitor enervated signals in the fancy of recognizing the discontinuities or trends that shape the environment. In Section 2. we explain the example of SWOT analysis with equalence to the oecumenical and competitive environment. The chapter concludes in Section 2. 6 with an evaluation of the relationship between the oecumenic and competitive environments. 9780199581610_035_063_CH02. indd 37 2/1/11 110352 AM 38 spell 2 Strategic abstract 2. 1 The General Environment 2 The external environment facing the organization consists of both a world(a) environment and a competitive environment. The competitive environment consists of the manufacturing and markets in which an organization competes. The competitive environment is analysed in detail in Chapter 3.The general environment, in co ntrast, is a lot referred to as the macro-environment. This is because changes that occur here pull up stakes ca-ca an resultant that transcends squiffys and specific industries. Figure 2. 1 shows the relationship between the general environment, the competitive environment, and the organization. It should be noted that, other things being equal, it is the competitive environment that has the close to now and immediate refer on the organization. The General Environment Political Economic The Competitive Environment Potential Entrants Power of Buyers The physical composition Power of Suppliers Competitive RivalrySubstitute Products/Services Social Technological figure 2. 1 The organization and its external environment That utter, organizations essential continually s dejection and monitor their general environment for signals, often asthenic or b atomic number 18ly perceptible, which competency indicate a change in their competitive environment. For example, smasheds in the exertion that produced typewriters would brace been unwise not to s domiciliate the general environment for signs of change, in this case technological change. The advent of micro-technologies was a 9780199581610_035_063_CH02. indd 9780199581610_035_063_CH02. indd 38 2/1/11 110352 AM the general environment 2 lear threat to the typewriter diligence, ushering in as it did the era of the word processor. It is easy to lead that individuals who relied upon the use of the typewriter were initially sceptical rough learning how to use the bare-ass technology. Nowadays one is hard pushed to see typewriters in use. In set to scan and monitor their environment, firms take aim tools of analysis or models that get out let in them to factor in the changes in the general environment and evaluate their impact. one(a) much(prenominal) approach involves scanning the environment to detect signals that will act as a signpost for future changes in the organizations industry.In additio n, an organization essential monitor its environment to discern pleasants and trends that are low to form and try to figure the future direction of these trends. Ginter and Duncan (1990) argue that macro-environmental analysis can act as an early-warning system by giving organizations condemnation to anticipate opportunities and threats and move up appropriate chemical reactions. therefore, the aim of macro-environmental analysis is to aid the organization in discerning trends in the general environment which susceptibility impact upon its industry and markets.The organization is then open to formulate a strategy and use its internal resources and capabilities to position itself to exploit opportunities as they a approach. At the equivalent eon the strategy will be acting to mitigate the set up of each threats. However, as we shall see in Chapter 3, on that point is a tone that the pace of change in the macro-environment is increasing, and is becoming more(preno minal) than than turbulent and un prophesyable. This un matter of course topicually shortens the lead time an organization has to anticipate and respond to changes in its environment. 39 2. Scanning, Monitoring, and Forecasting Changes in the Environment The purpose of scanning and supervise the general environment is to try to discern changes, however small, that feed a bun in the oven the potential to disrupt an organizations competitive environment. Once these changes are discerned, it is up to the organization to monitor them and see if they might incur a trend that can affect its industry. Clearly, experience and intuition will be baffling in trying to forecast where these changes will topicually manifest themselves, or indeed if they will take a shit some(prenominal) impact at all.We look at scanning, supervise, and promise changes in the general environment below. 2. 2. 1 Scanning the Environment It is often said that there are two certainties in animation death and taxes. However, a third certainty can be added change. If the external environment facing organizations was 9780199581610_035_063_CH02. indd 9780199581610_035_063_CH02. indd 39 2/1/11 110352 AM 2 40 discontinuities threats compositors cased by organizations that take up the potential to undermine the way they do business dim signals barely perceptible changes in the external environment whose impact has and to be felt 780199581610_035_063_CH02. indd 40 start up 2 Strategic synopsis stable and simple to understand, then firms would be instanced with an en executable bit of having relatively little change or, if change occurs, it would be easy to forecast based on historic trends. Some commodity markets exhibit a relative spirit level of st cleverness, making cryions or extrapolations based on prehistorical break inment quite reliable. However, nearly environmental conditions facing organizations are complex, uncertain, and aban tire step uped to change. They are complex because of the sheer volume of data that exists in the environment.Therefore whatsoever analytical tool or framework can simply haul up and simplify a tiny proportion of this data. At the same time, whatsoever given source of data, for example economic data on the human beings assistance of the de be intimaterance, is ambiguous as it can be interpreted in a number of different ways. If past(a) performance is no guarantee of what will occur in the future because of uneven changes and discontinuities then blasts at forecasting the future are fraught with irresolution. Discontinuities refer to the threats faced by organizations and industries that have the potential to undermine the way they do business.We have already mentioned the typewriter industry other examples include Amazon. com and Dell, which have both taken advantage of the network to change the way established products are customized and delivered to end consumers. Fahey and Narayanan (1986, quoted by Me rcer 1998) kindle three goals for an analysis of the general environment. First, the analysis should provide an understanding of incumbent and potential changes taking place in the environment. Second, it should provide important nakeds show for strategic decision makers.Third, environmental analysis should facilitate and foster strategic thinking in organizations. For Fahey and Narayanan, scanning may reveal actual or imminent environmental change because it explicitly counselinges on areas that the organization may have previously neglected (see Mercer 1998). Scanning the environment as a general employment has been made remote more make up trenchant with the advent of the net income. Prior to the Internet, the understand was that scanning was a monetary valuely bodily process which could altogether take account of a fraction of the culture that existed in an organizations environment.By redefining search be, the Internet has changed the economics of undertaking s canning. At the same time it has provided an opportunity to access a wealth of data which requires time and effort to structure properly. Scanning, therefore, is an opportunity for the organization to detect flimsy signals in the general environment before these have coalesced into a discernible pattern which might affect its competitive environment. Weak signals refer to minor changes in the external environment that an organizations scanning of the environment may barely register. This is because their impact has yet to be felt.The learn for organizations is to be able to read these signals correctly and monitor them until they coalesce into a more all the way discernible pattern. However, there are errors that can fall when looking for patterns. The get-go is that the organization may fail to position these signals. The wink is that the organization may discern a pattern that is not there but is based on the assumptions and mental models that cutrs railcarry in their he ads. We truism in Chapter 1 how senior vigilances reliance on its existing theory of the business can affect the success of the organization by blindsiding them to changes /1/11 110352 AM the general environment 41 taking place in the environment. Ansoff (1984) makes the point that the spotting of weak signals requires senior management commitment and sensitivity on the part of the observers. This means that the organization must be diligent in continually scanning its macro-environment for weak signals. When it believes that it has discerned something prodigious occurring in its general environment, this broad scanning can turn into a more foc employ monitor. 2 2. 2. 2 Monitoring the EnvironmentWhile scanning the environment may make organizations advised of weak signals, unless these are carefully monitored the resulting patterns will be missed. Monitoring can be seen as the activity that follows these initially different signals and tracks them as they grow into more clearl y discernible patterns. Monitoring allows an organization to see how these general environment trends will impact on its competitive environment. Whereas scanning is a more broad-brush approach, monitoring uses a finer brush stroke.However, the two are inseparable, since without an appellative of weak signals in the general environment there is no stretch for an organizations monitoring activities. bingle way in which an organization might monitor weak signals is to set thresholds such that any activity which occurs above the threshold will be monitored. This might include, for example, when an raise is sh take in by a major competitor in a particular tender or technological change. This spare-time activity then becomes the threshold at which the organization itself starts to take an interest. 2. 2. 3 Forecasting Changes in the EnvironmentThe purpose of scanning and monitoring the general environment is to aid the organization in developing viable forecasts of future trends before they become an unmitigated threat. This is specially useful when transaction with discontinuities which themselves will usually evolve from weak signals that exist in the environment. The quarry is to use this randomness to develop robust strategies that look into a degree of competitive advantage. Van der Heijden (1996) identifies three main types of uncertainty. 1. Risks. This is where past performance of connatural events allows us to estimate the probabilities of future ends. . Structural uncertainties. This is where an event is unique full not to offer evidence of such probabilities. 3. Un screwables. This is where we cannot even imagine the event. nigh managers are capable of relations with the type of uncertainty that appears in the form of risks. Also, what is unknowable cannot, by definition, be forecast and 9780199581610_035_063_CH02. indd 9780199581610_035_063_CH02. indd 41 2/1/11 110352 AM 42 structural uncertainties where no likely pattern of outcomes c an be derived from previous experience part 2 Strategic Analysis herefore the organization must wait for the event to occur before it can react to it. This leaves structural uncertainties where no probable pattern of outcomes can be derived from previous experience. In such a situation, van der Heijden suggests scenario planning as a useful tool of analysis to help the organization make sense of an uncertain and dynamic environment that has little in the way of clear road maps. 2 For information on strategic decision making under conditions of uncertainty go to the Online resourcefulness Centre and see the Key Work feature. www. oxfordtextbooks. co. uk/orc/henry2e/ . 3 Scenario Planning Schoemaker (1995) states that scenario planning is a disciplined method for imagining possible futures. It is an internally coherent view of what the future might turn out to be (Porter 1985, p. 446). The crude oil multinational Royal Dutch typeface has utilize scenario planning since the seven ties to help it generate and evaluate its strategic options. Scenario planning has given Shell a emend success rate in its oil forecasts than its competitors, and it was the offset oil fellowship to see overcapacity in the tanker business and atomic number 63s petrochemicals (Schoemaker 1995).Kahane (1992) reminds us that In the oil industry, experts have sometimes been able to suggest, but rarely to prefigure, the delineate turning points in crude oil prices . . . The Shell approach to strategic planning is, instead of forecasts, to use scenarios, a set of stories about alternative futures. scenario a thought-provoking, plausible, and internally consistent view of what the future might turn out to be tipping point an un apprehendd and unpredictable event that has a major impact on an organizations environment 9780199581610_035_063_CH02. ndd 42 These stories promote a discussion of possibilities beyond the well-nigh likely one and encourage the organization to consider what if questions. Therefore, a scenario can be seen as a challenging, plausible, and internally consistent view of what the future might turn out to be. They are not forecasts in the sense that one is able to extrapolate using past data. However, they do deal with the future and provide a tool of analysis for the organization to structure the surfeit of information that is contained in the present.In particular, scenarios help organizations tell the weak signals that signpost changes in its environment. It is these weak signals which precede environmental discontinuities, fractures, or strategic inflection points that help shape the competitive environment (Morgan 1988 Grove 1996). If an organization is to breathe proactive in its competitive environment it must not allow the rules of the game to be changed to its detriment, that is, it must be capable of traffic with a tipping point (Glad sound 2000), an unexpected and unpredictable event that has a major impact on an organizations e nvironment. /1/11 110353 AM the general environment 43 For a discussion of strategic inflection points and their impact on strategy go to the Online resource Centre and see the Key Work feature. www. oxfordtextbooks. co. uk/orc/henry2e/ 2 Strategic decisions are al close always fraught with ambiguity and uncertainty which attain complexness for decision makers. As human beings we are subject to biases and imperfect reason about uncertainty, that is, as individuals we will tend to misread events that are unconvincing and either ignore or overemphasize unlikely but significant events.In an attempt to resolve these shortcomings, most companies will use some form of discounted cash flow coupled with sensitivity analysis when analysing risky strategic decisions (Gertner 2000). The problem with these quantitative approaches is that they imbue the decision making with a spurringious sense of objectivity and can be misleading. For example, sensitivity analysis is seen as overly simpli stic in that by varying one disceptation at a time it fails to incorporate any links or correlations between them.Scenario planning is an approach to decision making under conditions of uncertainty that helps to overcome umteen of the shortcomings of traditional decisionmaking methods that is, scenario planning allows organizations to change some(prenominal) variables at the same time without keeping other variables constant. Crucially, scenario planning helps to overcome some of the biases and imperfect reasoning that human beings make under conditions of uncertainty. Scenarios are a tool of analysis to help improve the decision-making process set against the mise en scene of a number of possible future environments.They advantage the organization by readily helping managers think in a more taxonomical way. This allows individuals to more readily recognize change in their business environment instead of ignoring or rejecting it. Van der Heijden (1996), a former head of scenar io planning at Shell, states that the benefits of scenario planning for Shell have been More robust strategic decisions. Better thinking about the future by a reaching mental model. Enhancing corporate perception and recognizing events as a pattern (the recognition and monitoring of weak signals until they coalesce into a pattern is clearly important here). Improving communication without the company by providing a context for decisions. A means to provide leadership to the organization. The process of scenario planning should have the objective of electropositively influencing the strategy of the organization. This requires that the scenarios devised should stretch the imagination of management while also remaining plausible. In order to achieve this, organizations must be prepared to invest resources in educating managers to help them make the surpass use of scenarios.They hire to recognize that developing scenarios takes time and is most effective when managers from diff erent 9780199581610_035_063_CH02. indd 9780199581610_035_063_CH02. indd 43 2/1/11 110353 AM 44 part 2 Strategic Analysis 2 parts of the business interact. By constructing double scenarios, an organization can seek the consequences of uncertainty for its survival of the fittest of strategies. Furthermore, an organization can formulate strategies knowing that the assumptions on which it competes, what Drucker (1995) refers to as its theory of the business, are come ind and adequately assessed. See Case shoot Novacroft which highlights some of the difficulties of taking account of a changing environment). case withdraw 2. 1 NovacroftDealing with change Over the past atomic number 23 eld Novacroft, which designs, develops and manages smart tease for travel and leisure-service providers, such as Transport for London, has enjoyed strong demand thank to policies promoting exoteric transport and Oyster-style integrated ticketing systems. But proposed public spending cuts and heav y trading conditions in the travel industry make future investments more doubtful, tally to Novacrofts managing director Debra Charles. Our market should be both emerging and growing, but there are economic barriers, she admits. Organisations, especially in the public sector, have to make savings. Our competitors are financially stretched so they are interchange cheap. We must innovate to find new clients as well as saving our existing customers money. Charles, who has a background in both technology and marketing, launched Novacroft in 1998 with money inherited from her parents. As the companys be suggests, she was inspired to start a firm that would use the web to develop new ways of working. I thought it would be great to create a transparent online database so that organisations could see what was happening with their money and their clients, she remembers. Now, the Northampton-based firm manages more than 1m customer records for clients that issue pre-paid travel tickets and other smart cards. module verify and process paper or online applications before loading the information onto a chip, producing p stick outic cards, processing payments and providing a help centerfield that answers cardholders queries. Novacroft can also analyse records ranging from call notes to scanned documents to help clients understand their customers habits.One of Novacrofts highest write contracts is to manage the concessionary Oyster cards for students, children and 16- and 17-year olds on behalf of Transport for London. As well as checking that applicants have given correct information about their age, address and place of education, the companys helpline deals with questions such as how to replace doomed or stolen cards. The company also manages concessionary travel cards on behalf of the Scotch government and handles online applications for Young Persons, Family and Senior Railcards for the Association of Train Operating Companies. 780199581610_035_063_CH02. indd 44 2/1/11 110353 AM the general environment 2 In the past, clients might have used several different firms to produce cards, provide databases and integrate systems, but we have all that under one roof, explains Charles, whose foreland rivals are major systems integrators such as Accenture and Logica. We have been successful in getting big companies on dining table with the tender process because we have invested in hiring and training the even out people and really thinking about what the customer needs. We even self-impose penalization clauses. As a result, Novacroft made a substantial profit last year on a turnover of ? 6m, up from ? 4. 9m in 2007. The company has 96 employees, which rises to approximately 200 when extra staff are brought in to the call centre during the busy start to the academic year. Finding new clients by maximizing the puke and quality of service is a key challenge for Novacroft. As Charles points out, in the aftermath of the bank bail-outs, pledges s uch as transport secretary Lord Adoniss promise to consider incentives for train operating companies that introduce smart ticketing look far from secure. washbowl we really assume that these statements are facts or that money is ringfenced? she says. The real certainty is that the government and train operating companies have to save money. In modern months Novacroft has worked on scenario planning to consider how the company might react to changing demand. The company prides itself on a foxy approach to market conditions, mournful nimbly and using all its available tools to tackle future trends. We pass 14 hours in a hotel room thinking about what we know, what we dont know and removeing the rules of the game and our competition. Understandably, Charles is reluctant to reveal her conclusions, but she is very confident that the exercise was worthwhile. We have created a massive opportunity thats totally outside what our competitors are thinking about. Some diversification i nto products such as money cards is likely, while pull ining databases that clients can outsource to India is another possibility. Improving efficiency to keep prices competitive for cash-strapped public sector organisations is another priority. Since March, Charles has introduced a series of lean management techniques that have cut osts by more than ? 80,000 while maintaining service standards. For example, a study of customer service queries revealed that the number of calls processed by the help centre could be cut by improving online information. The company is also reaping the benefits of investment funds around ? 40,000 in staff leadership training over the past three months, she says. Charles believes that, patronage the slow refine, Novacroft could achieve a turnover of up to ? 20m indoors the next five years. We stand for innovation, service delivery and value for moneyand thats always attractive. 45Source Smart ticketing business Novacroft is looking to play its cards r ight Daily Telegraph, 14 August 2009 9780199581610_035_063_CH02. indd 45 2/1/11 110353 AM 46 part 2 Strategic Analysis Questions 1. In what ways might scenario planning help Novacroft to remain competitive? 2. What remedies might Novacroft pursue to void its reliance on public sector finance? 2 3. Comment on Debra Charless confidence in Novacrofts business model. 2. 3. 1 Undertaking Scenario Planning1 Scenario planning is applicable to almost any situation in which a decision maker needs to understand how the future of his or her industry or strategic usiness unit might develop. It divides our knowledge into two areas (1) things we think we know something about, and (2) things we consider uncertain or unknowable. The first area is based on the past and continuity. For example, an organization can make fairly safe assumptions about the direction of a countrys demographic profile. The uncertain elements include such things as future oil prices, interest rate, and the outcomes of po licy-making elections. nonetheless here it is not necessary to account for every possible outcome, since simplifying the outcome is fine for scenario planning.Therefore, an organization might simply categorize future interest rates as high, medium, or low, quite a than trying to work out every possible permutation. Also, as scenarios highlight possible futures but not specific strategy formulations, outside opinions such as those of consultants can be included in the process. A process for developing scenarios is as follows. 1. Define the scope. This involves setting the time frame and the scope of analysis. The time frame can be determined by factors such as product life cycles and rate of technological change. The scope of analysis may include products, markets, and geographical areas.Once the time frame is set, the question becomes What knowledge would the organization benefit most from in that timescale? 2. Identify the major stakeholders. Those who can affect and are abnorm al by the organizations decisions. The organization needs to know their true levels of interests and power, and how these have changed over time. 3. Identify basic trends. Which political, economic, complaisant, technological, and industry factors will have the most impact on the issues identified in Step 1? The impact of these trends on current strategy can be listed as positive, negative, or uncertain. . Identify key uncertainties. Which events that have an uncertain outcome will most affect the issues the organization is impacted with? Here again the 9780199581610_035_063_CH02. indd 46 2/1/11 110353 AM the general environment 47 organization might consider political, economic, social, and technological factors, in addition to industry factors. For example, what will characterize future consumer trends? An organization should develop possible outcomes for each of these uncertainties. These should be hold to keep the analysis simple. 2 5. Construct initial scenario themes.Once trends and uncertainties are developed, the organization has the basic building blocks for scenario planning. It can then identify extreme world views by juxtaposing all positive elements in one scenario and the negative elements in another broad scenario. 6. full point for consistency and plausibility. This involves checking to see if the trends identified are compatible with the chosen time frame. If they are not, then remove all the trends that do not fit the time frame. Do the scenarios combine outcomes of uncertainty that actually go in concert?In other words, ensure that inconsistent outcomes are not specify in a scenario, such as having full employment and zero inflation together. Lastly, have major stakeholders been placed in a position they will not tolerate or cannot change? In this case, the scenario draw will probably change into another one. The key then is to identify this supreme scenario. 7. Develop learning scenarios. Here the role is to develop relevant themes for the organization around which possible outcomes and trends can be organized. The scenarios can be given a name or title to reflect that they insure a story.This also helps individuals to remember the scenarios. At this stage the scenarios are useful for research and further learning inside the organization rather than decision making. 8. Identify research needs. At this stage, further research may be required to understand uncertainties and trends more fully. This is because organizations are knowledgeable about their own competitive environment but less knowledgeable about other industries. Therefore, the organization may need to study changes, in technology for instance, which have yet to impact its industry but may in conclusion do so. . Develop quantitative models. Once further research has been gained, the organization may wish to revisit the internal consistency of the scenarios and decide whether it might benefit from formalizing some interactions in a quantitative mo del. 10. Evolve towards decision scenarios. The ultimate aim of this process is to move the organization towards scenarios that can be used to test its strategy formulation and help it generate new ideas. At this point it is helpful to double check Steps 18 to see if the scenarios take account of the issues facing the organization.If the scenarios are useful to the organization, they might have the following characteristics (1) they address the fearfulnesss of individuals in the organization (2) the scenarios are internally consistent (3) they describe fundamentally different futures 9780199581610_035_063_CH02. indd 9780199581610_035_063_CH02. indd 47 2/1/11 110354 AM 48 part 2 Strategic Analysis 2 as argue to being variations on a particular theme and (4) each scenario describes an equilibrium state that can exist for a considerable period of time as opposed to being merely short-lived.In summary scenario planning attempts to capture the richness and range of possibilities, stimu lating decision makers to consider changes they would otherwise ignore . . . organizing . . . into narratives that are easier to nail and use than great volumes of data. Above all . . . scenarios are aimed at challenging the prevailing mind-set. (Schoemaker 1995, p. 27) It is perhaps worth reiterating that scenarios are not intended to predict the future. They are designed to help managers deal with a highly uncertain and dynamic environment.They may be aimed at the general or competitive environment (for a discussion of why scenario analysis should be use at the industry level see Porter (1985)). Porter, whilst recognizing the value of multiple scenarios for an organizations choice of strategy when considering scenario planning at the macro-level, argues, Macroscenarios, despite their relevance, are too general to be sufficient for developing strategy in a particular industry (Porter 1985, p. 447). Whether this statement is accepted may depend more on the industry being addressed rather than scenario planning per se.Scenarios encourage management to think the unthinkable, to question and surface assumptions they hold about the environment, and to be prepared to view events from a radically different perspective. Scenarios are a tool of analysis that examines the impact of uncertainty on organizations and industries by explicitly identifying some of the key uncertaintiesthe scenario variables. For scenarios to be effective, they must encourage the creation of robust strategies that match the organizations limited resources with the endless challenges in the external environment.To do this, scenario planning must ensure that as many as possible of the long-term opportunities and threats facing the organization are identified and addressed. For more information on how to undertake scenario planning go to the Online Resource Centre and see the Tools and Techniques feature. www. oxfordtextbooks. co. uk/orc/henry2e/ 2. 4 PEST Analysis A useful tool when scanning t he general environment is PEST analysis. This refers to political, economic, social, and technological factors. It is worth noting that some commentators include legal and environmental factors separately, preferring to croak the acronym to PESTLE.However, the legal element of the acronym can be 9780199581610_035_063_CH02. indd 48 2/1/11 110354 AM the general environment 2 subsumed deep down the political factor. In addition, the use of the last E (which refers to environmental factors) is often meant to signify the effects of our lifestyles on our environment, such as the use of fossil fuels and their impact upon climate change. In this comply it can be captured at heart the social factor, or indeed within all quartette factors in one form or another.Therefore, it is not important whether we use PEST (or STEP) or PESTLE, but to understand how this framework can be used and to be aware of its limitations. As long as the choice of acronym is clearly defined we have a consistent a pproach. What will PEST do for the organization? PEST analysis is simply another tool to help the organization detect and monitor those weak signals in the hope of recognizing the discontinuities or fractures shaping the environment. PEST analysis can be used to help detect trends in the external environment that will ultimately find their way into the competitive environment.It provides a link between the general and competitive environments in that weak signals in the general environment can become key forces for change in the competitive environment. Although we will deal with each factor in turn, it should be noted that interrelationships between the factors exist. For example, a social trend of healthier eating and consumers increasing distaste for pulverization farming (the crowding of animals and fowl in confined spaces prior to their sales agreement for human usance) may signal to supermarkets a change in consumer deportment and spending patterns. 9 2. 4. 1 Political Fac tors The political factor of PEST deals with the effects of government policy. Inasmuch as government policy is worked out through legislation, it encompasses all legal elements of this analysis. This includes items such as government stability, taxation policy, and government regulation. politics stability is not a major issue in Western economies. However, where multinational corporations operate across international borders, the stability of governments and political systems in those countries needs to be taken into account.These corporations need to be sensible that there will not be any sudden and pestiferous changes that might jeopardize the substantial investments they will have made. The safety of their staff office operating in these countries will be paramount, as will the introduction of an infrastructure which allows the efficient transfer of goods and services as well as financial assets. For instance, a government policy of deregulation or privatization has the e ffect of opening up markets to competition.Previously comfortable industries feel the chill wind of change, and organizations within the industry are forced to innovate and cut costs to remain competitive. This is because new entrants will often enter a market with deject cost curves and more innovative products and services owing to a relegate use of technology and a clearer understanding of consumer needs. To avoid being surprised, companies need to be scanning their environment for signs of change in government policy which might impact on their industry. 9780199581610_035_063_CH02. indd 49 2/1/11 110354 AM 2 50 corporate social debt instrument ecognition that organizations need to take account of the social and ethical impact of their business decisions on the wider environment in which they compete part 2 Strategic Analysis An air or sea disaster which costs human lives may prompt tighter government regulations in the areas of health and safety, particularly where an investi gation shows that the disaster could have been avoided. Companies operating within these industries should not be waiting to react to the outcome but should have worked out the ramifications of government involvement and be positioning themselves to take advantage of government regulation.The decline in carbon dioxide emissions and new fuel consumption standards for cars came about as a result of intergovernmental regulations. This, in turn, was a result of widespread look up by consumers and environmental groups about climate change due to increase levels of greenhouse gases in the atmosphere. This highlights the links between social trends and political change. Government regulation need not be something for companies to fear.Porter and van der Linde (1995) point out that environmental regulations, such as reducing pollution, may act to spur competitive companies on to innovate and reduce costs to counter the change magnitude costs of regulation. While the US car makers fought new fuel consumption standards in the vain hope that they would go away, the Japanese and German car makers developed lighter and more fuel-efficient cars. The companies that reap the competitive benefits will be the early movers the companies that see the opportunity first and embrace innovation-based solutions (Porter and van der Linde 1995).To do this, managers need to develop a new mindset which recognizes environmental betterment as a competitive opportunity rather than a threat. There is evidence across the Anglo-American economies of the UK and the US that some organizations are beginning to recognize that good business can involve corporate social responsibility (CSR). For example, the worlds leading media company, clock Warner, produced its first comprehensive subject field on its corporate social responsibility activities in 2006. It states Corporate social responsibility is not an afterthought at our company. It is central to what we do.Thats because Time Warner cannot be a great company unless we are a good company . . . Its simply good business to do so. (Time Warner 2006) In the US the SarbanesOxley Act 2002 resulted from the corporate collapse of Enron, WorldCom, and Tyco. There was widespread concern that boardroom administrators (including non-executives) and the accountancy profession had failed to safeguard shareholders interest, and in the case of Enron had actively operated to pervert that interest. Internal auditors were seen as ineffectual and often completely unaware of what powerful executives were doing.This legislation can work to the advantage of companies that are proactive in their response to it. For example, shareholders will be more confident in investing in a company which can show that it already has stringent ethical guidelines in place and that any breach of those guidelines will be taken seriously. The Building Society Act 1986 allowed building societies in the UK to offer current accounts and financial services that were previously the preserve of banks. This had 9780199581610_035_063_CH02. indd 50 2/1/11 110354 AM the general environment 51 ar-reaching effects on the financial services sector, escalate competition for customers and leading to consolidation within the industry. A player within the industry would have been wise to conduct some form of PEST analysis in order to determine the effects of these politically impelled changes within the industry and on their organization. 2. 4. 2 Economic Factors 2 Key economic indicators include interest rates, disposable income, unemployment rates, retail price exponent (inflation), gross domestic product (GDP), and exchange rates. However, economic data can be notoriously fickle and ambiguous.In addition, an economic indicator can never provide a complete picture (even of the subset of data it purports to track), but rather provides a snapshot and simplification of complex economic phenomena. This makes scanning and monitoring the general environme nt for signs of economic shifts which might impact an organizations industry a little difficult. The strengthening of an economy will principally benefit industries, but the extent of its effect will vary according to which economic factors are most affected. For example, the wind industry and manufacturing are most susceptible to increases in the rate of interest.Manufacturing organizations which export goods abroad will be scanning the general environment for signs of an appreciation in exchange rates, the effect of which will be to make it harder for them to sell their goods abroad but relatively easier for importers to sell their goods in the domestic market. In order to remain competitive, manufacturers exportation abroad will need to make efficiency gains and innovate so that they can offset the unfavourable exchange rate with a reducing in price or increase in quality. strategy focus PEST Analysis The Construction IndustryThe construction industry worldwide is famous for o perating on narrow profit margins. Any sudden and lengthened rises in interest rates can have a thoughtful effect on industry profitability. The key for players in this industry is to embrace funds at an interest rate which allows building projects to be sinless successfully, on budget, and on time. Where there is slip page of large-scale construction projects, as was seen with the production line Tunnel, this immediately brings into doubt their financial viability. Any delay inevitably increases the lowest project cost.Investors will be acutely aware that their investment in a project has an opportunity cost, that is, their money might be better invested elsewhere. If interest rates begin to climb this 9780199581610_035_063_CH02. indd 9780199581610_035_063_CH02. indd 51 2/1/11 110354 AM part 2 Strategic Analysis Construction firms already scanning and monitoring their environment can anticipate economic trends and prepare for them. iStockphoto. com/David Newton 2 52 exacerbat es the situation, as investors will demand a greater return. The consortium of banks financing loans will want to rearrange the interest ates on offer to reflect the increase risk and changing economic conditions. UK and US banks are known for their preference for short-term financing and unwillingness to invest in the equity of construction projects, in contrast with their Japanese counterparts. This makes the monitoring of data and detecting any changes in the environment of great importance. Investment banks will readily collapse up any adverse change in the economic rudiments of a project. Therefore, the organization must not only be aware of these changes but also have contingent plans in place for dealing with them.It also helps if the organization is aware of the interrelationships between economic variablesthat a rise in inflation will probably cause the monetary politics to consider increasing interest rates. They can then work through the ramifications of such changes on their projects. If one of the governments political priorities is to manage the economy, we can see a relationship between economic and political factors. Construction firms already scanning and monitoring their environment will be expecting these trends and therefore be prepared.Central bankers, such as the chairman of the US federal official Reserve Bank and the Governor of the Bank of England, are faced with a number of dilemmas. For instance, the economic data they will be tracking and monitoring will contain conflicting views. This forces them to use their thinker to look for comparable patterns that have occurred in the past as a basis on which they can make decisions. This is not all that they have to contend with. The ease of economic data being monitored may lead them to believe that the economy is overheating. Their response may be a quarter-point increase in interest rates.However, the time it takes to implement the interest rate rise and for this to impact on the e conomy may take a further sestet months. In that time it is conceivable that more recent economic data will point to the economy actually slowing down. Therefore, the effect of the rise in interest rates will be to accelerate 9780199581610_035_063_CH02. indd 52 2/1/11 110355 AM the general environment 53 the likelihood of an economic downturn. This reinforces the need for sombre and intelligent judgement when using PEST analysis. 2. 4. 3 Social Factors 2Social factors include cultural changes within the environment and are often referred to as socio-cultural. In the UK, increasing consumer concern with genetically modified food (GMF) and lobbying from consumer groups forced the government to scale down its introduction of genetically modified crops. Clearly, such social trends are of great importance to companies which research and produce genetically modified products. Many have been caught unawares by the strength of consumer response and find that they must first allay consumer fears if their products are to be fully accepted.Indeed, the frozen food retail merchant Iceland was one of the first retailers to state emphatically that none of the food products it stocks contains genetically modified ingredients. In doing so Iceland had accurately read a change in social trends and recognized that it would influence consumer spending patterns. Other supermarkets were chop-chop to follow. strategy focus Demographic Changes Courtesy of Johnson & Johnson The US and Western atomic number 63 face an ripening race with attendant problems for pension fund provisions. As the base of the working population continues o shrink, while advances in medical exam science and healthier eating ensure that people continue to live longer, companies are faced with shortfalls in the pension fund provisions they make for employee retirement. One solution is to encourage employees to take out personal pension plans that will supplement any state provision. Another solution being considered by governments is for employees to consider working for longer. In this way they can build up their pension fund to an acceptable level and avoid any shortfall. In response to a falling birth rate, companies like Johnson & Johnson, intricate with the provision of baby-care products,In response to a falling birth rate, companies have efficaciously targeted these like Johnson & Johnson have targeted their products at an adult female baby products at an adult female audience. 9780199581610_035_063_CH02. indd 53 2/1/11 110356 AM 54 part 2 Strategic Analysis 2 audience. For example, their baby lotion is now marketed as being kind and gentle to womens skin, as well as that of babies. This represents a response to changes in the general environment that directly affect their industry. Retail organizations in the US and Europe are more and more responding to the changing demographics of an ageing population by employing lder personnel. They recognize that retired employees pos sess a wealth of experience and respect for others that can be used to add value when serving customers. 2. 4. 4 Technological Factors Without doubt some of the major changes taking place in the general environment that are impacting the competitive environment are technological. One merely has to think about how Amazon and Dell have used the Internet to change traditional retailing within their respective industries. For instance, for a small retailer operating in a remote location, the financial outlay of marketing its product to customers nationwide would prove prohibitive.However, with the advent of the Internet, a retailer can access these consumers with a basic web page advertising its wares worldwide. It is interesting to note that small family businesses find their goods being demanded far outside their national borders because of awareness of their products through the Internet. Technological factors include the rates of obsolescence, that is, the speed with which new techn ological discoveries supersede established technologies. The rate of change in technology and innovations has the effect of causing new industries to emerge and also changes the ways in which existing industries compete.Technological advances include the Internet, the use of sophisticated software program (increasingly being used in the design and testing of automobiles), genetic applied science (see Section 2. 4. 3), and nanotechnology. The rapid rate of change of technology has changed the dynamics of industries such as newspaper publishing, banking, financial services, and indemnity. This has allowed new entrants to enter the market at a lower cost base than incumbents, thereby offering more competitively priced products and services and gaining market share in the process. reign Line insurance in the UK cuts out the insurance broker (intermediate) by providing insurance quotations direct to the consumer over the holler. This allowed it to gain rapid market share and eventual ly become the marker leader. It changed the rules of the insurance industry, forcing incumbent players to follow suit or face a loss in market share. As the insurance industry becomes increasingly commoditized, differentiation becomes harder to achieve as organizations compete on price. Direct Lines first-mover advantage is being eroded, as competing firms such as Norwich Union prove capable of competing on a price basis. 780199581610_035_063_CH02. indd 54 2/1/11 110357 AM the general environment 2 First Direct, a subsidiary of HSBC, pioneered the use of telephone banking in the UK. At the time competitors were slow to follow suit, but, once it was established, all players offered a telephone banking option. The same is true of Internet banking. Telephone and Internet banking provide obvious consumer benefits as the financial cost of undertaking proceeding within a bank branch is far in surfeit of the same transaction undertaken by telephone or online.In fact, when the transaction is undertaken online the cost falls substantially. Therefore, organizations must be prepared to innovate and adopt new technologies if they wish to remain competitive. The Internet has been compared to the Industrial Revolution in toll of the changes it has brought about. The pace of change of technology is increasing. Its unpredictability is increasing. Markets are becoming increasingly turbulent. This makes it important to try to detect the weak signals which grow into discernible patterns that have the potential to change how industries operate.Moreover, if tipping points are unexpected, we need to change our thinking via the use of scenario planning to expect the unexpected. Organizations may not be able to predict these events but they will be in a stronger competitive position to respond to them once they have occurred. While the impact of technological change and changing consumer preferences continues to challenge the business model of traditional high alley retailers such as the UKs WH Smith, such changes are not completely the preserve of the private sector.Organizations in the public sector also face changes, often socio-political in nature, and here too an understanding of PEST analysis can benefit the organization. (See Case Study Radical Change in the NHS, which highlights some of the important factors thrust change within the field of study health Service). 55 case study 2. 2 Radical Change in the NHS Senior officials have set hard-hitting targets to reduce the number of patients referred to medical specialists, or treated in Accident and Emergency departments, while GPs will be asked to cut down on the amount of time spent in consultations.The plans are being issued as senior managers warned that the NHS is about to face the great financial pressures since its inception. They fear that when the current spending round ends in 2011, the impact of an anticipated real-terms freeze or cutscoming as the demands on the NHS of an ageing popula tion increase will be devastating. The NHS alignment, which represents NHS managers, will tell this calendar weeks Labour Party conference that the impending challenge is so great that hospital closures and job cuts must be enforced across the country. 9780199581610_035_063_CH02. indd 55 2/1/11 110357 AM iStockphoto. com/Sturti part 2 Strategic Analysis 2 56 The National Health Service It comes as two leading think tanks predict a future funding gap of between ? 20bn and ? 40bn within six years of 2011. Regional health authorities have ordered hospitals and master(a) care trusts to draw up plans for cuts worth billions. In London, NHS trusts have been told to detach more than half of A&E patients, and those seeing specialists, to cheaper polyclinics run by groups of GPs. Meanwhile, family doctors will be asked to speed up their consultations, reducing the average time per patient from 12 proceeding to eight.The instructions drawn up by NHS London, and seen by The Sunday Telegrap h, order trusts to demonstrate that they can deliver an aggressive scenario in response to funding pressures. Under its affordability assumptions, already-controversial plans to reduce the number of patients treated in hospital are given more demanding targets in an attempt to cut costs. Sixty per cent of activity which now takes place in A&E departments should happen in community clinics within five years, the document says, along with 55 per cent of outpatient treatment.Thirty per cent of outpatient appointments will be stopped altogether. Managers say not all appointments are necessary, though many doctors argue it is impossible to know in advance which patients do not need to be seen. The number of diagnostic tests carried out will be cut by 15 per cent, while the amount of surgery will be reduced by seven per cent. Although the polyclinic model, to reduce demand on hospitals, is supposed to shift more treatment into the community, GPs will be told to reduce their average appoin tment time by one third, from 12 minutes to eight.Senior managers in other regions, who will draw up their own plans later this year, said rural communities faced particular pressures, with small maternity and soil general hospitals likely to struggle in the funding crisis. In a speech tonight to the Labour Party conference in Brighton, the NHS Confederation will warn that the service across the country faces unprecedented difficulties, which require bold and decisive measures. Its policy director Nigel Edwards told The Sunday Telegraph The NHS has never experienced a financial challenge of this magnitude or succession in its history. 9780199581610_035_063_CH02. indd 56 2/1/11 110357 AM the general environment 9780199581610_035_063_CH02. indd 57 2 He said improving the operation of the NHS, and treating more patients earlier in primary care, would not be enough to balance the books. Delegates will be told Savings only start to become available when we can shut entire buildings, si tes and reduce staffing numbers. The organisation, which represents NHS managers, will also call for uncomfortable decisions to be made to limit staff pay. Under a three-year deal already agreed, nurses will arrive a rise of 2. 5 per cent in April. Sir Robert Naylor, chief executive of University College Hospital in London, said pay should be frozen for NHS staff after that point. If it was not, every one per cent pay rise could cost 10,000 job cuts, he said. The chief executive said that while he supported plans to treat more patients in the community, he was concerned that PCTs were planning to cut back on hospital services before alternatives were fructify in place. The investment in those services has to come first or where do the patients go? he said, criticising oversimplified analyses which failed to take account of increasing public demand. Dr Laurence Buckman, chairman of the British Medical Associations GP committee, draw the plans as desperate and inadequately thought through. Dr Buckman, who works as a GP in London, said targets to reduce outpatient appointments by 30 per cent would put patients at particular risk. He said tout ensemble this means is that those people who are refused a referral to a specialist will be forced to go privately, or go nowhere. This will be difficult for doctors, but patients will be the real victims. While some specialist referrals turn out to be unnecessary, GPs only asked for a specialist opinion when they needed it, Dr Buckman said. A study by the Kings Fund and the Institute for Fiscal Studies forecasts a funding gap of between ? 20bn and ? 40bn by 2017, if funding for the NHS receives no increase, or gets a real-terms freeze which only keeps pace with inflation. Sue Slipman, director of the Foundation Trust Network, which represents the best hospitals, warned of an Armageddon scenario which could circulate without decisive action on pay, and terms and conditions.She said There is a trade-off between saving j obs, and pay increases, and in the current climate, protect jobs needs to be a priority. Katherine Murphy, from the Patients Association, accused NHS managers of wasting billions on management and repeated organisational restructuring during the boom years of record investment. She said there was no evidence that plans to shift patients into the community would provide safe care. Elderly patients often require intensive support which often means lots of staff, in hospitals. The need is only going to get greaterthese plans look like madness, she said.A spokesman for NHS London said its documents provided planning scenarios, rather than forecasts, to cope with a changing economic environment. He said 57 2/1/11 110358 AM 58 part 2 Strategic Analysis the NHS was investing heavily to ensure care was provided in the most appropriate setting. Source Plans for swingeing hospital cuts as NHS on bound of Armageddon Sunday Telegraph, 26 Sep 2009 2 Questions 1. Outline the PEST factors drivin g change within the NHS. 2. Which PEST factors do you consider to be the most important, and why? 3.How can an analysis of PEST factors help the government and NHS chief executives to resolve the crisis in the health service? 2. 4. 5 Limitations of PEST Analysis The economic example illustrates some of the limitations of dealing with macroenvironmental analysis. First, PEST analysis is not simply writing a shopping listthe use of disparate bullet points without any consideration of their wider ramifications. In listing the economic factors, for example, one must clearly draw out the implications of each factor on the organizations environment.In addition, the rate of change of PEST factors in the general environment and their increasing unpredictability act to limit the use of PEST analysis. Some have argued that the competitive environment is the only true plain for the organization to analyse since it is the competitive environment that has the greatest impact on a firms markets and products (Porter 1985, particularly Chapter 13). Whilst there is agreement that the competitive environment has the greatest effect on an organizations ability to achieve competitive advantage, it would be unwise to refrain from analysing the general environment.For information on how to write a PEST analysis go to the Online Resource Centre and see the Tools and Techniques feature. www. oxfordtextbooks. co. uk/orc/henry2e/ 2. 5 SWOT Analysis SWOT analysis refers to strengths, weaknesses, opportunities, and threats. Strengths and weaknesses refer to the organizations internal environment over which the firm has control. Strengths are areas where the organization excels in comparison with its 9780199581610_035_063_CH02. indd 58 2/1/11 110358 AM the general environment 2 competitors, while weaknesses are areas where the orga