The Wider Economy, Industries
and Competitors
Introduction
Organisations do not exist in a vacuum. They exist and coexist, compete
and cooperate in the same terrain as others. A graphic view of such terrains
can be portrayed by borrowing images from the animal world where
business organisations can be observed as creatures trying to outsmart
others in a proliferated and challenging landscape in order to survive. For
that reason, it is critical to have a good understanding of the organisation’s
environment and its competitors in order to be able to develop strategies
that have the potential to outperform rivals. This is even more important
when factoring in the complexity and the diversity of the modern-day
economy, and the fact that deregulation, globalisation and political and
economical unifications intensify interactions.
Consequently, it is essential for the decision maker to have accurate ‘road
maps’ that are continuously updated with new information as and when
conditions change in order to be able to steer the company accordingly to
achieve the objectives. Figure 1 illustrates simplistically the different levels
of an organisation’s environment to provide an overview of competitive
landscapes.
An Overview of the Levels of an Organisation
Õs Business Environment
Macro
(External Environment)
The Wider Economy
Meso
(External Environment)
The Operating Env ironment or Task Environment
Micro
T he Industry
(supply)
Figure 1
(Internal Environment)
The Organisation
T he Marketplace
(demand)
As shown in Figure 1, an organisation has two key environments. The first
is the external environment that includes the macro (the wider economy)
and the meso levels (the industry and the marketplace). The second is the
internal environment that consists from the micro level alone (the firm’s
internal aspects).
The sections below and the following few chapters
discuss the various organisational environments in detail and provide
techniques with which to carry out different sets of analyses to support
decision-making.
The Macro Environment
The development of competitive strategies falls, by default, at the level of
business strategy, as discussed in chapter one because this level is
concerned with navigating a firm in its specific industry and marketplace. If
an organisation has more than one business, i.e. Strategic Business Units
(SBUs) in different industries or more than one SBU in the same industry,
each business unit will need to develop their own competitive strategies
according to their very own particular circumstances and environmental
challenges and opportunities.
However, before such strategies are developed an analysis of the macro
environment will first have to be carried out to identify the prevailing
characteristics of the wider economy in order to evaluate the effect of these
conditions on the organisation’s industry and their impact on the company.
In doing so, an appreciation of economics fully supports the analyst to both
seek appropriate factors to examine as well as understand better their
impact and effect on business.
Nevertheless, in the field of business
strategy the basic PEST (Political, Economic, Social and Technological)
framework enjoys widespread acceptance as a useful technique that enables
individuals to appraise the macro environment even without a particular
knowledge of economics.
The technique was first introduced by Aguilar (1967) using the initials ETPS
to provide a simple and memorable acronym that summarises the key
aspects of the macro environment in order to contextualise that level of
analysis. Since then, the framework is appearing in the wider literature of
business and management in a number of ways including additional
variables.
Some of such versions are PESTLE (the additional letters stand for Legal and
Environmental), SLEPT, SLEPTE, STEP and STEEP (the additional E stands for
ecological).
Cartwright (2001) even created a SPECTACLES framework
incorporating even more diverse aspects (Social, Political, Economic,
Cultural,
Technological,
Aesthetic,
Customer,
Legal,
Environmental,
Sectoral).
However, the ‘Aesthetic’ variable is mostly an internal to the
organisation characteristic and the ‘Customer’ is, clearly, a feature of the
marketplace. Hence the technique is not concentrating at the macro level
alone, potentially creating unnecessary confusion.
Paradoxically, given the importance and increasing impact of globalisation
on world economies such a perspective has not yet been fashioned on any
of the PEST-based frameworks available in the public domain, consequently,
leaving a significant gap in the technique.
In order to troubleshoot this
weakness, in this book, the PESTILE form of the framework is adopted
(Panagiotou and Van Wijnen, 2005) where the initials stand for: ‘Political’;
‘Economic’; ‘Socio-Cultural’; ‘Technological’; ‘International’; ‘Legal and
Regulatory’ and ‘Environmental and Ecological’. In this way, a structured
framework is advanced that summarises the key aspects of the macro
environment consistently to enable a focused level of analysis.
An important aspect in practice, nonetheless, is the manner in which the
technique is implemented. Repeated observations in the field indicate that
most users apply the technique simplistically. For example, by populating
the framework with bullet points. However, a key requirement for any kind
of analysis is the evaluation of the data examined in order to determine the
impact and effect of the different factors on the company so that
appropriate strategies are developed given the identified challenges and
opportunities. The commonly used bullet points is not, perhaps, the best
way of doing so because bullet points tend to be brief and implicit hence
hindering clarity and detail.
A more effective way, by far, is to also allocate values on each construct
identified in the different variables, according to the analyst’s or team
members’ perceptions, in order to support conclusions and informed
decision-making. Figures 2, 3, 4 and 5 illustrate different PESTILE analyses
that are considered to represent best practice.
Figures 2 and 3 contain
qualitative values and Figure 4 quantitative values. Figure 5 illustrates the
graphical representation of Figure 4.
In addition, the outlines of these examples have been devised somewhat
differently to reflect various organisational contexts. Figure 2 demonstrates
a countrywide example for a small developing country, figure 3 provides an
overview of a large organisation’s presence in diverse markets and figure 4
displays a medium sized firm in a single market context.
In other words, the framework can be designed in many different ways to
enable a technique that is concise, focused and straightforward - limited
only by the designer’s imagination and sophistication. The most important
aspect, nevertheless, is the interpretation and evaluation of these constructs
by ranking their perceived importance from the company’s viewpoint.
Therefore, identifying the different macro factors is only half the task. The
task is complete only if there is also a statement about the impact and effect
of the identified factors on the company because only then informed
decision-making can be reached.
To conclude, attention is also drawn to the simplicity of examples used here
because of space limitations.
In real life, the likelihood is that an
organisation’s PESTILE analysis will be much more elaborated, if enough
thought and reflection has been put into it. As mentioned above, it is also
suggested that users avoid bullet points when populating the framework. It
is best to enter bullet paragraphs instead because in the process of
synthesising the paragraph the breadth and depth of comments will be
much more explanatory thus justifying the analyst’s viewpoint and hence
the value assigned on each attribute.
A Developing Country
Example PESTILE Analysis
Variable
Constructs
Effect on Sectors
T
IT
M
A
O
P
E
¥Stab le d emo cratic sy stem w ith co mmitted g o v ern men t to su p p o rtto ch ang e
¥N o immed iate risk o f civ il u n rest, terro rism etc.
¥Stro n g cu ltu ral ties w ith Eu ro p e/A sia/A frica
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
¥A frican su ccess sto ry
¥Flag gin g eco no my relian t o n declin in g mark etsecto rs
¥Lag g in g in comp ariso n to o th er islan d eco n o mies (H o n g K o n g etc.)
¥Ch eap co st o f liv in g b u t n o tas ch eap as so meco u n terp art co un tries
¥A ccess to v ario u s lo an s/fin ance fro mWo rld Ban k , In d ian G o v ern men t etc.
¥G o o d tax in cen tiv es fo r b u siness & ind iv id u als & resid en cy p lan
0
0
+
+
+
+
+
+
+
+
+
+
0
+
+
+
0
0
0
+
+
0
0
+
+
+
+
+
0
¥Biling u al p o pu latio n w ith rich an d d iv erse cultu ral back g ro u nd s
¥Majo rity emp lo y ed in man u factu rin g / g o v ern men t ro les
¥G o o d p o p u latio n mix (5 4 0 k w o rk ers, 6 4 k immig ran t w o rk ers)
¥Lack o f tech nical sk ills
¥Stro ng serv ice eth ic
+
+
0
+
+
+
+
0
+
+
0
+
0
+
0
0
+
+
+
0
+
+
0
0
+
0
0
+
¥G o o d k n o w -h o w in tex tiles an d ag ricu ltu re p articu larly su g ar in d u stry secto r
¥Lin k ed to th e SA FE fib er o p tic cab le
¥A d eq uate lan dlin e in frastru ctu re
¥Mo b ile n etw o rk
¥Lo w PC d iffu sio n
¥Relativ ely low in ternet p en etr atio n
0
+
+
+
0
0
0
+
+
+
-
+
+
+
0
0
0
+
0
0
0
0
0
0
+
+
+
0
-
+
0
+
+
0
0
+
+
+
+
-
International
¥Pressu re fro m man u factu rin g in A sia, N o rth A frica, Eastern Eu ro p e
¥Ch in ajo in in g WTO
¥N o o pen sk iesp o licy fo r airlin es
0
0
-
0
0
-
-
0
0
-
0
0
-
-
0
0
-
Legal
And
Regulatory
¥WTO remo v al o f p referen tial tariffs o n tex tiles
¥Co to no u A g reemen t & Lamy in itiativ e abo lish in g p referen tial access/p rice
¥ICT Co p y rig h t/co mp u ter crime leg islatio n facilitatin g g ro w th
¥A G O A 1 1 A g reemen t sp ecial ru le fo r app arel Ğd u ty /q u o te free
¥Lo sso f p referen tialaccess to EU /U S
0
0
0
-
0
0
+
0
0
0
-
0
0
0
-
0
0
+
0
0
0
0
0
0
0
0
0
+
0
0
¥Co n sisten tly g o o d climate, b eau tifu lb each esan d lan dscap e
¥G reen en erg y so u rcesfro m su gar b y -p ro d u cts
¥Remo te lo catio n p articu larly to U S
¥K ey geo g rap h ical areafo r A frica an d East A sia (lo catio n , time zo n es)
+
+
+
+
+
+
0
+
+
+
+
0
+
+
+
+
0
+
+
+
+
+
Political
Economic
Socio-Cultural
Technological
Environmental
and
Ecological
Key :
Figure 2
Sectors: T=To u rism;IT= IT; M=Man ufactu ring /Tex tiles;
Effect: + = Positiv e. - = N eg ativ e. 0 = N eu tral
A=A g ricu ltu re; O=O ffsh o re Cen tre;P= O ffsh o re Pro cessin g; E= Ed u catio n
Aircraf t Manuf acturer
Example PESTILE Analysis
Effect on Key Markets
A merica s
Economic
Constructs
So uth
A merica
UK
Fra nce
Germa ny
C hina
J a pa n
Su b sid ies an d Co u n terv ailin g Measu res
co d e
¥Bilateral ag reemen tsfo r large civ ilaircraft
¥WTO litig atio n b etw een U S an d Eu ro p e
¥WTO litig ation b etw een Bo mb ard ier an d
Emb raer
¥D eregu latio n remo v esb arriersto en try
+
+
+
+
+
+
+
+
+
0
-
+
0
-
+
0
-
+
0
-
+
0
-
+
0
-
+
0
0
-
+
0
-
¥Fu elp rice increase
¥D ep reciatio n o f U S d ollars
¥In creasin g w orld w id ed eman d fo r
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
¥H ig h research an d d evelo p men tco sts
¥U se of military tech no lo g iesin th e civ il aircraft
+
-
+
-
+
-
+
-
+
-
+
-
+
-
+
-
¥Co mp etitio n law s
¥Emp loy men t law s, H ealth
¥En v iro n men tallaw s
+
-
+
-
+
-
+
-
+
-
+
-
+
-
+
-
-
-
-
-
-
-
-
-
+
+
+
+
+
+
+
+
¥Th e new
co mmercial
airlin es
¥Cu rren cy flu ctu atio n s, tariffs an d p rice co n tr o ls
¥In creasin g in tern atio n al d iv isio n o f lab o u r
Socio-Cultural
¥G lo b al p o p u latio n g row th in dev elo p ing co u n tries.
¥In crease in av erag e life ex p ectan cy in w estern
civ ilizatio n .
¥In crease o f disp o sab le in co mein d ev elo p in g
co u n tr ies.
Technological
mark et
¥Pressu re fo r lo w er w eig h t an d lig h ter materials
¥ D ep en d en ce on sp ecialist su pp liers
Legal and
Regulatory
Environmental
and
Ecological
¥G reen issu es
¥Pressu re fo r lo w er
an d Safety
w eig h t, carb o n emissio n and
n o ise
¥Climate p ro tectio n o n ch arg e
¥Co n stru ctio n o f tu rb o p ro p s in o rd er to rep lace
ag eing fleets, meet mo re strin g en t env iro n mental
co n strain ts at co mmu n ity airp o rt
Key : + = Po sitiv e. - = N eg ativ e. 0 = N eutral.
Figure 3
A sia
C a na da
Variable
Political
Euro pe
U SA
A High Street Firm with Internet Presence
Example Q uantif iable PESTILE Analysis
Variable
Po litica l
Construct
¥Demo cratic and stab lesy stemth at su pp o rts b usin ess
activ ities
+3
¥Eco n omic slo wd o wn impacts d eman d lev els
¥Co n sumers h ave b eco memo re p rice sen siti v e
¥In creasin g interest rates fu rth er impact d eman d lev els
¥Ov erall h ig h er co st of liv in g cau tio ns b u y ersan d redu ces d eman d lev els
¥Desp ite eco n omic p ro blems co n sumer d ispo sab le in co me isstill relativ ely h ig h
¥Lo w u n emp lo y men t
¥In creasin g costs o f raw materials ad d to th e
co stso f p ro du ctio n an d red u ce p ro fitmarg in s
-2
-1
-2
-2
+2
+2
-3
So cio -Cultura l
¥Ex p ansio n o f eth ic g ro u p s requ ires p ro d u ct/serv ice attrib u te mo d ificatio n s to reflect p referen ces
¥Co n sumers areb eco ming in creasin g ly mo re d eman d in g
¥In creasin g con su mer co n fid en ce o f In tern et sho p p in g esp ecially amo n g th e y o u ng g en eratio n
¥Greater co n sumer awaren ess and so p h isticatio n o f p ro du ct/service attrib u tes
-1
-1
+2
-1
Techno lo g ica l
¥Th e In tern etis rap idly ex p and in g d igital mark ets an d
imp acts h ig h street sales
¥Hig h PC an d bro ad b an d d iffu sio n su p p orts In tern et-b ased sales
¥Th e ad v an cemen ts o f mo b ile commu n icatio n s su p p ort n ew distrib u tio n ch ann els
¥Th e hig h d iffu sio n o f in teractiv e d igital TV h as created a n ew mark et
-2
+2
+2
+3
Interna tio na l
¥Co n g en ial in ter-co u n tr y relatio n sh ip s p ro v id e o p p o rtu n ities fo r in tern atio n al ex p an sio n
¥Go o d co n d ition s fo r ov erseaso u tso u rcin g in co u n trieswith cheap er lab o u r an d o th er co sts
¥Th e glo b alisatio n o f in d u stries an d mark ets in ten sifies co mp etitio n
+1
+2
-1
¥Deregu latio n lo wers b arriers to entry in th e in d u stry an d in creases co mp etitio n
¥Hig h er tax atio n rates
¥Greater p resen ce o f reg u lato ry b o d ies in th e in d u stry
-2
-1
-2
¥Gro win g p ressu re to use ren ewab le so urces in th e p ro cess o f pro d u ction ad d sto p ro d uctio n costs
¥Emp h asis o n waste man ag emen t
¥Co n sumer in creasin g preferen ce to g reen p ro d ucts an d fair trad e req u ir es carefu l man ag emen t
¥Op p o rtu n ities to en h ance th e b ran d with corp o rateso cial resp o n sibility characteristics
-2
0
-1
+2
Eco nomic
Leg a l a nd
Reg ula to ry
Eco lo g ica l a nd
Env iro nmenta l
Key: -1 = Low negative effect. -2 = M edium negative effect. -3 = High negative effect
0 = Neutral. +1 = Low pos itive effect. +2 = M edium pos itive effect. +3 = High pos itive effect
Figure 4
Effect on the Company
Graphical Representation of the Quantifiable PESTILE Analysis Example
Economic Variables
Technological Variables
Socio-Cultural Variables
2
3
2
1.5
1
2.5
1.5
0.5
0
Effect on the
-0.5
Company
-1
2
1.5
1
Effect on the
0.5
company
1
Effect on the
0.5
company
0
0
-0.5
-1.5
-2
-2.5 Economic slowdown
-3 Increasing interest rates
Stable disposable income
Increasing costs of raw materials
Consumer price sensitivity
Higher cost of living
Low unemployment
-1
-0.5
Expansion of ethnic groups
-1 Internet shopping confidence
1.5
-0.2
1.5
1
Effect on the
company
Effect on the
0.5
company
0
-0.4
1
-0.6
0.5
Effect on the
company
-0.8
-1
-1.2
-1
-1.6
Good conditions for overseas outsourcing
-1.8
Deregulation lowers barriers to entry
-2
0
-0.5
-1.4
-0.5
Figure 5
2
0
2
High PC and broadband diffusion
Hign diffusion of digital TV
Ecological/Environmental Variables
Legal & Regulatory Variables
International Variables
Congenial inter-country relationships
-1
Higher competition
due to globalisation
Demanding consumers
Greater consumer sophistication
-1.5
Internet impact on high street
-2
Advancement of mobile communications
Higher taxation
Greater industry regulation
-1.5
Growing pressure for renewable sources
-2
Consumer preference on green products
Waist management pressures
Enhance brand with CSR aspects