Contextual environment and scenarios Chapter 2, Exploring Corporate Strategy EBE and Scenarios materials

Why do we need to analyse the contextual environment?

Understanding the Environment l Diversity –Many different influences l Complexity –Interconnected influences l Speed of change –Particularly ICT

Macroenvironment – PESTEL (1) Exhibit 2.2

Macroenvironment – PESTEL (2) Exhibit 2.2 Political Government stability Taxation policy Foreign trade regulations Social welfare policies Economic Business cycles GNP trends Interest rates Money supply Inflation Unemployment Disposable income

Macroenvironment – PESTEL (3) Exhibit 2.2 Sociocultural Population demographics Income distribution Social mobility Lifestyle changes Attitudes to work and leisure Consumerism Levels of education Technological Government spending on research Government and industry focus on technological effort New discoveries /developments Speed of technology transfer Rates of obsolescence

Macroenvironment – PESTEL (4) Exhibit 2.2 Environmental Environmental protection laws Waste disposal Energy consumption Legal Competition law Employment law Health and safety Product safety

What are the strengths and limitations of PESTEL analysis?

Key Aspects of PESTEL Analysis l Not just a list of influences l Need to understand key drivers of change l Drivers of change have differential impact on industries, markets, and organisations l Focus is on future impact of environmental factors l Combined effect of some of the factors likely to be most important

How do you feel about scenarios?

[...] Now what is the message there? The message is that there are no "knowns." There are things we know that we know. There are known unknowns. That is to say there are things that we now know we don't know. But there are also unknown unknowns. There are things we don't know we don't know. So when we do the best we can and we pull all this information together, and we then say well that's basically what we see as the situation, that is really only the known knowns and the known unknowns. And each year, we discover a few more of those unknown unknowns. It sounds like a riddle. It isn't a riddle. It is a very serious, important matter. There's another way to phrase that and that is that the absence of evidence is not evidence of absence. It is basically saying the same thing in a different way. Press conference D. Rumsfeld, NATO headquarters, Brussels, 6 June 2002

WWK WWKWDK WWDKWDK The ‘Unknowns’

F SH uncertainty predetermineds Forecasting and Scenario planning Distance into the future

Scenarios serve four main purposes:- 1.Prospective – anticipating and understanding risk 2.Entrepreneurial –discovering new strategic options 3.To help managers break out of their established mental constraints and get closer to “seeing possible reality” 4.To evaluate the robustness of strategic options given different possible futures

Scenarios Are: An archetypical image of the future AND An interpretation of the present AND An internally consistent story about the path from present to future Are not: l Stories about the strategy of the organisation l Predictions l Extrapolations l Good/bad futures l “Science fiction”

Strategic Questions Today l which customers do you serve? l through what channels do you reach your customers? l who are your competitors? l what is the basis of your competitive advantage? l what are your distinctive competencies? Tomorrow l who will your customers be? l through what channel will you need to reach your customers? l who will your competitors be ? l what will need to be the basis of your competitive advantage? l what distinctive competencies will you need to develop?

Steps to Developing Scenarios l Identify focal issues or decisions - consider “strategic questions” l Identify horizon year l brainstorm on external environment - PESTEL l cluster and label issues to establish scenario agenda - Identify driving forces l Rank by Impact on the business and Uncertainty l set up scenario 2 by 2 matrix – ensure independent axes l Flesh out Scenarios l name scenarios with expressions of the dynamics occurring l describe stories in horizon year by cause and effect reasoning over time l Consider implications for the business l Selection of leading Indicators

Building Scenarios 1.Consistent mix of identified factors 2.Key uncertainties 3.Dominant themes 4.Optimistic, pessimistic, middle ground Build 2 or 3 scenarios based on:

Some common errors l Make sure the horizon year is appropriate to the issue l Use active voice sentences/phrases for driving forces l When discussing “impact” of driving forces be clear that you are concerned with impact on the client organisation l Make sure axes of 2x2 scenario matrix are independent and related to contextual environment

Building Scenarios Pre-determineds Key uncertainty 3 Key uncertainty 2 Key uncertainty 1 Scenario 1 Scenario 2 Scenario 3

Consider once more the Scenarios purposes:- 1.Prospective – anticipating and understanding risk 2.Entrepreneurial –discovering new strategic options 3.To help managers break out of their established mental constraints and get closer to “seeing possible reality” 4.To evaluate the robustness of strategic options given different possible futures

Scenarios and Learning “... the ability to learn faster than your competitors may be the only sustainable competitive advantage.....” de Geus HBR 1988