Session 3 : Environment and the Firm, PEST & Scenario

Planning
Presented by Prof. (Dr.) Manish Popli

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 External Environment
Analysis
(I) Vision
Strategic Analysis Mission
Internal Environment
Analysis

Corporate Strategy
Business Level
strategy
Growth
Divestment
strategy
(II) Generic Strategies
Strategic
Formulation

M&A Strategy Strategic Alliance Globalization

Organizational
(III) Corporate Governance
Architecture
Strategic
Implementation Sustainable
Competitive
Strategic
Strategic Leadership Advantage
Entrepreneurship
 External Analysis (1/3)

• Why is it important?

• Provides Opportunities and Holds threats

• Shaping the “rules” of the game:

– How firms compete

• Influencing the availability of critical resources

• Affecting the likely returns from the investments

The environment covers a lot of territory

– Essentially everything outside the organizations’ control
– As managers, we must focus on the parts of the environment that affects our
business

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 External Analysis (2/3)

• Three External Environments include:

• General
– Today’s Session
• Industry Analysis
– Session 4 and 5
• Competitor Analysis
– Session 7

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 External Analysis (3/3)

Macro Environment
Political, Economic, Socio-cultural,
Technological, Environmental, Legal, Global

Industry Environment

Strategic Group

The Organization

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General Environment Analysis

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 PESTEL framework

Political/legal • Pro-Market reforms

(see next slide) • Anti-trust laws
• Environmental Protection laws
• Taxation laws
• Deregulation philosophies
• Labor training laws

Economic • Inflation rate

• Interest rate
• Trade deficit/surplus
• Budget deficit/surplus
• Personal saving rates
• Business saving rates
• Gross domestic product
• Exchange rates

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 Indices

• Heritage Foundation Index:

• http://www.heritage.org/index/

• World Competitiveness Year Book Published by IMD, Switzerland

• PRS Group’s International Country Risk Guide

• https://databank.worldbank.org/home.aspx
– World Bank Enterprises Survey

• https://data.worldbank.org/indicator/NY.GDP.MKTP.CD

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 PESTEL framework ...

Socio-cultural • Workforce diversity

• Attitudes about work life quality
• Shift in work and career preferences
• Shifts in preferences in product and service characteristics
• Multiple- income families
• Health and fitness awareness
• Erosion of educational standards

Technological • Product + Process innovations

• Use of wireless technology
• Biotechnology, nanotechnology
• Consumer electronics
• Private-government supported R&D
• New communication technologies
• Plant automation

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 PESTEL framework…

Environmental • Energy consumption

• Sources of energy development
• Renewable energy efforts
• Water availability as resource
• Environmentally friendly products
• Global warming
• Regional changes in population growth and decline

Global • Important political events

• Powerful economic alliances
• Critical global markets
• Newly industrialized countries
• Regional trade agreements
• Entry of China in WTO
• Debt problems in PIGS

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 Impact of General Environment (1/2)

• The general environment can hold either opportunities for, or threats to, entire
industries.

• Any examples?
– Declining Interest rates

• Same environmental trend can have different effects on different industries.

• Any examples?

• The impact of an environmental trend may be different for different firms within the
same industry!
• Any examples?
– Educomp vs Byjus

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 Impact of General Environment (2/2)

The following ..have potentially ..probably won’t affect ..have potentially negative
environmental trends.. positive effects on these much effects on

DEMOGRAPHIC
Aging population Medical services Steel Colleges & Universities

SOCIOCULTURAL
Convenience foods Farm equipment
Multi-income families

Greater health & fitness

Exercise equipment Meat products
awareness

POLITICAL/LEGAL

Increased environmental Waste Management Book publishing Automobiles

legislation

TECHNOLOGICAL
Advances in Flash memory Compact discs
Solid state memory

Progress in biotechnology Ethical drugs Building materials

MACROECONOMIC
Declining interest rates Housing construction Prescription drugs

GLOBAL
Growing competitive strength of
Global telecommunications
newly industrialized countries(NICs)

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SWOT

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 SWOT Analysis (1/2)

• Strengths (S):
– are resources and capabilities that enable your company or unit to perform well

• Weakness (W)
– are characteristics that prohibit your company or unit from performing well and
need to be addressed.

• Opportunities (O)
– are trends, forces, events and ideas that your company or unit can capitalize on

• Threats (T)
– are possible events outside your control that your company or unit needs to
plan for or decide how to mitigate.

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 SWOT Analysis (2/2)

• Important tool for auditing the overall strategic position of a business vis-à-vis
its environment

• SWOT involves both Internal & External Analysis.

• Internal Analysis is easier (less information overloading) than External

Analysis

• SWOT subsumes PESTEL Analysis

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 SWOT Framework/Template

Within Firm (Internal) Environment (External)

 STRENGTHS  OPPORTUNITIES
 Changing Customer Preferences (S)
 Globalized/Enlarged Economy (P & E)
 Technological Advantages (T)
 Favorable Regulatory Policies (P)
 Low Tax Regimes (P & E)
 Demographic Changes – age factor (S)
 New Distribution Channels (E & T)
 WEAKNESSES  THREATS
 Shifting Customer tastes (S)
 Restricted Geographical Access (E & P)
 Technology Denial/Obsolescence (T)
 Adverse Regulatory Changes (P)
 Aging of the population (S)
 Emergence of newer distribution
channel – like flipkart/Amzon shopping
vs brick & mortar channels (Future
group) (T)
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 General Environment

Trends Uncertainties

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Scenario Planning (SP): A Tool for Strategic Thinking

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Why to use Scenario Planning?

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 Scenario Planning (1/4)

• Scenario Planning is a process for constructing a range of plausible futures to

use as a backdrop for discussing strategies.

• Provides a broad framework  ideas influencing strategy at the corporate level

and assisting the business in identifying risks and opportunities.

• In SP, the macro scenario remains the focus, providing a comprehensive

assessment of how the future business environment could develop.

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 Scenario vs. Forecasts

The Present The Future

The Path
Forecasts

Alternative future images

Current Realities (Mental Maps)

Multiple Paths

Scenarios

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 Scenario Planning (2/4)

• Possibility to combine quantitative data with qualitative input, enabling scenario

planners to incorporate results from other forecasting techniques and allow for soft
and fuzzy variables.

• How it can help to overcome issues in decision making?

– Challenges Manager’s mental models by explicitly confronting them with their

own biased viewpoints or the prevailing mindset.
– Cognitive Inertia
– Overconfidence

• Combined with other tools such as Industry structure and competitive analysis,
scenarios represent an integral part of the corporate strategy.
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 Scenario Planning (3/4)

• How SP is different?

• Contingency Planning

• Sensitivity Analysis

• Computer Simulation

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 Scenario Planning (4/4)

• Which kind of organizations will especially benefit from Scenario planning?

– Uncertainty is high
– Too many costly surprises in the past
– The quality of thinking is too routinized or bureaucratic

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Creating Scenarios

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 Creating Scenarios

• Task 1 : Identifying a local issue or decision :

– What specifically are concerned about with respect to the future?

• Task 2 : Time Horizon

• Task 3 : Identifying key trends and uncertainties in the external environment

– The brainstorming can focus on five general categories of forces: “social, technological,
economic, environmental and political forces” that interact with one another to create
complex and technological plots

• Task 4: Check for Consistency and Plausibility

• Task 5 : Scenario Writing

– Share the scenarios as stories

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 Creating Scenarios

• What, in your opinion, could be examples of uncertain aspects of future?

– Interest rates
– Oil prices
– Results of political elections
– Impact on reforms (FDI in retail etc.)
– Rates of innovations
– Impact of Other political events in the world (republican vs Democrats in US
elections and so forth)
– Regional trade agreements
– Global Climate change rules
– New Global political axes
– Trump’s tariffs on Imported good from China!

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Scenarios are made: How can we use scenarios?

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 Using Scenarios

(I) Resource Gap Analysis:

• Identify Winning resources and capabilities

– Identify Best/Good/Delay resources

– Do a gap analysis for resources and capabilities necessary and the

resources/capabilities currently possessed by the organization.

• So, Organizations should invest in capabilities needed in all or a majority of

scenarios (Qualifying criteria for future capex/growth plans).

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 Weak Signals
Using
andScenarios
Graduated Response (1/3)

(II) Resource Maneuvering

• Generate Signposts :

– Establish a process for identifying “early indicators”.

– Generally done through sign-posting exercise where participants are asked to

discuss the events they would expect to see today and over intervening period
that would indicate that scenario is coming true.

– That awareness prevents future events from blindsiding participants.

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Weak signals and graduated response

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Weak signals and graduated response

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 Final comments!

• Unfortunately , we don’t have crystal balls to help.

• The SP process forces to think outside the generally accepted future and builds
robust envisioning.

• Must establish process for establishing “early indicators” or “Sign posts”

• Establish a process to deliver information to decision makers

• By taking out the time to structure our thinking about the long term, we can better
prepare our firm to seize the opportunities faster sustainable competitive
advantage.

• Helps managers aware of environmental uncertainties by confirming them with

fundamentally different future states.

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 Final Remarks

• When contemplating the future, it is useful to consider three classes of

Knowledge –

1. Things we know we know.

2. Things we know we don’t know

3. Things we don’t know we don’t know

“Various biases- overconfidence , under and over prediction , the tendency to look
for confirming evidences- plague all three, but the greatest havoc is caused by the
third”

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Thanks 

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