11. Macroenvironmental (STEEP/PEST) Analysis
Description and Purpose
This chapter focuses on the social, technological, economic, ecological, and political/legal (STEEP) aspects of the environment that can affect the competitiveness of industries and companies. STEEP has long been a focal point of environmental scanning and monitoring activity in most organizations. These factors generally are considered to be beyond the direct influence of an individual company.
This method is also sometimes called political, economic, social, and technological (PEST) analysis. For the purposes of this chapter, and for ease of understanding, we will call this technique STEEP, although you can simplify the technique to PEST factors.
Although many organizations recognize the importance of the environment, all too often this analysis ends up making a small or minimal contribution to strategy analysis and formulation. This can be because the organization views the environment as being too uncertain or dynamic to do anything about. Or perhaps many environmental factors have delayed or indirect effects on the organization and therefore often escape the notice of managers who are more concerned with day-to-day operations.
Analysts commonly segment the environment into three distinct levels: the general or macro environment, the operating environment, and the internal environment. Figure 11.1 shows the relationship of these levels to each other and to the organization. This book as a whole provides techniques that allow you to understand things happening at all three levels.
Figure 11.1. The three levels of the environment.
Managers need to be aware of these environmental levels, know what factors they include, and try to understand how each factor and the relationships among the factors affect organizational performance. The STEEP technique described in this chapter will especially help you understand the general environmental level.
The general environment is broad in scope and has long-term implications for the organization and its strategies. These implications usually are understood to be beyond an organization’s direct influence, such as the role of government and its legislation on an industry.
The general environment is broken into subcategories or segments. One effective form of segmentation is the STEEP categorization scheme. As mentioned, it is known by other names as well, including PEST, PESTLE, SEPTember, SLEPT, SPECTACLES and STEEPLES. More important than which of these schemes is chosen is recognizing that the primary purpose of these segments or subcategories is to avoid overlooking major aspects of the general environment in your overall analysis.
The following list describes several key variables that are present under each STEEP factor shown in Figure 11.2. The STEEP sectors are not mutually exclusive—the lines between the categories remain fluid. Issues, events, or stakeholders can actually traverse several sectors at once.
Figure 11.2. The elements of STEEP analysis.
Ideological characteristics
Types of union organizations
Income gaps among social segments
Percentage of population in economic and social segments
Value systems for social classes
Cultural background of citizens
Birth and death rates
Technological
Patents held
R&D budgets
Number of colleges and universities in a region
Pace of technology change
Presence of technology clusters
Pace of process or product improvements
Bandwidth capacity
Ecological
Air and water quality
Recycling capacity
Sources of power
Stage of evolution in the product life cycle
Pollution levels
Substitutability of raw materials
Level of environmental regulation
Economic
GDP growth rates
Exchange reserves
Rate of inflation
Income distribution levels and bands
Interest rates
Balance of payments
Political/Legal
Policies of political parties
Activism of regulatory agencies
Presence of property protection laws
Ability to influence political decision-making
Voting rates and trends
Nature of power and decision-making structures
Public opinion
Environmental conditions affect the entire strategic management process. Organizations do not operate in a vacuum. A key to effective strategic management is to make decisions that will enable actions to correspond positively within the context in which those actions will ultimately take place. To some degree, an organization’s internal conditions—in particular, its strengths, weaknesses, resources, and capabilities—determine the action. On the other hand, the action context often is dictated largely by external factors. To some extent, a company can shape the environment to its advantage. Yet in another way, a company often has to adapt or react in ways that disadvantage it less than its competitors.
Strengths
The key strength of environmental analysis is that it has the explicit task of leading executive thinking beyond current activities and short-term horizons while still making frequent and sensible links to current and shorter-term activities to retain credibility. To be successful, environmental analysis needs to be linked conceptually and practically to current planning operations. Thus, it is important to involve key organizational planners in the environmental analysis.
The organization’s process of strategy formulation is considerably weakened unless it has a filtering process that allows it to establish the importance and relevance of external developments. The STEEP technique allows this to happen.
The organization’s decision-makers must also develop a structured way of identifying and analyzing relevant trends, events, and stakeholder expectations in the STEEP environment. This includes the systematic assessment of environmental change on the company’s businesses and action plans. This can be accomplished at an organization-wide policy level or in a functionally focused way (for example, new products for marketing managers or lobbying strategies for government affairs managers).
An organization’s success or failure can depend substantially on how accurately its decision-makers read the environment and respond to it. Therefore, managers must think carefully about who should gather the information and how to structure its flow and use. Cross-functional teams of internal specialists often can perform environmental analysis effectively. Having the support and encouragement of top management is an important success factor, as is having appropriate systems established to support the effort.
Successful environmental analysis also needs to be responsive to decision-makers’ information needs. These information needs may change over time, and you will need to adjust the environmental analysis in accordance with such changes.
Effective environmental analysis has a positive effect on competitive performance if proper actions are taken and proper evaluations are made. Timely actions will yield good results over an extended period of time.
Weaknesses
Several empirical studies have shown that the STEEP method of environmental analysis is difficult to do effectively over time. Different types of environmental contexts (dynamic or placid, simple or complex, continuous or discontinuous) also impact its effectiveness.
Problems in environmental analysis tend to fall into several categories:
• Interpretation. Organizational decision-makers often have difficulty conceptualizing or defining their environment. This makes it difficult to interpret the specific effects that the environmental variables will have and the nature of effective responses that the organization may choose to pursue. Issues involved in interpreting environmental factors include being able to structure meaningful studies, showing financial impact, synthesizing short- and long-term implications, a lack of senior management involvement in the analysis, difficulties in translating potential opportunities into action plans, and allocating the time and resources required to do accurate analysis.
• Inaccuracy and uncertainty. Problems experienced here include inaccuracies in analytical output and lack of faith in the results due to the presence of too many ambiguities and uncertainties or both. This can be a result of difficulties with depicting environmental events and trends, properly characterizing uncertainties in meaningful terms, and accurately forecasting the effects of STEEP forces and the social and technological evolution and trends.
• Short-term orientation. Many decision-makers dislike spending money on speculative results; they are concerned primarily with short-term matters. Many of the variables in the STEEP segments take years to evolve, frequently far outlasting the analysts and decision-makers in the organizations who need to understand them.
• Lack of acceptance. Not accepting the value of environmental analysis can be due to management’s lack of understanding of its value, difficulties in encouraging line managers to utilize its outputs, resistance to changing forecasting methods, and assumptions among managers that they are already experts at implementing and managing this process. Another related issue is failing to link the STEEP analysis to competitive implications. A key goal of using this technique should always be identifying competitive implications for the organization based on the environment analysis.
• Misperceptions. These include management’s limited scope or invalid perceptions about the environment, such as thinking in country terms as opposed to global terms.
• Diversified businesses. Human limitations, prior experience, and bias affect environmental analysis. This is especially true in multinational environments where home-country biases and attitudes often lead organizations to superimpose their own experiences, views, and understanding on variables that do not act in ways suggested or supported by the STEEP factors.
How to Do It
The environmental boundaries you define bind the breadth, depth, and forecasting horizon of the analysis. Breadth refers to the topical coverage of the environmental data collected. Depth determines the level of detail in the STEEP data being sought and analyzed. Forecasting horizons usually span the short, medium, and longer timeframes, as dictated by the relevant organization’s specific environment.
To establish environmental boundaries, examine the organization’s strategic plans. Consider its geographic reach (where it does and does not compete), its product or service scope (segments, categories), its time horizon for returns on fixed resource commitments, technology and innovation, sources of its resources (human, capital, other financial and raw materials), regulatory issues, and flexibility. Note that the process is constrained by the people available and dedicated to performing the task.
After the environmental boundaries have been defined, you can analyze the five STEEP segments by following a five-step process:
1. Understand the segment of the environment being analyzed.
2. Understand interrelationships between trends.
3. Relate trends to issues.
4. Forecast the future direction of issues.
5. Derive implications.
Step 1: Understand the Segment of the Environment Being Analyzed
What are the current key events and trends within the segment? Events are important occurrences in the different STEEP domains. Trends are the general tendency for events to occur and the course of those events. For example, within the social segment, you would look to capture trends surrounding work and leisure, consumption and savings, education, travel, religious activities, and household work.
What evidence supports the existence of these trends? It is important that data or evidence underlying the existence of trends is captured so as to facilitate continued monitoring and forecasting of the trend’s direction and evolution.
How have the trends evolved historically? Like industries, products, and organizations, trends have life cycles with identifiable stages: They emerge, develop, peak, and decline. You need to identify where a trend is in its life cycle. Understanding the cycle of trends is critical in identifying their subsequent evolution.
What are the nature and degree of change or turbulence within trends? Trends fluctuate according to their rate of evolution, magnitude, and fractionation. Rate of change in a trend requires you to focus on whether the trend is accelerating, decelerating, or remaining static in its life cycle. Magnitude looks at the degree of spread associated with a trend and whether it is affecting larger or smaller groups to greater or lesser degrees. Fractionation looks at the relationship of the trend to other trends to see whether the focal trend is affecting or being affected by other trends.
How do the trends affect the organization? Conceptually, trends may have three kinds of impacts on an organization:
• Negative impacts are associated with threats to the organization’s ability to achieve its goals. They may also prevent the organization from acting on its current strategy, increase its risks associated with moving forward with the existing strategy, increase the level of resources required to implement the strategy, or suggest that a strategy is no longer appropriate.
• Positive impacts are associated with opportunities for the organization to achieve its goals. The trends may support or strengthen existing strategies, may increase the organization’s likelihood of being able to implement its planned strategy, or suggest a new opportunity that can be exploited if one or more strategies were changed within the framework of the organization’s existing mission.
• Neutral or zero impacts may be stabilizing or irrelevant forces and may also increase the confidence that decision-makers have in their strategies.
Step 2: Understand Interrelationships Between Trends
What are the interrelationships between trends? Understanding the interrelationships requires you to identify the impact of the different STEEP segments and sub-segments. Look for areas where trends suggest redefinitions of or changes from the expected evolutionary path or where they are reinforcing one another.
What are the conflicts between trends? Trends often push in opposite directions and counteract one another. For example, people are becoming more committed to their work at the same time they are seeking more family time outside the workplace.
Step 3: Relate Trends to Issues
Not all trends are of equal importance to an organization or industry. Some trends affect an organization directly, and others might have only a tangential effect, depending on how they interact with the organization’s strategy and execution. The astute analyst will identify the trends and combinations of trends that are likely to have the greatest impact on the organization’s goals. The most critical ones are defined as issues for the organization. This is where STEEP and issue analysis (see Chapter 8, “Issue Analysis”) find complementarities.
Step 4: Forecast the Future Direction of Issues
Assess the underlying forces. Forecasting the future evolution of a trend or set of trends within an issue requires you to analyze the driving forces behind the issue. You must be able to distinguish between symptoms and causes. This is a difficult task, because often the driving forces work against one another and push simultaneously in multiple directions. After you have accurately identified the causes, you can develop alternative projections of the issue’s evolution.
Make alternative projections of the issues. To avoid the limitations created by single forecasts, it is useful to develop multiple projections or scenarios. Each of these scenarios will represent a differing view of the future that is developed around clearly identified trends. For example, identify a best case, worst case, and neutral case scenario for issue development. Then subject the scenario to a set of questions to test its veracity. What underlying forces are propelling the trends? What is the likelihood that they will continue? How strong is the evidence that its component trends are accurate? Do the interrelationships among the trends make sense? This is where STEEP and scenario analysis (see Chapter 10, “Scenario Analysis”) find complementarities.
Step 5: Derive Implications
Macroenvironmental analysis needs to make a contribution to and serve as an input to the organization’s strategic planning process. Implications should be focused on three levels:
• The structural forces surrounding your industry and any strategic groups within the industry
• How they affect your organization’s strategy
• How they are expected to affect competitors’ strategies
This assessment should provide the key inputs in determining what future strategies might be. The implications can be more easily communicated to executives through the use of a template or worksheet.
Case Study: STEEP Analysis of the Life and Death of Brands
Some of the major brands that currently adorn our homes and offices will face decline and death in the future. Brands, like every product and service, are affected and/or influenced by a combination of internal (micro) and external (macro) environmental factors. For example, consider the STEEP elements and their influence on brands and the marketplace:
• Social. Products and the brand names associated with them may become socially unacceptable. People also tend to notice newer or more hyped or exciting developments, as opposed to long-standing, comfortable ones. Equally, consumer tastes change, and the brand may have lagged behind, thus risking a rapid decline. In other words, the organization has failed to consider the brand’s health.
• Technological. Technology can create radical change and cause great disruptions or distortions in preexisting markets. The rise of the Internet has seen the demise of the fax machine and has wreaked havoc on traditional recording media such as LPs, cassette tapes, and more recently, compact discs. What products and/or services will nanotechnology or 3-dimensional printing change?
• Economic. A recession or global financial crisis can have a significant effect on whether current customers can afford to continue purchasing certain types of branded products, particularly luxury or leisure-oriented ones that are generally ascribed to discretionary income categories. Equally, a rise in the cost of raw materials, such as oil or minerals, affects a brand’s financial performance. If long-term economic instability results, the brand’s future may be in jeopardy. A tip worth keeping in mind is that when you look at economic issues, always consider global economic issues. For example, what would be the impact of a breakdown of the European Union and the Euro?
• Environmental. Global warming will continue to affect brands in the future and may currently be doing so in ways that are difficult to pinpoint. Car manufacturers, no matter where they are in the world, are considering ways to replace the current combustion engine with solar or electric engines. They also are thinking about the life cycles of their products far beyond their useful functional life (cradle-to-grave thinking). Companies that have invested in alternative power supplies, such as fuel cells, will most likely increase the longevity of their brands.
• Political. If a country is politically unstable, it is likely to be or to become economically unstable. This can have a major impact on a brand that is limited to the market in a particular country. If a brand has regional or international presence, it may be buffered or otherwise protected within those additional markets. The political segment also includes acts of terrorism.
• Legal. This is often linked to the political situation within a market. Changes in legislation can have serious effects on brand longevity. This can be seen with various tobacco brands whose markets have been reduced due to legislation that restricts or prevents promotion or use of the brands. In some cases, companies have diversified into different products, keeping the ability to leverage or trade on their brand name.
By understanding these influencing factors, an organization can review its brand position within the marketplace. Moreover, it can attempt to forecast or scenario-plan (see Chapter 10 for more about Scenario Analysis) possible outcomes for its brands, depending on the implication of the trends of the STEEP factors. For example, as just mentioned, a tobacco brand facing increasing global promotion and distribution restrictions might seek to diversify into other business areas. It might be able to leverage and reenergize an existing brand name to develop new market opportunities. Marlboro diversified into a range of clothing distributed through its own stores.
Source: Adapted from Groucutt, J., “The life, death and resuscitation of brands,” Handbook of Business Strategy (Rockville, MD: Emerald Group, 2006), pp. 101–106.