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Analysing the operational environment - Coggle Diagram
Analysing the operational environment
All organisations have a common business model
We source our knowledge or raw material
We make or create something using that knowledge or raw material
We deliver this transformed product or service to a customer
This structure is enabled by
Planning: Strategic consideration of what we hope to achieve
Commercial reality: How are we going to survive; profitability and funding
One of the major problems with strategic thinking is the plethora of risks and uncertainties that we are faced with on a daily basis. These can be categorised into a number of areas
Environmental influences
In today's corporate world, these are often recognised through the approach of the organisation to CSR
There is a prevailing view that an organisation needs to consider its use of resources and how it will attempt to replenish these used resources for future generations
Technological influences
The speed and complexity of technological development appears to continue at an exponential rate of change
As part of any strategic planning process, we need to allow for the uncertainties of technological advance
Human influences
As human beings we are naturally competitive, although each individual will have their own level of competitiveness
The work of behavioural scientists suggets that an individual focus on a particular task or direction can in itself be skewed by a wide range of external influences
If we were to consider that an organisation is only ever a collection of individuals, working in cohesion, then any strategic development needs to consider and allow for the vagaries of human behaviour
Recognising the boundaries
We need to be able to clearly identify the boundaries within which we operate
Johnson et al (2017)
identified these boundaries as a series of increasingly large layers
At the centre of this structure is the
organisation
itself
The second level is denoted by Johnson as
competitors and markets
and the third level as
industry or sector
, these two levels could be considered as part of the micro or near environment. Directors and managers will have some level of ability to influence these layers and the impact that they have upon an organisation. The level of influence will diminish the further away from the centre one moves. However, there will only be limited, if any, control available within this micro environment
By the time we reach Johnson's macro environment, control and influence have been replaced by the need to respond. In strategic planning and strategic analysis, it is important to recognise these forces and to understand the potential impact upon the organisation
Macro thinking - the 'far' environment
The biggest single problem with macro thinking, faced by the directors of any organisation is the sheer distance of the far environment, and the seeming lack of ability to be able to influence or control the various external forces at play - these forces are sometimes referred to as megatrends, significant changes that can be slow to form but which have significant impact
While much of macro thinking is to do with the forces with which we have to deal, it is possible from a strategic thinking perspective to manage, mitigate and plan for a range of possible outcomes
At the oversight level it is possible to differentiate between the changeability and predictability of these differing environmental dynamics
Lynch (2015)
using the work of
Ansoff (Ansoff & MacDonnell (1990)
describes these dynamics as the turbulence in the environment and this creates a useful image for strategic thinking
Changeability
is defined as the degree to which the external environment is likely to change
Predictability
is defined as the degree to which such changes can be predicted
PESTEL
Politcal
The political element requires the consideration of the influence and role that government or governments might play in the wider operational marketplace
In many countries the state, represented by the government, can be an owner, a customer, a suppler and often a regulator of business
The health and education of people is largely determined by political influence and levels of changeability or predictability might form a significant part of macro strategic considerations
Economic
Although the economic elements will often derive from a particular political objective or stance, it is important that an organisation is able to determine the specific macroeconomic factors that will influence its strategic future which recognising that political and economics are often inextricably linked
Common forces that would be considered under this heading would be the heading would be the impact of interest rates, currency exchange rates, inflation rates and other economic growth rates from the country where the organisation is based and also the impact and influence that may be experienced from the economic considerations and decisions of other countries
Socio-cultural
This element concerns centrally the impact of changing demographics within a region or a country and the differing levels of wealth distribution among the population
Demographics
Many western countries have an increasingly ageing population, at least in part as a result of increased longevity and this can provide both an opportunity and a threat within the private and public sector
A particular socio-cultural force affecting strategic thinking is the increasing expectation of services and care that will be required for the elderly demographic against the resultant diminishing supply of younger people within the workforce
This aspect also requires consideration of population geography and an organisation must ensure that it is basing its key operations in an area where appropriate levels of skill and expertise may be attracted into the workforce and management
Wealth distribution
Western civilisation has seen an increasing concentration of wealth in the hands of fewer people, this has had a constraining effect on certain areas of consumption but with an increase in demand for luxury goods in other areas
Changes in cultural attitude are driven by demographic change and in turn can drive demographic change
Technological
The technological element infiltrates most aspects of the way we live our lives today
Technology push or market pull
In our strategic thinking, are we anticipating the use of technology to help us to drive effective business solutions or are we being forced down a particular route by either customer or supplier or have we failed to keep our hardware or software current and leading edge?
People skill divergence
Have we recognised as a strategy the likely need for higher skilled, technologically aware people within an organisation, recognising a future point where the structure of many jobs may well be undertaken through robotic mechanisms?
Diffusion
Have we considered the process and likely timing of the spread of the use of technology within the differing boundaries that we are considering?
We also need to be aware of the vast range of potential new influences from within the world of technology such as biotechnology, nanotechnology, 3D printing technology and the invention of new materials such as graphene
Environmental
There has been a strong focus in recent years on how an organisation tackle its CSR, this ranges from the requirement to comply with laws covering areas such as waste disposal to increasing narrative reporting requirements from companies whose shares are publicly traded
Sustainability and stewardship
What damage is being done to natural resources and how can we show that our longer term impact is either positive or neutral?
Global warming
How will the arguments surrounding this topic and its potential impact, affect our strategic plans?
Public conscience
There are potentially supply and demand implications that could arise from our strategic planning
Legal
The directors, managers and company secretaries of an organisation are entrusted with developing strategic plans on behalf of the owners
They need to have a strong knowledge and awareness of existing legislation within the wider environment and take into consideration the trends and likely development of legal expectations
Of all the macro elements, the legal and regulatory landscape is the one where an organisation is most likely to have to respond and comply rather than have any influence or impact
Some of the specific legal areas that need to be considered from a macro perspective are
Labour and employment laws
Environmental protection legislation and consumer regulation
Finance, taxation and reporting requirements
Ownership, merger and competition law
Forecasting and scenario planning
Strategic planning is faced with significant diversity and complexity as evidenced in the PESTEL model, combined with the fact that the use of PESTEL will be based around the depth of our understanding of 'today' and the anticipation of an unknown 'future'
Johnson (2017)
introduces a useful model where he contrasts the differences between the following
Single point forecasting
The focus being one single figure or result
This is where we are able to forecast with a degree of certainty both a starting point and the route from today to a future defined end point
An organisation needs to have resolute confidence about the future, but even this will be based around certain starting parameters that may in reality change across the passage of time
Range forecasting
The focus being a range of possibilities
This is where there is a relatively high level of risk involved along the route; the diversity of end point possibilities will be determined by the levels of risk that we perceive at the today; sometimes we are also able to design probabilities to the potential outcomes
Alternative futures forecasting
The focus being a defined number of potential fixed point outcomes
This will be where we recognise there are a range of likely results from our strategy but that the end result will be dependent upon decisions or events along the route
Ringland (2014)
developed an interesting set of scenario planning dimensions to challenge the strategist what really matters within a particular organisation
Vital Issues:
What is critical for the future as we currently perceive it? - Data and knowledge
Positive outcome:
What does the best possible outcome look like? What difference would it make? - Utopian impact
Negative outcome:
What does the worst possible outcome look like? What difference would it make? - Dystopian impact
Internal systems:
What are the culture, structure and process drivers within the organisation? What might need to change? - Reality and obstacles
Key learnings:
What have we learned from previous strategies? - Experience
Key decisions:
What are the urgent actions needed to begin the process of strategic change? - Immediacy
Personal dimension:
What would I like to influence to make a real difference? What can I do to make a real difference? - Ego and reality
Micro thinking - the near environment
The term near environment implies the forces and influences that will impact the daily lives of our business, but which are not part of the business itself
Although often we will be forced to react to such forces because they are within relatively close proximity, we are able to more readily include their potential impact within our strategy
Economics dynamic
A
monopoly
exists where there is no competitive rivalry. In the UK, monopolies at an organisational level are restricted and controlled by the Competition and Markets Authority
When one company acquires another, its relative market strength and power over the consumer is determined and ca be restricted or restrained
Monopolistic strength can exist within a particular service. Buyers are forced to take the price at which the product or service is being offered by the monopolistic provider
An oligopoly exists where there is a high concentration of a defined number of players. There is always a risk of cartel pricing within such oligopolies. There is a significant risk of hyper-competitiveness where only a few players exist. This ca often be cut-throat and threaten overall business longevity for one or more players
Perfect competition exists where there are many competitors providing similar and largely undifferentiated products or services. Buyers will make their decision based on price or other point of differentiation.
A recognition of where an organisation is positioned at a particular point in time is an important starting point in time is an important starting point for strategic considerations; whatever the business is attempting to achieve in the future it is certain that its positioning along this dynamic will change - where does the organisation currently sit? Is it at the monopolistic end of the dynamic with the ability to set prices within the near environment or is it at the other end of the dynamic being forces to take the prices that the market dictates
There are other similar parameters which will enable us to consider further the starting point for strategy:
In the near environment, is the organisation considered to be a rule maker or a rule follower?
Is the strategy being developed a result of foresight or to enable the organisation to combat competition?
Is the strategic thinking of the directors and other leaders aimed at resdesigning the micro-environment or restricting itself to enable it to operate within the current environment?
Business lifecycle
An industry, or segment of an industry, will go through four basic phases of change
Introduction
High level of strategic planning
Need to decide on market aim - small share vs large share
High prices available but with higher per unit overheads therefore lower profitability
Competitors will be showing moderate interest
Growth
Continued focus on strategic planning, anticipation of maturity levels
Consolidation of market positioning
Potential for good profitability as long as costs are contained
Competitors showing significant interest
Maturity
Strategic planning for volume maintenance and anticipation of decline
Maitenance of market share
Prices and profit margins are likely to decrease as the market matures
Competitos focused on product differentation
Decline
Strategic planning for either the next growth phase or new products or markets
Minimisation of loss of volume
Potential for losses unless costs can also be reduced in line with volume
Competitors will be assessing their own position, potentially leading to opportunities
Market segementation
Johnson (2017)
introduced the idea of market segmentation which recognises the differences that exist between different groups of customers and that customers have differing needs, expectations and ways of behaving
It builds on the concept of strategic groups - these are organisations within the same market place that have similar strategic characteristics and are following strategies