STRATEGIC BUSINESS

ANALYSIS
MODULE 5
 LET US PRAY
Lord God, we thank you that you promise to
be with us always. Thank you that your
presence is with us right now. Today, we give
you our hearts, our minds and our lives. Come
speak your words of life into our beings. We
pray that you would deepen our
comprehension, broaden our thinking, and
transform our understanding of what we are
about to study. For you are our wise
counsellor, our perfect teacher and our faithful
friend. Thank you Lord. Amen.
 Module 5:
Tools for Environment Analysis
There are many models for industry analysis and they each
provide differentperspectives and approaches. We begin this
chapter by reviewing some of the more salient models. We then
compare and contrast the models and address how they can be
used in conducting an industry analysis.
 Module 5:
Tools for Environment Analysis
Topic Outline:
• PEST
• Porter’s Five Forces Model
• Industry Value Chain
• Cooperation and Competition: Game Theory
• Scenario Planning
 Module 5:
Tools for Environment Analysis
Topic Outline:
• New Economy Models
• Blue Ocean Strategy
• Global Industry Models
• Stakeholder Analysis
 Module 5:
Tools for Environment Analysis
Learning Outcomes:
After reading the module, students must be able to:
1. After reading the module, students must be able to:
2. Discuss the relationship between strategy and the environment;
3. Assess industry economics, drivers of profitability, and the key success
factors (KSFs) to understand what it takes to win in an industry.
 PEST (Political, Economic, Social, Technological)

PEST analysis examines political, economic, social, and technological

forces that impact the industry. These forces can be viewed as macro in
orientation, and in many respects they are the early warning signals
about changes in an industry.
PEST (Political, Economic, Social, Technological)
 PESTEL ANALYSIS
PESTEL analysis. Providing a wide overview, PESTEL is likely to feed into both
environmental forecasts and scenario analyses. The PESTEL framework is one
of several frameworks (including the similar ‘PEST’ and ‘STEEPLE’ frameworks)
which categories environmental factors into key types.
PESTEL analysis highlights six environmental factors in particular: political,
economic, social, technological, ecological and legal. This list underlines that
the environment includes not only the economics of markets, but also
nonmarket factors.
 PESTEL ANALYSIS
Organizations need to consider both market and nonmarket aspects of strategy:
• The market environment consists mainly of suppliers, customers and
competitors. These are environmental participants with whom interactions are
primarily economic. Here, companies typically compete for resources,
revenues and profits. Pricing and innovation are often key strategies here.
 PESTEL ANALYSIS
Organizations need to consider both market and nonmarket aspects of strategy:
• The nonmarket environment involves primarily the social, political, legal and
ecological factors, but can also be impacted by economic factors. Key
participants in the nonmarket environment are not just other businesses, but
non-governmental organizations (NGOs), politicians, government
departments, regulators, political activists, campaign groups and the media.
In the nonmarket environment, organizations need to build reputation,
connections, influence and legitimacy. Lobbying, public relations, networking
and collaboration are key nonmarket strategies.
 PESTEL ANALYSIS
POLITICS
The political element of PESTEL highlights the role of the state and other
political factors in the macro-environment. There are two important steps in
political analysis: first, identifying the importance of political factors; second
carrying out political risk analysis.
 PESTEL ANALYSIS
POLITICS
Two variables helpful to identifying the importance of political factors:
● The role of the state. In many countries and sectors, the state is often
important as a direct economic actor, for instance as a customer, supplier,
owner or regulator of businesses.
● Exposure to civil society organizations. Civil society comprises a whole
range of organizations that are liable to raise political issues, including political
lobbyists, campaign groups, social media or traditional medi
 PESTEL ANALYSIS
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. It is important for an organization to understand how its
markets are affected by the prosperity of the economy as a whole. Managers
should have a view on how changing exchange rates may affect viability in
export markets and vulnerability to imports. They should have an eye to
changing interest rates over time, especially if their organizations have a lot of
debt. They should understand how economic growth rates rise or fall over time.
 PESTEL ANALYSIS
ECONOMICS
There are many public sources of economic forecasts that can help in predicting
the movement of key economic indicators, though these are often prone to error
because of unexpected economic shocks.
A key concept for analyzing macro-economic trends is the economic cycle.
Despite the possibility of unexpected shocks, economic growth rates have an
underlying tendency to rise and fall in regular cycles. These cycles can also link
to other important economic variables. For example, severe downturns in
economic growth are often followed by falls in interest rates and exchange
rates.
 PESTEL ANALYSIS
ECONOMICS
Awareness of cycles reinforces an important pattern in the macro-environment:
good economic times do not last forever, while bad economic times lead
eventually to recovery. The key is to identify cyclical turning points
 PESTEL ANALYSIS
SOCIAL
The social elements of the macro-environment have at least two impacts upon
organizations.
First, they can influence the specific nature of demand and supply within the
overall economic growth rate.
Second, they can shape the innovativeness, power and effectiveness of
organizations. In the first place, there are a number of key aspects of the social
environment that can shape demand and supply.
 PESTEL ANALYSIS
SOCIAL
These can be analyzed under the following four headings:
● Demographics. For example, the ageing populations in many Western
societies create opportunities and threats for both private and public sectors.
There is increasing demand for services for the elderly, but diminishing supplies
of young labor to look after them.
● Distribution. Changes in wealth distribution influence the relative sizes of
markets. Thus the concentration of wealth in the hands of elites over the last 20
years has constrained some categories of ‘middle-class’ consumption, while
enlarging markets for certain luxury goods
 PESTEL ANALYSIS
SOCIAL
These can be analyzed under the following four headings:
● Geography. Industries and markets can be concentrated in particular
locations. In the United Kingdom, economic growth has in recent decades been
much faster in the London area than in the rest of the country. Similarly,
industries often form ‘clusters’ in particular locations: thus there are high
concentrations of scientists and engineers in California’s Silicon Valley (see also
Chapter 10).
 PESTEL ANALYSIS
SOCIAL
These can be analyzed under the following four headings:
● Culture. Changing cultural attitudes can also raise strategic challenges. For
example, new ethical attitudes are challenging previously taken-for-granted
strategies in the financial services industry. Changing cultural attitudes can be
linked to changing demographics. Thus the rise of ‘digital natives’ (generations
born after the 1980s, and thus from childhood immersed in digital technologies)
is changing expectations about media, consumption and education.
 PESTEL ANALYSIS
SOCIAL
A second important social aspect of the macro-environment is organizational
networks, with significant implications for innovativeness, power and
effectiveness. These networks are frequently described as ‘organizational
fields’. An organizational field is a community of organizations that interact more
frequently with one another than with those outside the field.
 PESTEL ANALYSIS
TECHNOLOGY
Further important elements within the macro-environment are technologies such
as the internet, nanotechnology or new composite materials, whose impacts
can spread far beyond single industries. As in the case of internet streaming,
new technologies can open up opportunities for some organizations (e.g.
Spotify and YouTube), while challenging others (traditional music and
broadcasting companies).
 PESTEL ANALYSIS
TECHNOLOGY
Meanwhile, it is important to carry out the macro-environmental analysis of
technology in order to identify areas of potential innovative activity. There are
five primary indicators of innovative activity:
● Research & 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.
 PESTEL ANALYSIS
TECHNOLOGY
Meanwhile, it is important to carry out the macro-environmental analysis of
technology in order to identify areas of potential innovative activity. There are
five primary indicators of innovative activity:
● 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 organizations, with data available from Google Scholar for instance.
● New product announcements. Organizations typically publicize their new
product plans through press releases and similar media.
 PESTEL ANALYSIS
TECHNOLOGY
Meanwhile, it is important to carry out the macro-environmental analysis of
technology in order to identify areas of potential innovative activity. There are
five primary indicators of innovative activity:
● Media coverage. Specialist technology and industry media will cover stories of
the latest or impending technologies, as will various social media.
 PESTEL ANALYSIS
TECHNOLOGY
Many organizations also publish technology roadmaps for their sectors going
forward. Technology roadmaps project into the future various product or service
demands, identify technology alternatives to meet these demands, select the
most promising alternatives and then offer a timeline for their development.
Thus they provide good indicators of future technological developments.
 PESTEL ANALYSIS
ECOLOGICAL
Within the PESTEL framework, ecological stands specifically for ‘green’ macro-
environmental issues, such as pollution, waste and climate change.
Environmental regulations can impose additional costs, for example pollution
controls, but they can also be a source of opportunity, for example the new
businesses that emerged around mobile phone recycling.
 PESTEL ANALYSIS
ECOLOGICAL
When considering ecological issues in the macro-environment, there are three
sorts of challenges that organizations may need to meet:
● Direct pollution obligations are an obvious challenge, and nowadays
typically involve not just cleaning up ‘at the end of the pipe’ (for example,
disposing of waste by-products safely), but also minimizing the production of
pollutants in the first place. Having clean processes for supply, production and
distribution is generally better than managing the consequences of polluting
after the fact.
 PESTEL ANALYSIS
ECOLOGICAL
When considering ecological issues in the macro-environment, there are three
sorts of challenges that organizations may need to meet:
● Product stewardship refers to managing ecological issues through both the
organization's entire value chain and the whole life cycle of the firm’s products.
Stewardship here might involve responsibility for the ecological impact of
external suppliers or final end-users. It will also involve responsibility for what
happens to products at ‘end of life’, in other words how they are disposed of
when consumers have no more use for them. Thus car manufacturers are
increasingly responsible for the recycling and safe disposal of old cars.
 PESTEL ANALYSIS
ECOLOGICAL
When considering ecological issues in the macro-environment, there are three
sorts of challenges that organizations may need to meet:
● Sustainable development is a criterion of increasing importance and refers
not simply to reducing environmental damage, but to whether the product or
service can be produced indefinitely into the future. This sustainability criterion
sets constraints on the over-exploitation of particular sources of raw materials,
for instance in developing countries, and often raises issues regarding the
economic and social well-being of local communities
 PESTEL ANALYSIS
LEGAL
The final element in a PESTEL analysis of the macro-environment refers to
legal aspects. These can cover a wide range of topics: for example, labor,
environmental and consumer regulation; taxation and reporting requirements;
and rules on ownership, competition and corporate governance. In recent years,
the relaxation of legal constraints through deregulation has created many new
business opportunities, for example for low-cost airlines and ‘free schools’ in
various countries.
 PESTEL ANALYSIS
LEGAL
Legal issues form an important part of the institutional environment of
organizations, by which is meant the formal and informal ‘rules of the game’.15
This concept of institutional environment suggests that it can be useful in a
PESTEL analysis to consider not only formal laws and regulations but also more
informal norms: the ‘L’ can be stretched to cover all types of rule, formal and
informal. Informal rules are patterns of expected (‘normal’) behavior that are hard to
ignore. Thus, regardless of the law, there are fairly explicit norms regarding proper
respect for the ecological environment. Organizations ignoring these norms would
risk outrage amongst consumers or employees, regardless of the legal situation.
 PESTEL ANALYSIS
LEGAL
Legal issues form an important part of the institutional environment of
organizations, by which is meant the formal and informal ‘rules of the game’.15
This concept of institutional environment suggests that it can be useful in a
PESTEL analysis to consider not only formal laws and regulations but also more
informal norms: the ‘L’ can be stretched to cover all types of rule, formal and
informal. Informal rules are patterns of expected (‘normal’) behavior that are hard to
ignore. Thus, regardless of the law, there are fairly explicit norms regarding proper
respect for the ecological environment. Organizations ignoring these norms would
risk outrage amongst consumers or employees, regardless of the legal situation.
PESTEL ANALYSIS
PESTEL ANALYSIS
 Porter’s Five Forces Model
One of the earliest models used to examine industry economics and
industry attractiveness is Michael Porter’s Five Forces model.
Attractiveness is related to average industry profitability: the higher the
average industry profitability, the more attractive the industry. Rooted in
industrial economic theory, Porter suggests that there are five competitive
forces that shape industry attractiveness:
• rivalry among existing competitors,
• threat of new entrants,
• threat of substitute products or services,
• bargaining power of suppliers, and
• bargaining power of buyers
Porter’s Five Forces Model
 Porter’s Five Forces Model
POTENTIAL ENTRANTS
• Threat of Entry - The rationale behind new entrants as a major
competitive force relates to basic economic models suggesting that the
greater the number of competitors, the closer the industry is to perfect
competition.
• Economies of Scale - There are supply-side economies of scale
whereby, as the absolute volume of production increases, unit costs
per product tend to decrease, resulting in economies of scale.
• Product Differentiation - Established firms may also enjoy the
benefits of brand recognition and customer loyalty that have been built
on past marketing, advertising, and sales efforts.
 Porter’s Five Forces Model
POTENTIAL ENTRANTS
• Capital Requirements – These will serve as a barrier to entry to those
firms that either cannot secure the funds or cannot bear the risk
premiums charged.
• Cost Advantages Independent of Size - Potential entrants may face
other cost disadvantages that serve as barriers to entry that are
irrespective of scale or size. These cost disadvantages to new entrants
may be sufficiently large to prevent them from entering the industry.
 Porter’s Five Forces Model
POTENTIAL ENTRANTS
• Access to Distribution Channels - In some industries established
distribution channels can also leave little room for new players to enter,
given the nature of the channel itself or due to established channel
relationships. Barriers to entry are strong if new entrants face fierce
competition for limited retail shelf space or cannot break through long-
standing partnerships.
• Government Policy – Policies may create strong barriers to entry
through legislation, the imposition of standards, lengthy approvals,
monitoring or control processes, and licensing issues.
 Porter’s Five Forces Model
SUPPLIERS
The second force affecting industry structure is the bargaining power of
suppliers. Porter suggests that suppliers’ power can impact industry
profitability when they have the potential to place firms at the mercy of
rising input costs or reduced quality of necessary products or services.
Suppliers can also wield bargaining power if they sell to a number of
different industries and their product is differentiated. Furthermore, if
there are large switching costs in changing suppliers, then suppliers will
have more bargaining power.
 Porter’s Five Forces Model
BUYERS
With similar attributes as supplier power, there are several circumstances
that can affect a buyer group’s overall bargaining power:
•buyers are more powerful if they are concentrated or purchase in large
volumes, if they have full information, if they face few switching costs
•the products being purchased represent a significant portion of the
buyer’s costs, they are more likely to shop around for the best deal,
especially if the products themselves are standard or undifferentiated or
are not important to the overall quality of the buyer’s product or service
•if buyers pose a credible threat to backward integration they can also
yield significant bargaining power.
 Porter’s Five Forces Model
SUBSTITUTE OF PRODUCTS
Substitute products are products from outside the industry that can
provide a similar package of benefits or otherwise perform the same
function as the main product or service in the industry.
• Substitute products can reduce profitability in an industry as they place
a ceiling on the price that can be charged for the original product or
service.
• The assessment of threat by substitute products can be difficult and
quite dynamic as there are a variety of forces that shape product
features that can be “replaced” by substitutes with superior cost
competitiveness
 Porter’s Five Forces Model
INTENSITY OF COMPETITIVE RIVALRY
Rivalry is affected by the interaction of other structural forces as well as
through the sheer number and nature of competitors in an industry.
• Where there are only a few large players, the balance of power can be
easily observed and the extent to which these firms direct the
competition on price, brand, or distribution, for example, is relatively
transparent.
• Where there are many small firms, however, rogue behavior is more
likely.
• Where strategic stakes are high, the nature of competitive activity can
also be unpredictable.
 Porter’s Five Forces Model
In summary, Porter views industries with low supplier power, low threat of
entry, low buyer power, low threat of substitute products, and low
competitive rivalry as five-star industries with a high level of expected
profitability for firms within the industry. Once the strengths and
weaknesses of the forces affecting the industry as a whole have been
identified, the firm can then determine the strengths and weaknesses of
its position relative to the industry to formulate its competitive strategy.
Porter also cautions that industries are dynamic and while the structure of
the industry shapes strategy, firms can also shape industry structure.
INDUSTRY AND ORGANIZATIONAL VALUE CHAIN ANALYSIS
The organizational value chain is the set of primary activities selected
from the industry’s value chain (which includes all activities from raw
materials to sale to the final consumer and disposal) that have been
integrated into the structure of an organization.

The organizational value chain model illustrates how any product or

service could be described in terms of a set of primary activities and a set
of supporting activities.
INDUSTRY AND ORGANIZATIONAL VALUE CHAIN ANALYSIS

Porter’s value chain is a stylized representation, containing discrete boxes

encompassing many of the activities in a firm’s value chain. This analytical tool
should include the specific steps in a firm and industry’s unique value chain.
COOPERATION AND COMPETITION: GAME THEORY
Competitors attempt to read and interpret the signals sent by one another
to determine motivation and intent to cooperate or compete. This is tacit
collusion.
Jay Barney suggests eight industry attributes that facilitate the
development and maintenance of tacit collusion:
1. Small number of firms enables monitoring
2. Product homogeneity focuses attention on price, which is more easily
monitored
3. Cost homogeneity enables a common price structure and level of
output
COOPERATION AND COMPETITION: GAME THEORY
Jay Barney suggests eight industry attributes that facilitate the
development and maintenance of tacit collusion:
4. Price leaders provide order and discipline to the market
5. Industry social structure or recipe defines the standards of operating in
the industry
6. High order frequency and small order size minimize the cost of losing
an order and incentive to compete
7. Large inventories and order backlogs create buffers and reduce
pressure to compete
8. Entry barriers as noted by Porter in his Five Forces Model.
COOPERATION AND COMPETITION: GAME THEORY
Game theory provides additional insight into the nature of competitive
rivalry. Game theory is generally valid when there are few competitors, as
the intent is to study the interactions among the players and the payoffs
they receive.
• There are zero-sum games, in which one player’s gain is exactly equal
to the other player’s losses, and non-zero-sum games that relax this
constraint.
• The non-zero-sum game is reflective of most business situations since
it offers the potential for both cooperation and competition.
 SCENARIO PLANNING
Scenario planning recognizes the potential for a significant amount of
variability in industry analysis. Paul Schoemaker describes scenario
planning as a tool for strategic thinking. He outlines several steps for
constructing scenarios as follows:
1. Define the time frame and scope of analysis
2. Identify the major stakeholders
3. Identify basic trends
4. Identify key uncertainties
5. Construct initial scenario themes
 SCENARIO PLANNING
Scenario planning recognizes the potential for a significant amount of
variability in industry analysis. Paul Schoemaker describes scenario
planning as a tool for strategic thinking. He outlines several steps for
constructing scenarios as follows:
6. Check for consistency and plausibility
7. Develop learning scenarios of the strategically relevant groups
8. Identify further research needs
9. Develop quantitative models to examine the scenarios
10. Evolve toward decision scenarios.
 NEW ECONOMY MODELS
New economy models recognize that technological change (the “T” of
PEST) has had a fundamental and pervasive impact on industries. As a
result, models have been developed to deal with the idiosyncrasies of the
new economy, where technology and electronic commerce provide new
challenges in industry analysis.
 NEW ECONOMY MODELS
Disruptive innovation
• creates a new market and a new value proposition while displacing
existing technology or business models. Simply put, it shakes up an
industry by displacing existing models.
New Economics of Information.
• Evans and Wurster propose that “existing value chains will fragment
into multiple businesses, each of which will have its own sources of
competitive advantage. When individual functions having different
economies of scale or scope are bundled together, the result is a
compromise of each—an averaging of the effects. When the bundles of
functions are free to re-form as separate businesses, however, each
can exploit its own sources of competitive advantage to the fullest.”
 NEW ECONOMY MODELS
Unbundling.
• John Hagel and Marc Singer also suggest that firms need to rethink
what business they are in. “The unbundling of the corporation into its
three component businesses—customer relationship management,
product innovation, and infrastructure management—is only the first
step in the reshaping of organizations.
• The implication of this perspective is that there may be new roles in the
value chain of industries for groups who control and manage
information.
 NEW ECONOMY MODELS
The Long Tail
• Chris Anderson argues that the impact of technology in new economy
models has fundamentally changed the dynamics of the value chain and
consequently the five forces of certain industries.
• The implication of this perspective is that it has the potential to change
which industries are seen as “attractive,” or, at a minimum, to alter
significantly where the economic profit lies within an industry’s value
chain.
 THE BLUE OCEAN STRATEGY
The Blue Ocean Strategy proposed by W. Chan Kim and Renée
Mauborgne presents a view of strategy that differs from Porter’s more
static, deterministic view of industry analysis; instead they believe “there
is scarcely any attractive or unattractive industry per se because the level
of industry attractiveness can be altered through companies’
conscientious efforts of reconstruction [of the industry]”
They argue that Porter’s Five Forces model limits managerial decision
making to existing market spaces with limited consumer demand that
reduces competition between rivals to a zero-sum game.
 GLOBAL INDUSTRY MODELS
Global industry models recognize the added complexity when moving
from operating in one country to operating in many countries. One of the
key challenges is assessing the need and opportunity for global
integration across geographic contexts versus the need for local
responsiveness.
George Yip and George Coundouriotis present a framework for
analyzing the global nature of an industry. They suggest that viewing
industries as either global or not is an oversimplification. Their
framework encourages examination of each aspect of an industry to
assess its global orientation.
 GLOBAL INDUSTRY MODELS
Stakeholder Analysis
• Identify Stakeholders - There are many possible stakeholders that
need to be considered in the analysis. At the outset, stakeholders
should be broadly defined to incorporate any individual or group who
has an interest in the firm’s strategy and who can exert a significant
influence on the firm.
• Define Stakeholder Interests - For each stakeholder group, identify the
particular needs of the group by addressing the following questions:
What would be “best” for each stakeholder group? Could you possibly
deliver this? At what expense?
 GLOBAL INDUSTRY MODELS
Stakeholder Analysis
• Compare Strategy to Stakeholders’ Interests - Having identified the
stakeholders and their interests, compare the stakeholder interests to
the strategy. The following questions may be helpful:
 What are the likely consequences of your actions?
 What reactions will stakeholders have?
 What is your personal feeling about the issue?
 How do you weigh the positions of others?
 How do you set priorities? What are the effects?
 Are you prepared to defend your decision?
 Can you justify your action to others?
 GLOBAL INDUSTRY MODELS
Take Action to Align Strategy and Stakeholder Interests
• Given the previous analysis, assess whether the strategic choice
benefits each stakeholder.
 Mitchell, Agle, and Wood provide a stakeholder typology based on
three key attributes of the stakeholder:
(1) the stakeholder’s power to influence the firm,
(2) the legitimacy of the stakeholder’s relationship with the firm,
(3) the urgency of the stakeholder’s claim on the firm
GLOBAL INDUSTRY MODELS
Direction:
Think of a micro business that you want to
establish in Candelaria, Quezon. Then, create a
chart illustrating a PESTEL analysis on the
business you want to put up.