In 2013, the controversial oil giant BP faced a complex environment.
BP is one of the world’s largest oil and gas companies.
It operates right across exploration, production, refin-ing, distribution and marketing. It has about 21,000 service stations worldwide, half in the United States, 40 per cent in Europe. The largest sources of its oil production are Russia (about 45 per cent) and the USA (20 per cent); the USA accounts for about a quarter of its natural gas production and Russia about 10 per cent. Since 2005, BP has had a small alternative energy business, active in biofuels and windpower. In 2010, BP’s Deepwater Horizon oil rig exploded, caus-ing 11 deaths and an oil slick in the Gulf of Mexico covering 180,000 km 2 . In 2012, the US government fined BP more than $4 bn. (about £2.5 bn; €3 bn) for the disaster, and many court cases are still pending.
Some headline features of BP’s environment include:
Political : More than 80 per cent of the world’s oil reserves are owned by state-controlled enterprises, the largest being Saudi Aramco and the Iranian National Oil Company. In 2013, BP’s oil business in Russia was transferred from a controversial alli-ance with a group of leading Russian businessmen to a partnership with Rosneft, the state-controlled Russian oil company, in which BP would hold 18 per cent of the shares.
Economic : Forbes magazine reports predictions of economic growth between 2012 and 2020 of 7 per cent per annum for China, about 2 per cent for the United States and 1 per cent for Europe.
Oil prices peaked at about $120 a barrel in 2008, before dropping to around $30 as recession took hold in 2009, and recovering to around $100 in 2012. New extractive technologies led natural gas prices in the USA to fall 30 per cent between 2011 and 2013.
Social : Car usage is falling in many European economies. After having doubled in the preceding 30 years, miles travelled in the United Kingdom by motor vehicles have fallen by about 1 per cent between 2008 and 2012; miles travelled by train
reached a record in 2012, having increased by 50 per cent since the mid-1990s. From 2008 to 2012, the number of driving tests taken in the United Kingdom fell by about 17 per cent.
Technology : New technologies include the ex-ploitation of ‘fire ice’ (gas hydrates under the sea) and ‘fracking’, the extraction of gas by fracturing underground rock to produce ‘shale gas’. Fire ice might eventually equal 4,000 times all the natural gas consumed in the US in 2010; fracking offers the prospect of doubling the world’s available natural gas supply by 2020.
Ecological : Fracking is liable to pollute local water supplies and even trigger small earthquakes.
According to Cornell University, about 8 per cent of the gas extracted by fracking is released direct into the atmosphere, potentially a major contribu-tion to global warming. In the USA, natural gas costs about $50 per megawatt hour to produce; wave
$500; tidal $450; biomass $130; on-shore wind
$80.
Legal : The Deepwater Horizon disaster has led to new safety regulations for deepwater drilling. The European Union, where 90 per cent of oil extrac-tion is from the sea, has imposed stricter explora-tion licensing procedures, risk assessment and financial guarantees against the costs of accidents.
New regulations in the USA are estimated to increase costs by $1.5 m per oil well. In 2012, the USA banned BP from tendering for all government contracts.
Sources : BP Annual Report, 2012; Business Week , 7 March 2013;
Forbes , 26 March 2012.
Questions
1 Which of the above PESTEL factors offer the most important opportunities to BP, and which the most important threats?
2 Which of the above factors spill over from one PESTEL category to another? Does this matter?
● Economics refers to macro-economic factors such as exchange rates, business cycles and differential economic growth rates around the world. It is important for a business to under-stand how its markets are affected by the prosperity of the economy as a whole. Managers should avoid over-confi dence at the top of the business cycle, and excessive caution at the bottom. They should have a view on how changing exchange rates may affect viability in export markets and vulnerability to imports.
● Social infl uences include changing cultures and demographics. Thus, for example, the age-ing populations in many Western societies create opportunities and threats for both private and public sectors. Changing cultural attitudes can also raise strategic challenges: for example, new ethical attitudes are challenging previously taken-for-granted strategies in the fi nancial services industry.
● Technological infl uences refer to infl uences such as the internet, nano technology or the rise of new composite materials. As in the case of the internet in retailing, new technologies open up opportunities for some (e.g. Amazon), while challenging others (traditional stores).
● Ecological stands specifi cally for ‘green’ environmental issues, such as pollution, waste and climate change. Environmental regulations can impose additional costs, for example with pollution controls, but they can also be a source of opportunity, for example the new busi-nesses that emerged around mobile phone recycling.
● Legal embraces legislative and regulatory constraints or changes. For example, legal changes might include restrictions on company mergers and acquisitions or new tax treat-ments of profi ts earned overseas. On the other hand, legal changes can provide opportuni-ties, as for example the liberalisation of foreign investment in India.
As can be imagined, analysing these factors and their interrelationships can produce long and complex lists. Rather than getting overwhelmed by a multitude of details, it is necessary to step back eventually to identify the key drivers for change . Key drivers for change are the environ-mental factors likely to have a high impact on the future success or failure of strategy. Typical Figure 2.2 The political environment
THE MACRO-ENVIRONMENT 37
key drivers will vary by industry or sector. Thus a retailer may be primarily concerned with social changes driving customer tastes and behaviour, for example forces encouraging out-of-town shopping, and economic changes, for example rates of economic growth and employ-ment. Public-sector managers are likely to be especially concerned with social change (e.g.
rising youth unemployment), political change (e.g. changing government priorities) and legis-lative change (new training requirements). Identifying key drivers for change helps managers to focus on the PESTEL factors that are most important and which must be addressed most urgently. Without a clear sense of the key drivers for change, managers will not be able to take the decisions that allow for effective action.
Three concepts are useful for focusing on change while at the same time avoiding too much detail:
● Megatrends are large-scale social, economic, political, ecological or technological changes that are typically slow to form, but which infl uence many other activities and views, pos-sibly over decades. 3 A megatrend typically shapes other trends. Thus the megatrend towards ageing populations in the West infl uences other trends in social care, retail spend-ing and housspend-ing. The megatrend towards rapid economic growth in Asia drives employ-ment patterns in the advanced economies and commodity prices worldwide. It is important to identify major megatrends because they infl uence so many other things.
● Infl exion points are moments when trends shift in direction, for instance turning sharply upwards or downwards. 4 For example, after decades of stagnation and worse, in the early twenty-fi rst century sub-Saharan Africa may have reached an infl exion point in its eco-nomic growth, with the promise of substantial gains in the coming decade or so. Town-centre retailing may also have reached an infl exion point, where the rise of internet shopping and out-of-town retail parks has put urban shopping on a path to signifi cant decline in advanced economies. Clearly it is valuable to grasp the infl exion point at the moment when trends just start to turn, in order either to take advantage of new opportu-nities early or to act against escalating decline as soon as possible.
● Weak signals are advanced signs of future trends and are particularly helpful in identifying infl exion points. 5 Typically these weak signals are unstructured and fragmented bits of information, often perceived by observers as ‘weird’. A weak signal for the worldwide fi nan-cial crisis that began in 2008 was the rise in mortgage failures in California the previous year. An early weak signal foreshadowing the current success of Asian business schools was the fi rst entry of the Hong Kong University of Science and Technology into the Financial Times’ ranking of the top 50 international business schools in the early 2000s. It is import-ant to be alert to weak signals, but it is also easy to be overwhelmed by ‘noise’, the constimport-ant stream of isolated and random bits of information without strategic importance. Some signs of truly signifi cant weak signals (as opposed to mere noise) include: the repetition of the signal and the emergence of some kind of pattern; vehement disagreement among experts about the signal’s signifi cance; and an unexpected failure in something that had previously worked very reliably.
2.2.2
Building scenarios
When the business environment has high levels of uncertainty arising from either complexity or rapid change (or both), it is impossible to develop a single view of how environmental infl u-ences might affect an organisation’s strategies – indeed it would be dangerous to do so.
Scenario analyses are carried out to allow for different possibilities and help prevent managers from closing their minds to alternatives. Thus scenarios offer plausible alternative views of how the business environment might develop in the future. 6 Scenarios typically build on PESTEL analyses and key drivers for change, but do not offer a single forecast of how the envir onment will change. The point is not to predict, but to encourage managers to be alert to a range of possible futures. Effective scenario-building can help build strategies that are robust in the face of environmental change.
Illustration 2.2 shows an example of scenario planning for the global fashion industry to 2025. Rather than incorporating a multitude of factors, the authors focus on two key drivers which (i) have high potential impact; (ii) are uncertain; (iii) are largely independent from each other. These two drivers are the extent to which the world becomes more interconnected and the speed with which society, and fashion, changes. Both of these drivers may produce very different futures, which can be combined to create four internally consistent scenarios for the next decade and a half. The authors do not predict that one will prevail over the others, nor do they allocate relative probabilities. Prediction would close managers’ minds to alternatives, while probabilities would imply a spurious kind of accuracy.
While there are many ways to carry out scenario analyses, fi ve basic steps are often followed: 7 ● Defi ning scenario scope is an important fi rst step. Scope refers to the subject of the scenario analysis and the time span. For example, scenario analyses can be carried out for a whole industry globally, or for particular geographical regions and markets. While businesses typically produce scenarios for industries or markets, governments often conduct scenario analyses for countries, regions or sectors (such as the future of healthcare or higher educa-tion). Scenario time spans can range from a decade or so (as in Illustration 2.2 ) or for just three to fi ve years ahead. The appropriate time span is determined partly by the expected life of investments. In the energy business, where oil fi elds, for example, might have a life span of several decades, scenarios often cover 20 years or more.
● Identifying the key drivers for change comes next. Here PESTEL analysis can be used to uncover issues likely to have a major impact upon the future of the industry, region or mar-ket. In the fashion industry, key drivers range from demographics to technology. However, the scenario cube suggests two additional criteria are relevant (see Figure 2.3 ): uncertainty , in order to make different scenarios worthwhile; and mutual independence , so that the drivers are capable of producing signifi cantly divergent or opposing outcomes. In the oil industry, for example, political stability in the oil-producing regions is one major uncertainty;
another is the capacity to develop major new oil fi elds thanks to new extraction tech-nologies. These could be selected as key drivers for scenario analysis because both are uncertain and regional stability is not closely correlated with technological advance.
● Developing scenario ‘stories’ : as in fi lms, scenarios are basically stories. Having selected opposing key drivers for change, it is necessary to knit together plausible stories that incor-porate both key drivers and other factors into a coherent whole. Thus in Illustration 2.2 , the
‘Techno-chic’ scenario brings together in a consistent way a more global and integrated culture with a rapid rate of social, technological and economic change. But completing the story of ‘Techno-chic’ would also involve incorporating other consistent factors: for exam-ple, rapid development in China and India where low cost becomes supplanted by techno-logical sophistication as source of advantage; free markets to allow rapid growth and international trade; and the creation of an under-class whose cheap labour and outdated technological skills are no longer needed.
THE MACRO-ENVIRONMENT 39
● Identifying impacts of alternative scenarios on organisations is the next key stage of scenario building. ‘Techno-chic’ might have a very negative impact for many traditional fashion labels and retailers who could not keep up with hi-tech clothing and distribution. On the other hand, ‘Community couture’ could see the strengthening of local craft producers. It is important for an organisation to carry out robustness checks in the face of each plausible scenario and to develop contingency plans in case they happen.
● Establishing early warning systems : once the various scenarios are drawn up, organisa-tions should identify indicators that might give early warning about the fi nal direction of environmental change, and at the same time set up systems to monitor these. Effective monitoring of well-chosen indicators should facilitate prompt and appropriate responses.
In Illustration 2.2 , indicators of a ‘Slow is beautiful’ trend might be low wage growth and rises in religious observance.
Because debating and learning are so valuable in the scenario-building process, and they deal with such high uncertainty, some scenario experts advise managers to avoid producing just three scenarios. Three scenarios tend to fall into a range of ‘optimistic’, ‘middling’ and
‘pessimistic’. Managers naturally focus on the middling scenario and neglect the other two, reducing the amount of organisational learning and contingency planning. It is therefore typically better to have two or four scenarios, avoiding an easy mid-point. It does not matter if the scenarios do not come to pass: the value lies in the process of exploration and contin-gency planning that the scenarios set off.
Figure 2.3 The scenario cube: selection matrix for scenario key drivers