PESTEL

The PESTEL analysis was created in 1967 by Harvard Business School professor Francis Aguilar. You use a PESTEL analysis to answer this question: What strategic direction is suggested by the current and anticipated Political, Economic, Social, Technological, Environmental, and Legal climates?

PESTEL offers a simple, memorable framework with which to analyze the key drivers of change in the context in which your business operates. It’s used by “businesspeople” (of which you are one) to determine when to launch a product, when to create or update a brand, when to shore up investments in one area of the business, and when to perform organizational planning, marketing planning, and so on. Clinton Anderson, President of Sabre Hospitality and 20-year Bain consulting veteran, defined strategy to me as “the purposive allocation of resources to help achieve a certain aim.” The PESTEL isn’t about allocating those resources: it comes before that. It helps you see what the weather might be, so you know to pack an umbrella. It’s one of the strategist’s starting tools.

The PESTEL analysis is in this chapter because it isn’t specific to any particular industry and is foundational. But if you’re in the business of making pharmaceuticals, the aspects of the PESTEL climate you’ll find relevant will differ from those of the strategist from a telecommunications company. You will create your PESTEL while viewing each category through the lens of your own industry. That is, to take one of the six PESTEL elements as an example, there’s no such thing as “the economy” in a sense—that’s a reification. But you can bring your comments back to the specific ways a given trend or climate within each category might impact your industry and your customers. For instance, if you’re in the travel industry, fluctuating gas prices might affect your customers and your business. How will you mitigate this? If you’re making software products, gas prices are likely a weakly linked relation, and therefore an unnecessary, irrelevant place to focus your economic analysis. You’re not analyzing “the economy” itself—you’re using the economic landscape as a context for one aspect of your business.

Let’s look at each aspect more closely by offering some examples of the types of questions you can ask. There’s no formal framework within PESTEL to help you answer these questions. As an idea, it’s really not much more than the acronym.

Political

How will government policy change incentives for different industries? Consider trade and taxation changes. How might terrorism and military actions impact your contracting business? Regulation in China is different than in other areas, and its firewall means you might need to create a separate copy of software. How does that change your deployment strategy? How would new government sanctions deprioritize or delay your president’s interest in international expansion? If a state travel ban on Mexico is instituted, how would that modify your strategy?

Economic

Do consumers have the discretionary or disposable money to buy your leisure electronics or luxury product? What is the cost of financing to your customers who need to build an office to create space that your software helps lease? What are foreign exchange rates such that people might become less engaged in international travel, stay home, and drive more? What about unemployment levels and projections, level of GDP, and other economic trends?

For example, your research might uncover the following data points:

• Travel and tourism investment in 2016 was USD 806.5B, or 4.4% of total investment. It should rise by 4.1% in 2017, and rise by 4.5% per year over the next 10 years to USD 1.3T in 2027.

• Millennials save at a higher rate than other generations: One in six millennials has saved over $100K, and millennials save money at a rate twice that of baby boomers.

• By 2025, the eight largest cities in the world will have a total population equivalent to what the US had in the 1960s.

These are unadorned, uninterpreted facts. Once you have those data, you can put your thinking cap on, draw some conclusions, and look to gain insights about them. That might look like this:

• Fluctuations in the US dollar, Euro, and other foreign currencies can create sudden pockets of places where travel unpredictably becomes undesirable for a period of months.

• Introduction of Bitcoin and other cryptocurrencies could require additional infrastructure if it enters the mainstream for payments.

These are insights because they’re making weak claims and projections about possible outcomes.

Social

What are the changing attitudes of the people who constitute your primary base of customers, vendors, partners, and employees? Consider generational trends, family trends, and educational trends. Do the differing tastes and habits of millennials cause your CEO to reconsider certain aspects of the business or create a new brand? How health-conscious are people? What are the dietary trends? Are people more active? What are the educational trends? If most people read on a cell phone, or learn through watching videos, or live with their parents until they are 30 at a far higher rate than they used to, how do you imagine your CEO will find that relevant to the business, and how might that in turn change your strategy?

Technological

This one may seem redundant for us, but it’s often not. We get focused on the work at hand, and if we’re heads down in a mobile tech project or a legacy migration, we may not be keeping up with the latest in IoT and artificial intelligence. Consider this as if you are not a technologist, so you can more objectively look at technology trends from a business perspective. Work to understand how broad populations (countries, generations, customer segments) are using different kinds of technology and what advances are being made in popular areas of tech. Go to meetups and tech conferences or watch them online afterward, read Forester or Gartner papers, and McKinsey Insights, and check out websites such as O’Reilly, ThoughtWorks, Tech Crunch, and others as an easy start. They publish many whitepapers you can access even if you don’t have a membership.

Environmental

What are the ecological influences on your business? Are climate changes affecting your industry? How likely was it that trends toward sustainability in the consumer mindset and efforts to produce low-emission vehicles contributed to the rise of Tesla and its technology strategy with laptop batteries for electric vehicles? Are your customers or fulfillment associates and suppliers affected by the weather in ways that your products or logistics software can better support?

Legal

What laws are hotly debated recently that may change? Again, try not to think from a technologist’s view, considering only things like net neutrality (though that’s a good one to be aware of, especially in the internet business). What recent laws have been passed; what sanctions have been imposed on different countries? What new laws are brewing or anticipated? GDPR likely has an impact on your big data, analytics, and machine learning strategy. If you’re a franchisor, the co-employment laws would make a difference to your technology strategy, so maybe don’t suggest writing your own franchise employee scheduling application. Does the legalization of marijuana potentially change your business? What about antitrust laws if you’re interested in a merger or acquisition?

Scenario Planning

Of the many strategies in the world, the default strategy is consistently the “Do Nothing” strategy.  We don’t wake up every morning and evaluate whether or not we should still live in this house, eat breakfast, and continue to have a dog. We think, “This is my life,” and we continue our established routines. Maintaining the status quo—the Do Nothing strategy—is far and away the dominant strategy of people and corporations.

There are two problems with this strategy. The first is that it creates optimism bias. Worse, it deepens our belief in established and familiar patterns, enervating our ability to perceive change and anticipate the unexpected. People assume the future will look like the past—recall what happened to Russell’s turkey (“4. Probability of Each Outcome”). Instead, can you ask “What if?”

Your technology strategy will be richer and more layered, and will support the business in a more relevant and powerful way. You’ll choose to spend time and resources on stuff that matters more.

Scenario Planning is an an organized way of asking the question “What if—?”

Its history traces back to the 1950s at the RAND corporation, where a fellow named Herman Kahn devised the tool to test a variety of military strategies that could be employed against the Soviet Union during the Cold War. You can read more about the history of Scenario Planning in the Harvard Business Review.

You may recall the movie War Games from the 1980s in which the computer played the game “Global Thermonuclear War” against itself (in a kind of generative adverserial neural net, I surmise) millions of times in order to determine the winning strategy (conclusion: there isn’t one). This was a popular computer version of military Scenario Planning in action.

This is one basic format for conducting Scenario Planning in your organization, based on my experience several years ago with a McKinsey engagement. It starts with the consulting group conducting a lot of research and interviewing key members of the leadership team. This process takes several weeks. Then the group schedules a two- or three-day workshop for the leadership team, and gives us a presentation for an hour or so that represents its findings and hypotheses. This serves as a starting point and level setting for the exercise. Then we break into small groups, generate a bunch of scenarios, and work through a variety of them to imagine how they might play out. We then reconvene to distill the ideas down to a few that sound interesting and important. You can do this with a private voting round. Then with the remaining few, we divide into teams to figure out good arguments for why our scenario should be the one to win. The leadership takes this as input and thinks about it. As a result of this workshop, my company’s leadership at the time decided to go into an adjacent line of business and buy a company.

That’s the basic process you can use for Scenario Planning.

Futures Funnel

The Futures Funnel pattern is closely related to Scenario Planning (see “Scenario Planning”), and is really just a visual representation of the final, distilled outcome of that work. It’s a fun and compelling view that is useful for busy executives. You need to be able to fit it on a single slide, as shown in Figure 3-1.

Figure 3-1. Your Futures Funnel looks just like this before you add your descriptions

The funnel in the picture acts like a Venn diagram, of course. Think of each of the circles at the end of the funnel as a set. Your Futures Funnel will look just like this. Literally just plunk this down into your deck, with the addition of only one thing: a brief description of each of the four futures.

The widest set is all the things that could happen, the possible futures: any future can eventuate only if it’s possible.

Within that, it gets slightly more complicated. The next smallest subset is the plausible realm. This is the set of things that are more reasonable to expect to happen. It’s possible that a giant lizard rises up from the ocean and squashes Portland, but it’s not plausible. We don’t think about the ones that aren’t plausible too much.

You’ll notice there is one key difference between this and Scenario Planning. Here you are adding the value judgment of the preferred future. These are the things you want to happen. This, sadly, is the tiniest little port for us to try to land. It stretches across things that are plausible and probable and preferred, which is great, and things that are preferred but silly.

Next there are the probable outcomes. This is the set of things likely to happen, some of which we want, and some of which we don’t. Both areas are the place to focus. To help you think deeper about the preferred and plausible outcomes, and the preferred and probable outcomes, I refer you to the Backcasting pattern (see “Backcasting”).

Ignore any thought of what’s preferred but not plausible: this is the realm of fantasies. I suppose you could win the lottery, which might be preferred, but it’s not reasonable to suppose that you will, and there’s not much to be done about it anyway, so there’s no point in thinking about it.

But how do you come up with the material here? I suppose you could just put your thinking cap on, sit down, and invent what all the possible, plausible, probable, and preferred futures are going to be. And if you’re a futurist and can do that, that’s terrific. But if that’s not working for you, Table 3-1 shows a little framework to help you as you consider what this set of possible futures might be.

To help you fill these out, I recommend you use some other relevant patterns here: the SWOT analysis (see “SWOT”) and Porter’s Five Forces pattern (see “Porter’s Five Forces”). Those will really help jump-start your Futures Funnel.

Beyond its role as representing the outcome of a sophisticated Scenario Planning exercise, a second use of the Futures Funnel is to act as a substitute for Scenario Planning. If you have very little time to turn something in, or you are not working on a strategy of broad scope at this point, just do a Futures Funnel instead. It acts as a less rigorous (not at all rigorous, but that’s fine for many situations), mini–Scenario Planning exercise. Used this way, instead of the expensive multiday workshop, you implement it by just sitting alone in a room, thinking about what might happen, what’s plausible, what’s probable, and what’s likely. And then write it down and ship it.

Backcasting

We know what forecasting is: you start in the present and try to look into the future and imagine what it will be like. Backcasting is the opposite: you state your desired vision of the future as if it’s already happened, and then work backward to imagine the practices, policies, programs, tools, training, and people who worked in concert in a hypothetical past (which takes place in the future) to get you there.

It’s a wonderful tool.

In any forecast (or backcast), there are two kinds of variables: dependent and independent. The values of dependent variables can be known only on the basis of the values of the independent variables. Dependent variables are the unknowns, the moving parts that you want to ascribe an outcome to in order to engineer a strategy toward making that outcome more probable. Independent variables are controlled by the strategist, and make up the levers that you can pull to try to change your outcome. Figure 3-2 shows the process.

Figure 3-2. The backcasting process

Here are the steps in the backcasting process:

1. With your architecture, strategy, and product teams together, create a simple vision of the Beautiful Future. Do not give consideration to today’s circumstances, or how achievable it might be, just where you want to be. Don’t edit yourself. This should be a concrete image, or a metric goal such that you can determine very decidedly whether you have achieved it or not. For example, it could be fairly direct, like “All our software releases are on time,” or “No customer finds a bug before we do,” or “Defects have been reduced to six sigma levels.” Those may not seem like the realm of the strategist, but they are the realm of the CTO and development executives. And often you’ll have “get well” strategies. But these are examples. A more complex future vision might be about a legacy system replacement with a new, modern system. How does the team know when they’re done? How about “when they cut the power cord on the existing legacy system.” That’s an image, it’s concrete, and you can quickly see how a whole lot of things would need to have happened before that moment.

2. Hypothesize the immediately prior necessary state: those things that have to happen before the next moment can happen are called antecedents. They are the necessary condition for the next state to obtain. This is shown in Figure 3-2.

3. Then, once you have hypothesized the array of antecedents to the end state, you repeat the process to hypothesize the antecedent to that antecedent and so on, until you work your way back to the current state.

   The current state is also called the status quo. It’s Latin for “the state in which” we find ourselves today. It’s the set of present affairs across people, process, and technology.

   When you are performing this tracing back, keep in mind what would have to change with people, processes, and technology in each of the three steps. You cannot typically change one of those elements without incurring at least some impact on the others. Thinking of only one of these categories will result in myopia, and a failed strategy.

4. Next, consider the consequent. A basic statement in propositional logic has three parts: the hypothesis, the consequent, and the logical connector between the two. It looks like this:

   P ⇒ Q

   and means, “If P, then Q.”

   What you’re looking for here is that true premises can never produce a false consequence, which means it’s logically valid. But a hypothesis is a premise, not a statement of fact. So it’s easy to get into trouble and assign as consequents things that don’t follow.

   The consequent does not necessarily mean the consequence as it does colloquially, as in, “This directly causes that.” The consequent here should be the logical conclusion that necessarily follows, as an implication, as in “If Mister Boy is a cat, Mister Boy is a mammal.” As we’ve been cautioning, people in business meetings are not typically rigorous about this sort of reasoning. It is tempting to say, “If Mister Boy is a cat, Mister Boy is adorable,” but this is not a necessary consequent.

   Worse, there are many absurd-sounding statements that are logically valid, but still nonsense, because you’re dealing with a hypothetical proposition. For example:

   If pigs can fly, then I should wash my car on Tuesday.

   Once you have worked out your vision, your antecedents, and your consequents, use your powers of analysis as described in Chapter 2) in probability assignment to tag each antecedent hypothesis with a probability, given the current state. If you’re pressed for time, you can guess. But going through the exercise and sketching it out as shown will point you to a set of conclusions about actions to take. Then you can prioritize them and get them in a project plan.

Summary

When creating a broad, multiyear strategy, you can apply these patterns in the order they are presented, starting with analysis: first consider MECE and create a Logic Tree (both described in Chapter 2), and create a set of hypotheses. Then, write your PESTEL analysis (see “PESTEL”) and conduct a Scenario Planning exercise (see “Scenario Planning”). You can then create your Futures Funnel (see “Futures Funnel”) diagram and perform a Backcasting (see “Backcasting”). That will then likely cause you to refine your analyses.

Of course, if you’re making a more specific, localized strategy for, say, changing out your database vendor, you can take the PESTEL analysis, for example, more lightly, or skip these, and move on to the next set of patterns: those for understanding the context of your industry.