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The kHUB Curator Team members have each been assigned a BoK section to own. This includes seeking, editing and sharing content related to that section. The curators are also sharing their perspective of various sub-sections of their chapter and contributing personal examples, experience, or related articles corresponding to the subject matter.
Chapter 1 – Strategy Insight
Developing Strategic Context – Part 1
It is essential as part of strategy development to understand the context within which strategic choices must be made. Through the understanding of this context, strategic options may be evaluated in terms of how they may take advantage of macro-environmental shifts and match them with current or developing organisational capabilities and associated investments.
How does an organisation practically go about mapping these out as input into the strategic development process? Well, section 1.4 of the PDMA Body of Knowledge – "Preparing a Business Strategy" provides some helpful, tried-and-tested tools for this process. Here, the importance of developing a clear view of these elements is outlined: A comprehensive understanding of the business context is essential to informing the development of business goals and strategy.
Context can boil down to two main areas – the context of the outside world and of the organisation itself. In this two-part article series, I will outline two of the most common tools for this analysis – PESTLE and SWOT analyses - with some guidance and practical tips based on previous experience.
As per 1.4.2 of the BOK, a PESTLE analysis is a structured tool-based, macro-environmental analysis of Political, Economic, Social, Technological, Legal and Environmental factors. It is particularly useful as a strategic framework for seeking a better understanding of trends in factors that will directly influence the future of an organisation…
I have also seen it named as PESTEL, PEST, STEP, STEEPLE and so on. It doesn't really matter as long as the macro-environment's main elements are considered and captured somewhere.
As per 1.4.1 of the BOK, SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.
Strengths: Characteristics of the business or project that give it an advantage over others.
Weaknesses: Characteristics that place the business or project at a disadvantage relative to others.
Opportunities: Elements that the business or project could exploit to its advantage.
Threats: Elements in the environment that could cause trouble for the business or project.
Advantage can be taken of opportunities and to protect against threats, but they cannot be changed.
Examples include competitors, prices of raw materials, and customer lifestyle changes.
I have seen SWOT poorly done. For example, Strengths and Weaknesses should relate to attributes of the organisation in question; they are internal and can be changed. Opportunities and Threats relate to the external environment and cannot be changed, but they can be respectively exploited and mitigated. A common mistake is to relate a weakness into the future as something bad that may happen down the road and label it a threat. This is not a valid threat but rather the outcome of a weakness over time. Part of a strategy can be to leverage strengths or compensate for weaknesses, so correct categorisation of the factors is important.
Order of Usage
My first recommendation, in fact, is the order in which to tackle these tools. Given that PESTLE is used to understand and describe the macro-environment, it should typically be done first in my experience. Some of the trends and factors identified in the PESTLE analysis should be used during the SWOT analysis; otherwise, it somewhat misses the point of the exercise.
Optimising the PESTLE Analysis
The next recommendation I would like to mention is that the gems of most interest are the macro-factors that are changing or likely to change. It is those macro-changes that provide the fertile hunting ground for strategic choices that are in harmony with the changing business landscape. There is this famous and much-overused quote from Wayne Gretzky, a famous ice-hockey player: "Skate to where the puck is going, not where it has been." Whilst somewhat hackneyed within business, it still holds true that organisations must consider their strategy in the light of the transitioning business environment rather than how it has historically been.
The BOK outlines the types of trends and factors that fall under each PESTLE heading, so I won't repeat them here. To help illustrate them, some recent examples of current trends that would fall under each include:
- Political: Post-Brexit in the UK – with tax and regulatory ramifications for businesses based there and those serving that market.
- Economic: Impact of the global pandemic – depressing demand for in-person services such as hospitality and brick and mortar retail, at least temporarily. A view may also be taken on the longer-term economic ramifications.
- Social: Globally, the working-age population will see a 10% decrease by 2060 with significant drops in specific countries – increasing demand for services for the aged – for example, home care services, nursing homes and so forth.
- Technology: The continued rise of the Internet and online retail - driving continued demand growth for online shopping and video streaming services.
- Legal: EU Data Protection legislation and the continued impact on demand for Information security products and services.
- Environmental: The shift towards sustainability driving the economics of renewable energy and the likes of solar heating and electric cars.
One thing I have found about doing PESTLE analyses is that not all factors are equal in terms of their relevance for the strategic context of a given organisation or industry. The step such analyses should not miss is to highlight and focus in on the factors of most impact. If not done, it may appear to the audience of such analyses that all have the same relevance and the key trends of note get lost in the noise, or a significant number of factors are covered somewhat superficially. The factors should be listed in order of priority and impact, with those higher on the list elaborated more fully. One useful approach is to apply additional models specific to the factors of most import to dig a lot deeper and mine for greater nuggets of insight.
In one such analysis I did for the B2B business unit of a major telco several years ago, I conducted the initial PESTLE analysis across the complete set at a high level first. However, I then identified that the Technological and Legal/Regulatory trends were the most impactful and did a much deeper dive into those specific factors to provide a more in-depth research and analysis. This step is critically important. Continuing on with the concept of "skating to where the puck is going", if it's obvious where the puck is going, then a whole bunch of players are going to bump into one another whilst skating towards it en-mass. By investing in a more in-depth understanding of those changes' nuances and subtleties, the organisation is much better armed to be more surgical in exploiting those shifts when developing strategic choices.
In the particular exercise for the telco B2B arm I mentioned above, I prioritised Technological change as the most impactful fact for the analysis and, therefore, brought in another model to elaborate upon it in greater detail. As it is now several years old and does not contain any intellectual property, I will provide it here as an example of how to elaborate within a dimension of PESTLE to draw out greater detail of the impact of such changes.
Adner and Kapoor (2016) propose a framework for analysing the pace of technology adoption and substitution. They argue that new technology invariably needs an ecosystem to develop to achieve mass adoption. The challenge for the emergence of the new ecosystem vs the opportunity to usefully extend the old ecosystem determines the rate of substitution. The figure below maps the most relevant technologies for the organisation in question onto the framework and identifies the areas for the most attention. Note that the specific technologies in question do not have to be understood to grasp the approach.
Technology Adoption analysis framework (Adner and Kapoor, 2016)
Addressing each technology impact logically depends on where it falls within the adoption framework. Using this framework, I was able to identify not only the technological changes and describe them but also provide a categorisation to enable an appreciation of the pace of change and substitution. This is a critical factor to understand when trying to devise strategy. See below for some examples of some trends and changes identified in each category:
Items in this area are the burning platform. If these have not been anticipated, urgent action is required to find a strategic position.
Traditionally corporate networks were made up of a network of point-to-point leased lines based on legacy technology. This technology is pretty much dead and has been replaced mainly by much more flexible and scalable IP networks.
Replacement of fixed voice with VoIP and Mobile
With Voice over IP (VoIP) and fixed-to-mobile substitution, fixed voice has shifted significantly, increasingly being carried over mobile, the Internet or private data connections.
Figure 3, from Analysis Mason (2016), illustrates the resulting ongoing decline in fixed voice access due to the combination of VoIP and mobile substitution.
(Trend graph chart with additional details was provided.)
Business fixed voice connections, Ireland, 2008-2020 (Source Analysis Mason)
Mobile Data explosion
The introduction of 4G has revolutionised consumer and business usage of smartphones. Research by Wood (2016, p. 8) forecasts worldwide mobile data traffic to grow at a CAGR of 43% from 2016 to 2020 (see Figure 4).
(Trend graph chart with additional details was provided.)
Worldwide mobile data traffic, 2013-2020 – Wood (2016, p. 8)
Cloud computing is defined as "a style of computing in which scalable and elastic IT-enabled capabilities are delivered as a service using Internet technologies" (Gartner, 2016).
A recent survey found that IT organisations worldwide expect to increase their cloud spending by approximately 44% over the next two years to 43% of IT spend within two years (IDC, 2016). Increasing cloud adoption drives demand for network connectivity, increased bandwidth and related service offerings.
Illusion of Resilience
It is important to be building a position here, with the opportunity for "surprise" in that not all competitors will recognise the need to act decisively until it is too late.
Internet of Things (IoT)
The Internet of Things is defined as "the network of physical objects that contain embedded technology to communicate and sense or interact with their internal states or the external environment" (Gartner, 2016). Applications for IoT are many-fold across such verticals as fleet tracking, e-health, utility metering etc.
IoT connections will grow significantly to 2025 across Fixed and Mobile Networks and an emerging form of network called Low Power Wireless Access (LPWA). Figure 5 shows the total number of IoT connections worldwide is estimated to be in the region of 1.1Bn connections in 2016, forecasted to grow to >6Bn by 2025 (Analysis Mason Datahub, 2016).
(Trend graph chart with additional data was provided)
Figure 5 - Total IoT Worldwide connections 2016-2025 (Source Analysis Mason)
The most popular form of LPWA technology is expected to be NB-IoT due to its support by traditional vendors of service providers.
Research by IDC (2016) forecasts that by the end of 2017, two-thirds of European CEOs will have Digital Transformation at the centre of their corporate strategy and innovations driven by digital technologies are expected to bring about unprecedented business transformation.
Digital transformation will impact the macro-environment of service providers in two main ways:
- Heightened customer expectations of a digital experience from providers
- Operational cost efficiencies offering a competitive advantage to digitised providers
SD-WAN (Software Defined Networks)
There is an emerging trend towards software-defined networks in the cloud that take away much of the cost and complexity of managing on-premises equipment by making everything configurable from the cloud.
It is important to build a position in this area as the substitution is happening, albeit over a longer time. Firms without a relevant offering in the new technology may find themselves with low share when the substitution hits a tipping point.
Unified Communications (UC)
Voice, video, messaging, file sharing, web and audio/video collaboration. Vendor BroadSoft (2017) projects the tipping point for new shipments in 2020 when more cloud UC seats will be sold than on-premises.
This is the slowest form of replacement, in this case, as the current ecosystem also improves and evolves in parallel with the new and therefore, the pace of disruption is not as fast.
5G is the next wave of mobile networks that will offer super-high mobile data speeds and very low latency (sub-10ms delays), and high coverage, expect in 2020+.
And so on and so forth.
As you can see above, the analysis goes into quite a bit of detail around the macro-environmental changes concerning the Technological aspect of PESTLE, given it is the most important. This approach provides a good platform for strategic planning around portfolio strategic direction in the next phase of the process. Compare this with the entry for Social:
Millennials in the workforce – Tech-savvy millennials expect to use communications tools and technologies they take for granted in their personal life. Increasingly they will move into decision-making roles.
Given this analysis was for a B2B arm of a telco, social trends were not as relevant to the context and therefore not as fully explored. If this has been for the telco's consumer arm, this would have been expanded much more.
In conclusion, Strategic Context is extremely important to set the stage for developing strategic choices as part of the strategic planning process. I would advocate to do the PESTLE first and to make sure that the factors are prioritised and ordered accordingly. The depth of analysis for important and impactful factors should be much greater than for those less so. It is a great idea to bring in additional models and lenses through which these factors can be analysed and elaborated in greater depth, particularly those that mark a major shift in the relevant landscape
The next step after the PESTLE analysis is the SWOT analysis, which I will cover in my next article. In particular, I will cover how the use of scenarios can help flesh out a better understanding of how different opportunities and threats might play out into the future and how this can assist in evaluating strategic choices
About the Author
Brian Martin has over thirty years’ experience of Product Management, Product Development, Strategy and Innovation in numerous technology domains, most notably in Industrial Electronics, Telecommunications and Cyber Security. He has led a variety of Product Management and Development functions in the B2B sector and has also held responsibility for Business Unit Strategy and Innovation. He holds a BSc. In Computer Applications from Dublin City University, an MBA from the Open University and a post-graduate diploma in Strategy and Innovation from the Irish Management Institute. Brian is currently Head of Product, Strategy and Innovation at Integrity360, Ireland’s leading cyber-security specialist services provider.