Chapter 2: Macro-environment analysis

The market environment:

mainly suppliers, customers and competitors. Environmental participants w/ whom interactions are primary economic. Pricing and innovations are often key strategies here.

Directions of change

o 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. o Inflection points: when trends shift sharply upwards or downwards. E.g. sub-Saharan Africa may have reached an inflexion point after decades of stagnation (and may embark on a period of rapid growth). o 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.

Economics:

"The macro-environment is also influenced by macro-economic factors such as currency exchange rates, interest rates and fluctuating economic growth rates around the world. Economic growth rates have an underlying tendency to rise and fall in regular cycles. Severe downturn in economic growth are often followed by falls in interest rates and exchange rates. Awareness of cycles reinforces an important pattern in the macro-environment: good economic times do not last forever, while bad economic times eventually lead to recovery. The key is to identify cyclical turning points. Overall cycles in economic growth are made up of three principal sub-cycles, each of varying length."

The scenario cube

(i) high potential impact; (ii) high uncertainty; (iii) high independence from each other.

Forecasting

All strategic decisions involve forecasts about future conditions and outcomes. Forecasting: takes three fundamental approaches based on varying degrees of certainty: single point, range and multiple-futures forecasting.

Scenarios:

offer plausible alternative views of how the macro-environment might develop in the future, typically in the long term. The point of scenarios is more to learn than to predict. Scenarios are used to explore the way in which environmental factors inter-relate and the help to keep managers' minds open to alternative possibilities in the future. ¥ 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.

The non-market environment:

the social, political, legal and ecological factors. Key participants: NGO's, politicians, government departments, political activists and the media. In the non-market environment, organisations need to build reputation, connections, influence and legitimacy. Lobbying, Pr, networking and collaboration are non-market strategies.

The scenario process

¥ Defining the scenario scope: the first step, scope refers to the subject of the scenario analysis and the time span. The appropriate time span is determined partly by the life span of investments. ¥ Identifying the key drivers for change: PESTEL can be used to uncover issues that have major impact on the future of the industry, region or market. The scenario cube can help to define the most significant drivers. ¥ 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.

Key drivers for change:

¥ 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. ¥ Integrated, cause-effect relationships, multiple value drivers ¥ Long term pattern; Estimate life cycle, timing and impact Identify main value drivers (which factors mainly drive changes in macro and industry) and forces driving change (integrated macro forces, relevant megatrends) ¥ Types / categories of 'Value Drivers': - External / Internal -Independent / Dependent -Controllable / Uncontrollable

Ecological: When considering ecological issues in the macro-environment, there are three sorts of challenges that organisations need to meet

• Direct pollution obligations are an obvious challenge, and nowadays typically involve nog just cleaning up 'at the end of the pipe, but also minimising the production of pollution in the first place. • Product stewardship refers to managing ecological issues through both the organisation's entire value chain and the whole life cycle of the firm's products. Stewardship involves responsibility for the ecological impact of external suppliers or final and-users. It involves also responsibility for what happens to products at the 'end of life', how are they disposed if consumers have no more use of them. • Sustainable development is a criterion of increasing importance and refers to not simply to reducing environmental damage, but to whether the product or service can be produces indefinitely into the future. (Eg. Over-exploitation of particular sources or raw materials for example in developing countries)

Vulnerable to economic cycles

• Discretionary spend industries, where users can easily put off their spending for a year or two. Ex: Housing, restaurants and car industries. • High fixed cost industries. Ex: airlines, hotels and steel. These suffer from economic downturns because high fixed costs in plant, equipment or labour tend to encourage competitive price-cutting to ensure maximum capacity utilisation when demand is low.

Technological: There are five primary indicators of innovative activity

• Research and development budgets. Innovative firms, sectors or countries can be identified by the extent of spending on research, typically reported in company annual reports and government statistics. • Patenting activity. Firms active in patenting new technologies can be identified on national patent registers, the most important being the United States Patents and Trademarks Office. • Citation analysis. The potential impact of patents and scientific papers on technology can be measured by the extent to which they are widely cited by other organisations, with data available from Google Scholar for instance. • New product announcements. Organisations typically publicise their new product plans through press releases and similar media. • Media coverage. Specialist technology and industry media will cover stories of the latest or impending technologies, as will various social media.

Forecast approaches

• Single-point forecasting: implies a great degree of certainty (eg. Demographic trends), easy to translate in to budgets. • Range forecasting: suggesting possible outcomes in different degrees of probability. These 'fan charts' are often used in economic forecasting (eg. Economic growth rates or inflation) • Alternative future forecasting: alternative futures are discontinuous; they happened or do not with radically different outcomes.