Understanding the business environment and the drivers of change.

1. Understanding the business environment and the drivers of change. Opportunities and threats: PESTE, market forces and the forces of competition, scenarios.

2. Environment Understanding the environment

3. John’s seminar approach • Describing the business as it is. • Understanding the drivers of performance. • Understanding the drivers of the environment. • Understanding the options for developing the business. Understanding the environment

4. Understanding the drivers of business performance Understanding business environment/ drivers of change Understanding the business/ assessing performance Understanding options for business/ corporate development Understanding the environment

5. Coming from/ going to • We have been examining the characteristics of the business, and the drivers of business performance. • Our ultimate goal is to consider the options for the future development of the business, to maintain or to improve its performance as a value creator. • But before we do this we must consider the environment in which the business will be operating in future. Understanding the environment

6. Opportunities and threats • Understanding the environment in which the business will be operating in future is crucial because the business must continue to look for opportunities to develop and use its resources and capabilities AND of course it must seek as far as possible to protect its value creating activities and resources from changes in the environment which can threaten their current value. Understanding the environment

7. The point is therefore to understand the business environment and the drivers of change in order to help prepare the business for the future. Recall our definition of the firm: • Firms exist to motivate and co-ordinate the search for value, by searching for, exploiting, and protecting valuable opportunities. Understanding the environment

8. Every case is different • We said before that business’s vary a lot, and this is true also of the business environment. The environment of a fashion business is different from that of an electricity business. For example in one, six months is a long time, in the other it is more like six or even sixteen years. • So as before we need to think about the characteristics of the environment of a particular business and their strategic significance. The best strategists combine deep understanding of a particular business and its particular environment with the ability to conceive options and implement change. Understanding the environment

9. As before, for any case study you are faced with this background is unlikely to be fully specified so a bit of thought and research may be necessary to fill this out. • As before, there are lots and lots of things to consider about the environment but the objective is to try to identify and focus on the strategically significant for the business being studied. • This is the point of the tools and techniques discussed in the course notes (PESTE, scenarios etc.) • Again I would make the point that the information you develop needs to inform your analysis of a case but it will not always be necessary or possible to spell it out in full. Understanding the environment

10. Strategy and the future • Look back to our many views of strategy, to Prahalad and Hamel for example who talk about competing to shape the future, of identifying tomorrow’s opportunities, of building tomorrow’s competencies. Or PA consultants, understanding the complex dynamics of the relationship between the business and its changing environment. Or Brown and Eisenhardt, managing change. Or Kees’s view in your course notes of the concept of strategy. • Strategy is forward looking by definition and explicitly or implicitly it is about the complex relationship between the organisation, its performance and its changing environment. Understanding the environment

11. The business of success • Who is most likely to succeed? • Those who create&shape the future/ • Those who anticipate it and are prepared for it? • Those who react after it has happened? • Those who try to ignore it? Understanding the environment

12. Point of the exercise? • Immediate point is about the exam case where it will be crucial to consider the changing environment of the case business and to examine opportunities and threats carefully with a view to discussing how the business is to prepare for the future. • More generally a failure to understand and act on the implications of environmental change can bring a company as successful and powerful as IBM to its knees. Look also at Marks and Spencer in the UK. • On the other hand the ability to spot emerging opportunities and exploit them early was the making of Nokia, Dell, Sony, Cisco, and Turner Broadcasting et al. Understanding the environment

13. Team Tasks • For your chosen case company consider the nature and significance of environmental changes and the key factors driving opportunities for and threats to the business in the future. • Do a PESTE type analysis, consider the different elements of market forces and of the five forces analysis which impinge on market attractiveness, consider underlying cost drivers, consider the possibility of hypercompetition, and try to develop some likely scenarios, if appropriate for the business, and how these might impinge on the business. Understanding the environment

14. References guide • Material on this topic is found in, • Buspol chapters 3 and 4. • Busecon chapters 2,5,6, and 7. • Kees van der Heijden’s book on scenarios. • Web sites such as McKinsey and Marakon. • Woods, D’Aveni, Foster-Kaplan (McKinsey) et al specifically look at the complex nature of the ‘new economy’ businesses and the complex environment in which they operate. These could easily form a basis for an optional advanced course in SM for the ‘new economy’! Understanding the environment

15. Opportunities/ threats • Our focus is on opportunities and threats • The potential for innovative thinking about value creation in the future, to leverage existing resources and capabilities further and/or to build new resources and capabilities for the future. • What/where are the opportunities for improving good or average performance or turning around poor performance? • What are the potential threats to existing performance, threats to the value of positions and assets and capabilities from changing tastes, technologies, social trends, government policies, market and competitive forces. Understanding the environment

16. Types of environment • Some general considerations might be: • Changeability: likelihood of change. • Complexity: number of things which might change. • Novelty: the degree to which change creates really new situations. • Predictability: degree to which change can be predicted. • Speed and dynamics of change. • And these interact to influence overall environmental turbulence from low to extreme. • The hotel business faces change but to a lesser extent than the oil sector which is less than telecoms (or is it?). Understanding the environment

17. Dimensions of • Your course notes describe a way of dividing the environment into two parts: • the contextual environment which is the subject of PESTE analysis and • the operating environment which is the subject of industry analysis (5 forces) and market segmentation/ competitor analysis. Understanding the environment

18. From macro to micro env’t. • PESTE analysis: things which might affect you but you can’t affect them much (macro). • Industry/ 5 forces analysis: things which might affect industry/market level profits (such as new entry) but which to some extent you might be able to influence (meso). • Analysis of your competitors (S/W’s, possible actions?) and your potential customers (segmentation analysis) to inform your own actions (micro). Understanding the environment

19. Note however the overlaps. The contextual environment such as technological change impacts on competition through for example the development of substitutes, and competition can impact on technology through R&D spending by firms. Technological change is part of the env. for some firms but part of the competitive process for others. Also government policy on M&A’s, collusion, foreign investment impact on firm rivalry. Understanding the environment

20. PESTE • This stands for POLITICS,ECONOMICS, SOCIETY, TECHNOLGY, AND (NB) THE (physical) ENVIRONMENT . • Things which might affect you and to which you might need to respond or adapt. Changes in interest rates, government policies, new technologies, environmental concerns, etc. Examine some of these further (see below). • (See also checklist in course notes). • See also your notes page 3.8 (PA model/ next slide) for a useful way of organising your thoughts on this. Understanding the environment

21. Economy (E) Politics and policies(P) Technology (T) The Environment Demography and lifestyles (S) Markets Customers/ suppliers Competitors Threats Oppos Understanding the environment

22. PESTE: some dangers • PESTE type checklists can easily become meaningless laundry lists as people think of more and more things to add to the list. In any specific case it will not be the length of the list that counts but its usefulness in identifying meaningful opportunities and threats and considering their implications for the business. In this sense it may be seen as a prelude to scenario development. Understanding the environment

23. PESTE process • Therefore to keep things in perspective PESTE should try to focus on specifics. • What aspects of the macro economy are relevant to us, what aspects of technology, of politics and policies, etc. • How exactly will the future differ from the past. • Think from the inside out, from a knowledge of the specifics of the business (considered in detail earlier), to those aspects of the environment which seem likely to be most relevant. • Don’t worry too much about what information goes into which category, some changes transcend categories. • PESTE is not just for collecting and sorting ideas but for encouraging you to think about the implications of change. Understanding the environment

24. Key factors for success • A possible focus tool is the KFS concept. The KFS are those factors which are believed to be critical for survival in a particular industry. • For example the KFS in cosmetics are likely to be different from the KFS in steel or oil. • For example if the KFS in a market is control of labour costs then such things as wage trends, taxation, union strength, government policy on redundancy and pensions, demographics will matter. But if the KFS is effective logistics or quality or new product development your focus will need to be be different. Understanding the environment

25. Basic questions again • Another possible focus tool is to consider how changes might impact on: • What you do • How you do it • For whom you do it • With whom you do it • Against whom you do it • Where you do it • And on what basis you do it. Understanding the environment

26. Politics and public policy • Governments play the major role in all modern economies, although in some more than others!, in terms of overall macroeconomic management, tax policy, education and health, regulation of industry and finance, industry policies (national champions, subsidies to favoured sectors, incentives for multi-national investment), competition policies (cartels and mergers), public ownership, trade policy, technology policy, employment policy, environmental policy, welfare policy, housing policy, … • All of which impact the general business environment although on some more than others. Understanding the environment

27. Developments in government policy can create opportunities for business and threats. In recent years in many countries governments have reduced their involvement in business through privatisation and reduced regulation. But governments have also placed more emphasis on competition and market forces which can make life harder for business (Msoft!) • Governments also play a crucial role in establishing standards. Remember Nokia in telecoms? TV broadcast standards. Banking reserve standards. • Government expenditure is particularly crucial in areas such as health, transport, defence, education, construction, and defence. Understanding the environment

28. The economy • Major economic trends (national, regional, global? depending on the business) to be considered in output growth,productivity growth, employment growth, labour costs, inflation, exchange rates, international trade, balance of payments, interest rates, business cycles, financial stability, government finances, government debt levels, tax policy, investment trends of public and private sector, consumer expenditure trends, overseas investment, infrastructure investment, cost trends in energy, transport, communication, ….. • 2001 world slowdown is affecting your business. Understanding the environment

29. Macroeconomy and forecasting • Many organisations (OECD, World Bank, IMF, IMEDE, Economist.com) provide macroeconomic forecasting services for the world economy, regions such as SE Asia or Europe, nations such as Malaysia or Singapore. • Perman/ Scouller text has 2 chapters on macroeconomics and forecasting techniques if you are interested in the technical background beyond the course notes. I have recently written a new chapter for GSB Understanding the Business Environment (UBE) course specifically on understanding trends in the macroeconomy. Understanding the environment

30. Society • Trends in culture and values, lifestyle changes, education and health, demographic change, school leaving age/ retirement age trends, attitudes to work and wealth, trends in income distribution, attitudes to saving and spending, emigration and immigration, attitudes to government and politics, to the environment, sex and race equality, attitudes to and demand for product safety. Understanding the environment

31. Five decisive social changes • The reshaping of family life • Weakening of social ties and rising crime • Decay of social institutions • Structural unemployment especially in Europe (&Japan?) • Mosaic society (multi-culturalism) except in Japan. • Salmon, Scanning the global environment 1999 Understanding the environment

32. For example • I understand that the demographics of Singapore, ageing population and low birth rates, are a current cause for concern. • This will affect demand on local businesses and services and the supply of local labour. Local businesses may already be factoring in future labour shortages/ rising costs to their calculations and the government will be discussing immigration policy, retirement age, and retraining. • NB however, since these trends are quite clear they would not figure in any scenarios you might build (discussed later). Understanding the environment

33. Technology • Technological change is a pervasive fact of life for business nowadays, not just so called hi-tec businesses. Technology impacts on product development, on production processes, on logistics, on organisation, on the supply chain, on communication with customers, on the chain of substitutes, on new entry, on the need for partnerships, on employees, training , and so on. • Electronics, communications, new materials, new pharmaceuticals, new sources of energy, IT, ……. Understanding the environment

34. New technologies • Genetics (cloning etc) • Neurosciences • New materials (ceramics) • Nano-technology (machines for making machines) • IT progress (is there a limit to microchip power?) • Salmon, Scanning the global environment 1999 Understanding the environment

35. Two sided coin • There are of course two sides to consider. • Technology is a threat to some businesses (newspapers?) but it also opens tremendous opportunities as well. The trick is to try to be on the right side of the coin. • Thus newspapers as hard copy products may decline but the demand for content (news and information and good features) will not. So a newspaper business that wants to stay in business needs to realise that its no longer about producing hard print on expensive paper but delivering value electronically. The Financial Times in the UK is moving this way already. Understanding the environment

36. Environment • An increasingly important part of the environment of many businesses such as oil or autos is concern for the physical environment. Pollution, ozone layer, CFC’s, environmental degradation, damage to land and seas. • This has created legislative pressures in many countries and increasing pressure on business to reduce environmental costs. • Pressure from consumers for more environmentally friendly products has increased. Fuel efficient cars, low water use washing machines, longer life light bulbs, low pollution batteries, less harmful products in general. • These concerns keep growing: GM foods for example where there is great consumer resistance in Europe. Understanding the environment

37. General points • Some general considerations for PESTE: globalisation, financial interdependence, rapid information flows, e-commerce, speed of adoption of new products, diminishing returns to R&D?, ageing populations, regional blocs, changing role of the state, demand for health services and financing health, the anti-globalisation-anti-capitalist movement (Seattle, Prague, London), US boom/bust and the ‘new economy’ claims, OPEC revival, Japan’s comeback?, China’s dilemma, environmentalism, global terrorism, stock market over reaction, shortening product life cycles, speeding up of information flows, increasing transparency of prices due to internet, ………. Understanding the environment

38. The ‘new’ economy • Which refers to the way in which IT continues to revolutionise the world economy. • This will figure in many PESTE’s. I recommend in particular the following sources: • Economist magazine, Sept. 23rd 2000, and web site, economist.com/surveys/neweconomy/ and regular new technology updates. • and Meta-capitalism by Means and Schneider, published by Wiley. Understanding the environment

39. Implications of change • The problem is working out exactly what it all means for your business/case. First we can try to narrow our focus to consider factor markets and then the industry/ market level and consider what it all means for ‘market attractiveness’. • How will changes impact on demand and supply. • On demand growth, differentiability, segmentability, the development of substitutes/ complements and so on. • On supply growth, and the elasticity of supply. • On competition and rivalry? • This takes us back to the P 5 forces model as a way of organising our thoughts. See below. Understanding the environment

40. However • Of course whilst existing markets will still be important (autos, banks, drugs, education), the really valuable opportunities are likely to be found in markets now evolving or barely defined yet. • This is where the real entrepreneurial action will be found. As argued by Prahalad and Hamel in ‘Competing for the Future’. . Understanding the environment

41. P&H on the future • We are standing on the verge of a revolution. It will be the environmental r, the genetics r, the material r, the digital r, and the information r. Entirely new industries will be born. Existing industries will be transformed. Competition is for share of opportunities in the evolving markets, as opposed to market share in existing markets. Competition is to gain a deeper understanding of the drivers of change and to shape the new industry. Competition is to develop the necessary competencies and assemble the necessary resources and partners. Understanding the environment

42. So • If you want the real entrepreneurial action you will be studying the environment for the sort of opportunities that in 5/10 years will make you a Microsoft or an Nokia. • And whilst this will still involve thinking about demand potential, segments, and the drivers of market competition it will be at a different, more speculative, level than a standard 5 forces analysis of the text book. • For the rest of us, we can try using the 5 forces approach to structure our thoughts. Understanding the environment

43. Factor markets • Capital markets: cost and availability of capital. Stock markets, banks, venture capital. • Labour markets: cost and availability of labour. Skilled workers, managers, engineers and scientists. • Technology markets: cost and availability of technology. • Energy: cost and availability of energy. • Locations: cost and availability of good locations/ sites. Understanding the environment

44. Implications • S/D relations. Generally if changes increase demand faster than supply then this will be good for profits. But if supply increases faster this is not so good. • Differentiation. Will changes make this easier or will it encourage commoditisation. • Segmentation. Will changes make this easier or harder. How will it change segments. Understanding the environment

45. Implications of PESTE • Failure to spot and understand important changes can create major problems. • Retailers who miss demographic/ lifestyle changes (Marks and Spencer?), oil companies who miss environmental concerns (Shell in Europe), auto producers who over-estimate the strength of the European economies, banks who failed to see the financial meltdown coming in SE Asia a few years ago, music recording companies who weren’t prepared for Napster, insurers and the new terrorism! Understanding the environment

46. An example • Usinor-Sacilor (French steel maker) in 1990: • Increasing European economic integration (single market) • Likelihood of a severe recession in the early 90’s. • Changes in steel making technology • Increasing overseas competition for European markets especially from former communist countries. • Increasing concern about environmental impacts of smokestack industries • Increasing European rules on national subsidies to troubled businesses. • French government leaning towards privatisation • Difficulty in reducing workforce in France Understanding the environment

47. Scanning systems • A lot of potentially useful info is ignored. Look at how the US underestimated the terrorist threat. • Organisations need formal scanning systems to search for, analyse, interpret, store, disseminate, and utilise what is available. • The goal of the scanning system is to detect signals of opps and threats. • Scanning must be organised not left to chance. • Salmon, Scanning the global environment 1999 Understanding the environment

48. Scanning at L’Oreal • Societal: eg effects of ageing. • Geopolitical: eg rise of China • Technological: eg ceramic powders • Competitive: eg shifting boundaries between health and cosmetics sectors • Markets; eg trends in distribution • Legislative: eg health care budgets • Geographical: eg emerging market opportunities in Asia. Understanding the environment

49. ABC of competitive intelligence • Understand the forces driving competition • Attempt to break traditional mind sets • Build state of the art scanning systems • Understand what is driving performance • Listen, scan, share, learn together, exploit what you learn • Be aware of the potential for info being ignored, misunderstood, suppressed, not reaching the right people, not acted on and so on. • L’Oreal again Understanding the environment

50. The industry life cycle • An intermediate set of factors between PESTE and P5 forces. • Four stage cycle: introduction/emergence, growth, maturity, stagnation/decline. A simplification and there are exceptions. And of course firms may try to influence the cycle. • The important thing is looking for the shifts between stages. Look back at the PC industry. When did it mature? How did the internet impact on this. Is it now stagnating? What are the players doing about this? Because these shifts will have important implications for competition. Understanding the environment