Macro-environment Analysis

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Strategic
position

Macro-
environment

Resources Culture

StakeholdersIndustry

Learning outcomes
After reading this chapter, you should be able to:

• Analyse the broad macro-environment of organisations in
terms of political, economic, social, technological, ecological
and legal factors (PESTEL).

• Evaluate di�erent approaches to environmental forecasting.

• Construct alternative scenarios in order to address possible
environmental changes.

Chapter

Macro-environment analysis

Key terms
forecasting 5

key drivers for change

macro-environment

nonmarket environment

organisational field

PESTEL analysis

scenarios 52

2.1 Introduc tion

2.1 Introduction

Organisations depend upon their environments for their survival. Here environments are being
understood in their widest sense – to include political, economic, social, technological and
legal factors as well as ecological ones. These environmental factors supply both opportunities
and threats. Political factors helped knock 20 per cent o� Facebook’s share price when it was
revealed in 2018 that it had allowed Russian meddling in the American presidential elections
two years earlier. The clustering of millennials as a social group in high-rent cities has prompted
the emergence of new co-living businesses, such as Roomi and

edly, o�ering cheap and flex-
ible accommodation. Drone technologies are creating opportunities ranging from audit for
accounting firms such as Deloitte and Ernst & Young to wildlife protection in Africa. It is clearly
important that entrepreneurs and managers analyse their environments as carefully as they
can in order to anticipate and – if possible – take advantage of such environmental changes.

Environments can be considered in terms of a series of ‘layers’, as summarised in
Figure 2.1. This chapter focuses on organisations’ macro-environments, the outermost layer.
The macro-environment consists of broad environmental factors that impact to a greater
or lesser extent many organisations, industries and sectors. For example, the e�ects of
macro-environmental factors such as the Internet, economic growth rates, climate change
and aging populations go far beyond one industry or sector, impacting a wide-range of
activities from tourism to agriculture. The industry, or sector, makes up the next layer within
this broad macro-environment. This layer consists of organisations producing the same sorts
of products or services, for example the automobile industry or the healthcare sector. The
third layer is that of specific competitors and markets immediately surrounding organisa-
tions. For a car company like Nissan, this layer would include competitors such as Ford and
Volkswagen; for a hospital, competitors would include other hospitals and markets would
be types of patients. Whereas this chapter focuses on the macro-environment, Chapter 3 will
analyse industries and sectors and competitors and markets. Chapters 4 and 5 examine the
individual organisations at the heart of Figure 2.1.

Figure 2.1 Layers of the business environment

The macr
o-environment

Industry (or sector)

Competitors

Markets

The
organisation

Chapter 2 Macro – environment analysis

Macro-environmental changes can often seem too big, complex or unpredictable for
managers to grasp. The result is that changes can creep up on them until it is too late to
avoid threats or take advantage of opportunities. Thus many traditional retailers, banks and
newspapers were slow to seize the opportunities of the Internet; many oil and steel producers
underestimated the potential impact of China’s slowing economic growth. While managers
are always liable to some biases and inertia (see Chapter 5), this chapter introduces a number
of analytical tools and concepts that can help keep organisations alert to macro-environmental
change. The point is to minimize threats and to seize opportunities. The chapter is organised
in three main sections:

• PESTEL factors examine macro-environmental factors according to six key types: political,
economic, social, technological, ecological and legal. These factors include both market
and nonmarket aspects.

• Forecasting, which aims to predict, with varying degrees of precision or certainty.
Macro-environmental forecasting draws on PESTEL analysis and often makes use of three
conceptual tools: megatrends, inflexion points and weak signals.

• Scenario analysis – a technique that develops plausible alternative views of how the
environment might develop in the future. Scenario analysis di�ers from forecasting
because it avoids predictions about the future; it is more about learning di�erent possi-
bilities for environmental change.

The structure of this chapter is summarised in Figure 2.2.

2.2

PESTEL analysis

This section introduces a key tool for analysing the broad macro-environment of an organ-
isation: PESTEL analysis. Providing a wide overview, PESTEL is likely to feed into both envi-
ronmental forecasts and scenario analyses.

The PESTEL framework is one of several frameworks (including the similar ‘PEST’ and
‘STEEPLE’ frameworks) which categorise environmental factors into key types.1 PESTEL
analysis highlights six environmental factors in particular: political, economic, social,
technological, ecological and legal. This list underlines that the environment includes not
only the economics of markets, but also nonmarket factors. Organisations need to consider
both market and nonmarket aspects of strategy:2

• The market environment consists mainly of suppliers, customers and competitors. These
are environmental participants with whom interactions are primarily economic. Here

Figure 2.2 Analysing the macro-environment

PESTEL analysis

•
•

Learning-emphasis

•
•
•
Prediction-emphasis

2.2 PESTEL analysis

companies typically compete for resources, revenues and profits. Pricing and innova-
tion are often key strategies here. The market environment is discussed extensively
in Chapter 3, but issues such as economic cycle are also considered in this chapter
(Section 2.2.2).

• the nonmarket environment relates primarily to social, political, legal, and ecological
factors, but can also be impacted by economic factors. The nonmarket environment
typically involves interactions with non-governmental organisations (NGOs), polit-
icians, government departments, regulators, political activists, campaign groups
and the media. In the nonmarket environment, organisations need to build reputation,
connections, influence and legitimacy. Lobbying, public relations, networking and collab-
oration are key nonmarket strategies.

Nonmarket factors are obviously important for government and similar organisations
reliant on grants or subsidies, for example schools, hospitals and charities. However,
nonmarket factors can be very important for business organisations too. For example,
nonmarket factors are particularly important where the government or regulators are
powerful (for instance in the defence and healthcare sectors); where consumer sensitivities
are high (for instance in the food business); or in societies where political, business and
media elites are closely interconnected (typically smaller countries, or countries where the
state is powerful).

The following sections consider each of the PESTEL elements in turn, providing key analyt-
ical concepts and frameworks for each. Meanwhile, Illustration 2.1 on the so-called FANGs
provides examples of various PESTEL factors, showing how in practice they often interrelate.

2.2.1 Politics

The political element of PESTEL highlights the role of the state and other political factors in
the macro-environment. There are two important steps in political analysis: first, identifying
the importance of political factors; second, carrying out political risk analysis.

Figure 2.3 is a matrix that distinguishes two variables helpful to identifying the importance
of political factors:

• The role of the state: in many countries and sectors the state is often important as
a direct economic actor, for instance as a customer, supplier, owner or regulator of
businesses.

• Exposure to civil society organisations: civil society comprises a whole range of organisa-
tions that are liable to raise political issues, including political lobbyists, campaign groups,
social media or traditional media.

To take an example from Figure 2.3, the defence industry faces a highly politicised
environment. Defence companies typically have high direct state involvement: national
armed services are of course key customers, while states are often owners of their national
defence companies. At the same time, defence companies are often highly exposed to
groups from civil society, for instance campaigners against the international arms trade.
By contrast, food companies face less direct state involvement: most food companies are
privately owned and operate in private-sector markets. However, the political environ-
ment is still important for food companies, as they are typically exposed to pressures from
civil society in the form of fair trade campaigners, labour rights organisations and health
lobbying groups. Pressures from civil society organisations can increase state involvement
by demanding additional regulation, for instance buyer health standards for food products.
Canals are often state-owned but nowadays are not highly exposed to political pressures
from civil society organisations. Industries can rapidly change positions: thus revelations

Chapter 2 Macro – environment analysis

During mid-2018, the so-called FANG+ stock market index
(including Facebook, Amazon, Net flix and Alphabet/
Google) fell by more than 10 per cent. A PESTEL analysis
helps to explain why.

PESTEL analyses can be done using published sources
(e.g. company annual reports, media articles and consult-
ants’ reports) or more extensively by direct discussion with
managers, customers, suppliers, consultants, academics,
government o©cials and financial analysts. It is important
not to rely just on an organisation’s managers, who may
have limited views. A PESTEL analysis of the four main FANG
companies based on published sources shows a growing
preponderance of macro – environmental threats over
opportunities (specific industry analysis will be dealt with in
Chapter 3). In the figure above, the scale of Opportunities
and Threats on each of the PESTEL dimensions is indicated
by the relative extent of the bars. Just taking some issues for
illustration, the figure shows more and longer bars on the
Threats side than the Opportunities side. Thus:

• Political: FANG companies face increasing political hostil-
ity. India has banned Facebook’s Free Basics, a free but re-
stricted internet service. The United Kingdom is planning
specific taxes for online retailers such as Amazon.

• Economic: FANG companies are now facing market sat-
uration in developed markets. In 2018, Netflix missed
its subscriber growth targets by one million, and in the
USA, the costs required to acquire each new subscriber
have doubled from $60 to $120 (€105; £90.00). Netflix
is spending big now on producing new content specific-
ally for international markets. Facebook, facing declining

usage in Europe, is diversifying into new activities such as
digital dating.

• Social: growing awareness of internet addiction has
increased consumer willingness to undertake digital
detoxes. In 2018, Google launched a ‘Digital Wellbeing’
app, with user-friendly dashboards giving a detailed view
on how users spend their time.

• Technological: autonomous planes and balloons are being
developed by Facebook and Alphabet to deliver internet
access to large populations in the developing world. New
technologies may provide substitutes, as Telegram and Sig-
nal provide encrypted alternatives to Facebook Messenger.

• Ecological: the FANGs are big energy consumers, with
cloud computing accounting for 2 per cent of energy con-
sumption in the USA, and Google using as much power as
San Francisco.

• Legal: Amazon alone accounts for nearly half of US retail
spending, and 80 million Americans are part of its Prime
membership programme. Both in the US and Europe,
there is an increasing threat of legal regulation to curb the
market power of Amazon and other FANG companies.

Questions
1 Taking one of the FANG companies, what do you think

is its greatest macro-environmental threat, and what is
its greatest macro-environmental opportunity?

2 Have the opportunities and threats changed since
2018? How would you update this analysis?

Illustration 2.1 A PESTEL for the FANGs
In 2018, US technology giants were facing a toughening macro-environment.

Opportunities Threats

Developed world saturation

Digital detox

New technologies

Governmental partnerships

Substitutes

Political hostility

Online taxation and data constraints

New growth regions; diversification

Energy fears

High High

2.2 PESTEL analysis

about Internet monitoring by national security agencies has placed companies such as
Amazon and Facebook much more under scrutiny by governments, civil liberties groups
and consumers (see Illustration 2.1).

Organisations that face politicised environments need to carry out political risk analysis,
the analysis of threats and opportunities arising from potential political change. There are
two key dimensions to political risk analysis:3

• the macro–micro dimension. The macro dimension of political risk refers to the risks
associated with whole countries: for instance Nigeria, Russia or Venezuela. Many
specialist organisations publish relative rankings of countries’ macro political risks.
Western European countries are typically ranked low in terms of macro political risk,
as even changes of government following elections do not bring fundamental change.
On the other hand, some Middle Eastern countries rank high in terms of macro polit-
ical risk, because changes of government there can be sudden and radical.4 However,
there is also an important micro dimension of political risk, relating to the specific risk
of particular organisations or sectors within a country. It is important to distinguish
between macro political risk and specific micro-level risk. China is typically ranked
medium political risk on the macro dimension, but for some Japanese companies oper-
ating there the micro dimension is higher and variable. For many Chinese consumers,
resentment of Japan is strong and Japanese car companies are from time to time
targeted by nationalist boycotts.

• the internal–external dimension. The internal dimension of political risk relates to factors
originating within the countries, for example government change or pressure from local
campaigning groups. These can be relatively easy to monitor, requiring attention to elec-
tion dates and opinion polls for example. However, there are also external political risks,
the knock-on e�ects of events occurring outside particular countries’ national boundaries.
For example, a fall in oil prices driven by the internal politics of Saudi Arabia is liable to
have negative economic and political impacts on other big oil-producing countries such
as Russia and Venezuela. On the other hand, oil price falls can produce political benefits in
energy importing countries such as India or Japan. External political risk analysis involves
careful analysis of economic, political and other linkages between countries around
the world.

Figure 2.3 The political environment

Direct state involvement

Political exposure

High

Low

Low
High

e.g. Defence industry e.g. Canal industry

e.g. Food industry e.g. Hotel industry

Chapter 2 Macro – environment analysis

2.2.2 Economics

The macro-environment is also influenced by macro-economic factors such as currency exchange
rates, interest rates and fluctuating economic growth rates around the world. It is important for
an organisation to understand how its markets are a�ected by the prosperity of the economy
as a whole. Managers should have a view on how changing exchange rates may a�ect viability
in export markets and vulnerability to imports. They should have an eye to changing interest
rates over time, especially if they have to borrow to fund strategic investments. They should
understand how economic growth rates rise or fall over time. There are many public sources
of economic forecasts that can help in predicting the movement of key economic indicators,
though these are often prone to error because of unexpected economic shocks.5

A key concept for analysing macro-economic trends is the economic cycle. Despite the poss-
ibility of unexpected shocks, economic growth rates have an underlying tendency to rise and
fall in cycles: several years of good growth are likely to be followed by a couple of years or so
of lower or even negative growth. These cycles link to other important economic variables. For
example, rises in interest rates are likely to decrease economic growth rates as consumers cut
back on credit cards and businesses borrow less for investment. Awareness of cycles reinforces
an important pattern in the macro-environment: good economic times do not last forever, while
bad economic times lead eventually to recovery. The key is to identify cyclical turning points.

Managers making long-term strategic decisions should assess where they stand in the
overall economic cycle. For example, after several years of rapid growth a company might
be tempted to launch major investments in new capacity: in Figure 2.4, this would be year
202x. However, any new facilities might not be needed in the subsequent slowdown, leaving
the company with expensive over-capacity which still needs to be paid for at a time of low
growth. On the other hand, two or three years of slowing growth might make a company
over-cautious about new investment. But after the cyclical turning point of year 202y in Figure 2.4,
the company might face under-capacity and be unable to match recovering demand. Rivals who
had invested in extra capacity (or new products) would be able to seize the advantage, leaving
the over-cautious company struggling to catch up. In assessing the economic environment,
therefore, it is crucial not to assume that current economic growth rates will continue. Before
making any strategic investment, you should ask where you are in the current economic cycle.

Some industries are particularly vulnerable to economic cycles, for example:

• Discretionary spend industries: where purchasers can easily put o� their spending for a
year or so, there tend to be strong cyclical e�ects. Thus demand for furniture, restaurants
and cars tends be highly cyclical because people can easily delay or curtail spending on

Figure 2.4 Economic cycles and strategic investments

Economic
growth rate

(%)

Over-capacity

Under-capacity

Years

202x 202y

2.2 PESTEL analysis
41

these for a while. After a period of reduced spending, there is liable to be a strong upturn
as pent-up demand is finally released into the market.

• High fixed cost industries: industries such as airlines, hotels and steel su�er from economic
downturns because high fixed costs in plant, equipment or labour tend to encourage
competitive price-cutting to ensure maximum capacity utilisation when demand is low.
For example, an airline might try to fill its seats in the face of falling demand simply by
o�ering cheap tickets. If its competitors do the same, the resulting price-war will result in
low profits for all the airlines.

2.2.3 Social

The social elements of the macro-environment have at least two impacts upon organisa-
tions. First, they can influence the specific nature of demand and supply, within the overall
economic growth rate. Second, they can shape the innovativeness, power and e�ectiveness
of organisations.

In the first place, there are a number of key aspects of the social environment that can
shape demand and supply. These can be analysed under the following four headings:

• Demographics. For example, the ageing populations in many Western societies create
opportunities and threats for both private and public sectors. There is increasing demand
for services for the elderly, but diminishing supplies of young labour to look after them.

• Distribution. Changes in wealth distribution influence the relative sizes of markets. Thus
the concentration of wealth in the hands of elites over the last 20 years has constrained
some categories of ‘middle-class’ consumption, while enlarging markets for certain luxury
goods.

• Geography. Industries and markets can be concentrated in particular locations. In the
United Kingdom, economic growth has in recent decades been much faster in the London
area than in the rest of the country. Similarly, industries often form ‘clusters’ in particular
locations: thus there are high concentrations of scientists and engineers in California’s
Silicon Valley (see also Chapter 10).6

• Culture. Changing cultural attitudes can also raise strategic challenges. For example, new
ethical attitudes are challenging profit-maximising investment strategies in the financial
services industry. Changing cultural attitudes can be linked to changing demographics.
Thus the rise of ‘digital natives’ (generations born after the 1980s, and thus from child-
hood immersed in digital technologies) is changing expectations about media, consump-
tion and education.

A second important social aspect of the macro-environment is organisational networks,
with significant implications for innovativeness, power and e�ectiveness. These networks are
frequently described as ‘organisational fields’.7 An organisational field is a community of
organisations that interact more frequently with one another than with those outside
the field. These organisational fields are partly economic as they include competing organ-
isations within the industry or sector, as well as customers and suppliers in the marketplace
(see Chapter 3). However, the concept of organisational fields also emphasises social inter-
actions with other organisations. Such social interactions may be with other businesses, for
instance via managers who are members of the same industry associations or sporting clubs,
or via non-executive directors who sit on several company boards. There may also be noneco-
nomic interactions with political organisations such as governments and campaign groups,
legal entities such as regulators, and other social groups, such as professions and trade
unions. Sometimes key actors in the field might even be particularly influential individuals,

Chapter 2 Macro – environment analysis

for example politicians. The organisational field is therefore much broader than just indus-
tries or markets. Because of the importance of social networks, managers need to analyse the
influence of a wide range of organisational field members, not just competitors, customers
and suppliers.

Networks and organisational fields can be analysed by means of sociograms, maps of
potentially important social (or economic) connections.8 For a new hi-technology enterprise,
important network connections might be links to leading universities, other innovative firms
or respected venture capitalists, for example. Sociograms can help assess the e�ectiveness of
networks and identify who is likely to be most powerful and innovative within them. Three
concepts help to understand e�ectiveness, innovativeness and power:

• Network density typically increases network e�ectiveness. Density refers to the number
of interconnections between members in the network map. E�ectiveness is increased by
density because the more interconnections there are, the better the sharing of new ideas
between network members. Everybody is talking to each other, and nobody with poten-
tially useful information is isolated. It is easier to mobilise the whole network in support
of new initiatives. In Figure 2.5, the network on the right (organisation C’s network) is
denser than the network on the left (A’s network).

• Broker positions, which connect otherwise separate groups of organisations, are
often associated with innovativeness. Brokers’ innovation advantage stems from their
ability to link valuable information from one group of organisations with valuable infor-
mation from the other group. Because they provide the connection between the two
groups, they are able to exploit this combination of information before anybody else.
In Figure 2.5, organisation B is a broker, connecting the two networks on the right- and
left-hand sides.

• Central hub positions typically provide power within networks. A central hub connects
many organisations. Hubs have power because network members rely on them for inter-
connection with other members. Hubs are also potentially innovative because they can
collect ideas from the whole network, and they hear about what is going on in one part
of the network before most other parts. In Figure 2.5, both A and C are hubs. However,
organisation A is more central in its immediate network than organisation C (all network
members must pass through A), and to this extent is more powerful relative to its network
members.

Figure 2.5 Sociogram of networks within an organisational field

Organisational field

C’s immediate network is denser than A’s; B is a broker; A is a more central
hub than C.

E D

2.2 PESTEL analysis

Sociograms can have clear implications for strategic action. For example, organisation A
could gain an advantage over organisation B by establishing direct interaction with organ-
isation C, undermining B’s exclusive broker position. On the other hand, organisation E could
increase its innovativeness and improve its power relative to organisation A by making a
direct connection to organisation D in the right-hand network.

Sociograms can be drawn for key people as well as organisations: individuals are often the
link between organisations anyway. Personal networks are important in many societies, for
example the network of former consultants at the elite McKinsey & Co. consulting firm, or
networks of company directors, or the interpersonal guanxi networks that prevail in China.
Illustration 2.2 describes the network that has emerged from the armed service backgrounds
of many Israeli entrepreneurs. The crucial issue in analysing social networks is how hub posi-
tions, brokering roles and network density are likely to a�ect a particular organisation’s
power, innovativeness and overall e�ectiveness.

Some organisational fields can be characterised as ‘small worlds’.9 Small worlds exist
where the large majority of a network’s members is closely connected, either just one step
away (as C is from A in Figure 2.5) or perhaps a couple of steps away (as E is from B). Small
worlds typically give members a good deal of protection and e�ectiveness, due to their
density. However, outsider organisations (for example foreign firms) will have di©culty
penetrating small world networks on their own, and will typically require the help of insiders.
Small worlds are particularly likely in societies where economic activity is geographically
concentrated or where social elites share common backgrounds (for example, the French
elite is often characterised as living in the same exclusive parts of Paris and as graduating
from a small group of higher education institutions, especially the Grandes Ecoles). Thus an
important aspect of social analysis is the extent of small worlds in the macro-environment.

2.2.4 Technology

Further important elements within the macro-environment are technologies such as the
Internet, nanotechnology or new composite materials, whose impacts can spread far
beyond single industries. As in the case of internet streaming, new technologies can open
up opportunities for some organisations (e.g. Spotify and YouTube), while challenging others
(traditional music and broadcasting companies). Chapter 10 will discuss specific strategies
surrounding innovative new technologies in more detail.

Meanwhile, it is important to carry out the macro-environmental analysis of technology
in order to identify areas of potential innovative activity. There are five primary indicators
of innovative activity:

• Research and development budgets: innovative firms, sectors or countries can be identi-
fied by the extent of spending on research, typically reported in company annual reports
and government statistics.

• Patenting activity: firms active in patenting new technologies can be identified on national
patent registers, the most important being the United States Patents and Trademarks
O©ce.

• Citation analysis: the potential impact of patents and scientific papers on technology can
be measured by the extent to which they are widely cited by other organisations, with
data available from Google Scholar for instance.

• New product announcements: organisations typically publicise their new product plans
through press releases and similar media.

• Media coverage: specialist technology and industry media will cover stories of the latest
or impending technologies, as will various social media.

Chapter 2 Macro – environment analysis

Israel, a nation of just 8 million people, exports more than
$6bn worth of cybersecurity products a year, accounting
for about 10 per cent of the global cybersecurity market.
At the heart of this success is Unit 8200, the largest unit of
the Israeli Defence Forces and the equivalent of America’s
National Security Agency.

Unit 8200’s alumni have produced more hi-tech start-ups
per capita than the University of Stanford. Some of the
successful companies originating with Unit 8200 include
Check Point, with 2,900 employees and a pioneer in Virtual
Private Networks; NICE Systems, with 2,700 employees and
a pioneer in telephone recording technology; and Palo
Alto Networks, with 3,000 employees and a pioneer in
computer firewall technology. Unit 8200 recruits are drawn
from young Israelis doing their national military service.
Recruitment into Unit 8200 is highly selective (in the Israeli
Defence Force, only pilot training is harder to enter) and
favours skilled computer science students and linguists.
Recruits come disproportionately from the richer and more
highly educated Tel Aviv area of Israel, and from elite schools
such as Leyada, the semi-private Hebrew University High
School in Jerusalem (where the founder of Check Point was
a student). Alumni of Unit 8200 go not only into hi-tech
business; many pursue successful careers in politics, the
judiciary, the media and academia. For example, the former
CEO of NICE Systems became director general of the Israeli
Ministry of Finance.

Unit 8200’s young recruits are intensively trained and
work long hours in small groups applying the latest tech-
nology to security matters that might involve life and death.
To maximise security, Unit 8200’s technology systems – from
analytics to data mining, intercept and intelligence manage-
ment – are designed and built in-house. This experience
prepares Unit 8200 alumni well for futures in hi-tech busi-
ness. Avi Hasson, Chief Scientist at the Israeli Economy
Ministry and himself an alumnus of Unit 8200, describes
the working environment: ‘When it comes to managing a

startup, Unit 8200 is a fantastic school. . . . The unit encour-
ages independent thought. It’s something that was adopted
later by many companies, a little like the culture in Google,
in which good ideas can come from anywhere.’

Because recruitment in hi-tech tends to favour a ‘buddy-system’,
alumni are often sought out for employment by other alumni.
Experience of this intense, elitist organisation in the formative
years of youth creates strong social bonds. The 8200 alumni asso-
ciation has more than 15,000 members, and hosts networking
events and community outreach programmes, including start-up
accelerators.

By 2020, Unit 8200 is due to move adjacent to the
Advanced Technology Park at Be’er Sheva in southern
Israel’s Negev Desert. In 2013, Israel’s President Benjamin
Netanyahu had declared that Be’er Sheva would become the
‘cybercenter of the Western hemisphere’. Be’er Sheva already
had the advantage of the local Ben-Gurion University and its
Cyber Security Research Centre. The National Cyber Bureau,
a newly created agency advising the government on cyber
policies, moved to Be’er Sheva in 2015. Companies already
with operations in the Advanced Technology Park included
many leading foreign firms such as Deutsche Telecom, IBM,
Lockheed Martin, Oracle, PayPal and EMC. Venture capital
firm JVP, with more than $1bn funding available, was also
running a local ‘cyberincubator’ for start-ups. One of its first
ventures was sold to PayPal.

Sources: Haaretz, 18 April and 24 April 2015; Financial Times, 10 July
2015; TechCrunch, 18 March 2015

Questions
1 Identify at least one important hub and one important

broker in the Unit 8200 network.

2 If you were a foreign cybersecurity company, what
would you do to access Israel’s expertise?

Illustration 2.2 Intelligence Unit 8200 and the Small World
of Israeli Hi-Tech

2.2 PESTEL analysis

Although there is some variation between firms, sectors and countries in how far their inno-
vative activity is reflected by these kinds of indicators, generally they will help to identify areas
of rapid technological change and locate centres of technological leadership. For example,
the number of patent applications for the new material graphene (a material just one atom
thick, but both strong and highly flexible) increased from less than 100 a year in 2006 to 4,000
a year a decade later. China alone accounts for 58 per cent of the world’s graphene patent
applications and, while 76 applicants that have at least 60 applications each in the sector, 49
of them are Chinese organisations.11 For any organisation seeking a strong position in the
fast-developing graphene industry, links with China will plainly be important.

Many organisations also publish technology roadmaps for their sectors going forward.12
Technology roadmaps project into the future various product or service demands, identify
technology alternatives to meet these demands, select the most promising alternatives and
then o�er a timeline for their development. Thus they provide good indicators of future tech-
nological developments. Figure 2.6 provides a simplified technology roadmap for the Internet
of Things, providing connectivity for devices from fridges to heart monitors: in the period to
2033, this roadmap forecasts rapid progress in the number of Central Processing Units (CPUs)
and sensors per device, but less progress in CPU frequency, a measure of processing speed.
This kind of roadmap has implications for product design strategies in industries far beyond
the electronics industry, for instance architecture, domestic appliances and healthcare.

2.2.5 Ecological

Within the PESTEL framework, ecological stands specifically for ‘green’ macro-environmental
issues, such as pollution, waste and climate change. Environmental regulations can impose
additional costs, for example pollution controls, but they can also be a source of opportunity,
for example the new businesses that emerged around mobile phone recycling.

Figure 2.6 Technology roadmap for the Internet of Things

0
2
4
6
8
10

2019 2021 2024 2027 2030 2033

CPUs per device

Max CPU frequency
(MHz x 0.01)

Sensors per device

Source: Drawn from data extracted from the International Roadmap for Devices and Systems, 2018 edition, Institute
for Electronics and Electrical Engineers.

Chapter 2 Macro – environment analysis

When considering ecological issues in the macro-environment, there are three sorts of
challenges that organisations may need to meet:13

• Direct pollution obligations are an obvious challenge, and nowadays typically involve not
just cleaning up ‘at the end of the pipe’ (for example, disposing of waste by-products
safely), but also minimising the production of pollutants in the first place. Having clean
processes for supply, production and distribution is generally better than managing the
consequences of polluting after the fact.

• Product stewardship refers to managing ecological issues through both the organisation’s
entire value chain and the whole life cycle of the firm’s products. Stewardship here might
involve responsibility for the ecological impact of external suppliers or final end-users.
It will also involve responsibility for what happens to products at ‘end of life’, in other
words how they are disposed of when consumers have no more use for them. Thus car
manufacturers are increasingly responsible for the recycling and safe disposal of old cars.

• Sustainable development is a criterion of increasing importance and refers not simply
to reducing environmental damage, but to whether the product or service can be
produced indefinitely into the future. This sustainability criterion sets constraints on the
over-exploitation of particular sources of raw materials, for instance in developing countries,
and often raises issues regarding the economic and social well-being of local communities.

In assessing the macro-environment from an ecological point of view, all three criteria of
pollution, stewardship and sustainability need typically to be considered.

The extent to which these ecological criteria are important to organisations relies on three
contextual sources of pressure, the first two arising directly from the macro-environment:

• Ecological. Clearly ecological issues are more likely to be pressing the more impactful
they are: a chemical company may have more to worry about than a school. However,
there are three less obvious characteristics to assess. First, ecological issues become more
salient the more certain they are. For example, as doubts have reduced about the facts of
global warming, so the pressures on organisations to act on it have increased. Pressures
are also likely to be greater the more visible ecological issues are: aircraft pollution is more
salient as an issue than shipping pollution because aircraft are more obvious to ordinary
citizens than pollution done far out to sea. Similarly, the emotivity of the issue is liable to
be a factor: threats to polar bears generally get more attention than threats to hyenas.
Ecological analysis therefore requires assessing certainty, visibility and emotivity.

• Organisational field. Ecological issues do not become salient just because of their inherent
characteristics. The extent of pressure is influenced by how ecological issues interact with
the nature of the organisational field. An organisational field with highly active regulators
or campaign groups will clearly give saliency to ecological issues. However, high levels
of field interconnectedness will also increase the importance of ecological issues: within
densely interconnected networks, it is harder to hide damaging behaviour and peer pres-
sure to conform to ecological standards is greater.

• Internal organisation. The personal values of an organisation’s leadership will clearly influ-
ence the desire to respond to ecological issues. Actual responsiveness will rely on the
e�ectiveness of managerial systems that promote and monitor behaviours consistent with
ecological obligations.

Although ecological issues can exercise unwelcome pressure, there are potentially strong
organisational motives to respond. As in Figure 2.7, the three kinds of contextual pressure can
satisfy a variety of motives. Fundamentally, there is of course a sense of ecological responsi-
bility: thus the personal values of the organisation’s leaders might stimulate ecological initia-
tives, or routine production systems might reduce pollution. However, another outcome can

2.2 PESTEL analysis

be legitimacy, as reflected in regulatory compliance and a good reputation with consumers.
Finally, responding to ecological issues can even enhance competitiveness. For example, mini-
mising waste in production processes for pollution reasons can reduce costs. Green products
are attractive in the marketplace and often command a price premium.

2.2.6 Legal

The final element in a PESTEL analysis of the macro-environment refers to legal aspects.
These can cover a wide range of topics: for example, labour, environmental and consumer
regulation; taxation and reporting requirements; and rules on ownership, competition
and corporate governance. In recent years, the relaxation of legal constraints through
deregulation has created many new business opportunities, for example for low cost
airlines and ‘free schools’ in various countries. However, regulations can also handicap
organisations: Illustration 2.3 shows how the e-cigarette company Juul ran into important
legal issues as it entered new markets and regulators struggled to keep up with the new
technology.

Legal issues form an important part of the institutional environment of organisations,
by which is meant the formal and informal ‘rules of the game’.14 This concept of insti-
tutional environment suggests that it can be useful in a PESTEL analysis to consider not
only formal laws and regulations but also more informal norms: the ‘L’ can be stretched
to cover all types of rule, formal and informal. Informal rules are patterns of expected
(ŉormal’) behaviour that are hard to ignore. Thus, regardless of the law, there are fairly
explicit norms regarding proper respect for the ecological environment. Organisations
ignoring these norms would risk outrage among consumers or employees, whatever the
legal situation.

Formal and informal rules vary sufficiently between countries to define very different
institutional environments, sometimes known as ‘varieties of capitalism’.15 These vari-
eties of capitalism have implications for the ways in which business and management
are done in those environments and the prospects for success, both for insiders and for
outsiders. Although every country differs in detail, three broad varieties of capitalism

Figure 2.7 Contexts and motives for ecological issues

Ecological:
•
•
•

Contexts

•
•
•
•

Organisational motives

Substantially adapted from: Bansal, P. and Roth, K. (2000), ‘Why companies go green: a model of ecological
responsiveness’, Academy of Management Journal, 43(4), 717–36 (Figure 2, p. 729.)

Chapter 2 Macro – environment analysis

Adam Bowen and James Monsees launched their distin ctive
Juul e-cigarette in 2015. The product’s sleek style led to the
Juul becoming known as the ‘iPhone of e-cigarettes’. Juul
became the most popular e-cigarette in the United States
by the end of 2017, and by the end of 2018 commanded a
market share of over 70 per cent. In November 2018, the
Altria Group (a traditional tobacco company) bought one
third of the company for $12.8bn, making the two founders
billionaires.

Bowen and Monsees dreamt up their colourful e-cigarettes
while pursuing their master’s degrees at Stanford Univer-
sity. They were smokers themselves, wanting to free them-
selves of a dirty and dangerous habit. The Juul design uses
a patented form of nicotine salts, at 5 per cent strength,
to deliver the quick nicotine peak associated with trad-
itional cigarettes. The website for their company declares
its mission as to ‘improve the lives of the world’s one billion
adult smokers by eliminating cigarettes’. Juul claims that it
has converted one million adult smokers to Juul products,
allegedly a safer product.

Traditional tobacco companies typically rely on television
advertising, but Juul initially focused on powerful social
marketing campaigns featuring attractive young models
and singers on Instagram, Twitter and YouTube. Campaigns
went viral, with celebrities such as Bella Hadid posting
about Juul. The result was a surge of use among teenagers,
attracted also by Juul’s sweet flavours and by the fact that its
small size and low odours help concealment. In 2018, it was
estimated that 3.6 million American schoolchildren were
using e-cigarettes, presumptively mostly Juuls.

However, Juul faced increasing criticism from the media,
health professionals and regulators over its marketing. Nico-
tine addiction can cause substantial damage to the devel-
oping brain, including lasting impairment to memory and
attention span, and increased psychiatric conditions such as
depression and anxiety. Four lawsuits were filed in 2018 in
the United Sates against Juul by parents, underage users and
others, attacking its marketing strategy and safety claims.

Monsees declared: ‘Any underage consumers using this
product are absolutely a negative for our business. We
don’t want them. We will never market to them. We never
have.’ The company launched a new marketing and social

media code underlining that its products were not appro-
priate for young people, switched to using only models
aged over 35, restricted the availability of sweet flavours,
and made increasing use of traditional television rather than
social media channels. At the same time, it began exploring
markets overseas.

Juul’s first overseas market was Israel, which it entered
early in 2018. At the time, Israel had no regulations on
e-cigarettes. However, the Israeli government responded
within two months, banning Juul on the grounds that its
5 per cent nicotine concentration was two and a half times
the level required by the European Union, a norm that Israel
freely adopted. Juul next launched in the United Kingdom,
still in the European Union, using a formulation with less
than 2 per cent nicotine. In late 2018, Juul launched in
Canada, where a relaxed legal regime allowed it to o�er
both 3 and 5 per cent formulations plus a range of flavours
larger than the recently restricted ones in the US.

At the same time, Juul was revealed to be considering
expansion into Asia. Indonesia was one potential target
market, given its fast-growing population of nearly 270
million. Indonesia is also one of a handful of countries
which has not signed the World Health Organization’s
global treaty on tobacco control: two thirds of Indonesian
men smoke tobacco daily. Other markets Juul was reportedly
considering were Malaysia, Singapore, India, South Korea
and the Philippines.

Main sources: Fast Company, December/Januar y 2018/19; Reuters
Business News, 18 November 2018; Forbes, 16 November 2018; www
.juul.com.

Questions
1 Assess the relative importance of formal laws and

informal norms for the development of Juul’s strategy
in the United States.

2 How do you think the di�erent institutional environ-
ments internationally have influenced Juul’s overseas
strategy so far and what kinds of countries do you think
it should prioritise?

Illustration 2.3 Juul duels with the rules
The fashionable e-cigarette company addresses regulatory environments
internationally.

2.2 PESTEL analysis
49

have been identified, whose formal and informal rules lead to different ways of
doing business:

• Liberal market economies are institutional environments where both formal and informal
rules favour competition between companies, aggressive acquisitions of one company
by another and free bargaining between management and labour. Companies in these
liberal market economies tend to raise funds from the financial markets and company
ownership is either entrepreneurial or, for older companies, widely dispersed among
many shareholders. These economies tend to support radical innovation and are recep-
tive to foreign firms. Although neither is perfectly representative, the United States and
the United Kingdom correspond broadly to this type of institutional environment.

• Coordinated market economies encourage more coordination between companies, often
supported by industry associations or similar frameworks. There are legal and normative
constraints on hostile acquisitions on the one hand, and various supports for consensual
and collective arrangements between management and labour on the other. Com panies
in these coordinated market economies tend to rely on banks for funding, while family
ownership is often common. These economies support steady innovation over the
long-run and, because of coordination networks, are typically less easy for foreign firms to
penetrate. Again, neither is perfectly representative, but Germany and Japan correspond
broadly to this type of institutional environment.

• Developmental market economies tend to have strong roles for the state, which will either
own or heavily influence companies that are important for national economic devel-
opment. Formally or informally, the state will often encourage private-sector firms to
coordinate between themselves and with national economic policy-makers. Labour rela-
tions may be highly regulated. Banks, often state-owned, will be a key source of funding.
Long-term, infrastructural and capital-intensive projects may be favoured, but foreign
firms will often be at a disadvantage. Although each is very di�erent in its own way, Brazil,
China and India all have aspects of this developmental market economy environment.

A macro-environmental analysis of any particular country should therefore include an assess-
ment of the local variety of capitalism and the extent to which it favours particular kinds of
firm and strategy.

2.2.7 Key drivers for change

The previous sections have introduced a variety of concepts and frameworks for analysing
each of the PESTEL factors, particularly at a macro-level. As can be imagined, analysing these
factors, together with their interrelationships, can produce long and complex lists of issues.
Rather than getting overwhelmed by a multitude of details, it is necessary to step back to
identify the key drivers for change in a particular context.16 Key drivers for change are the
environmental factors likely to have a high impact on industries and sectors, and the
success or failure of strategies within them.

Key drivers thus translate macro-environmental factors to the level of the specific industry
or sector. Thus social and legislative changes discouraging car use might have di�erent and
greater e�ects on supermarkets than, for example, retail banks. Identifying key drivers for
change in an industry or sector 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 strategic decisions that allow for
e�ective responses: to return to the example above, the supermarket chain might address
reduced car use by cutting the number of out-of-town stores and investing in smaller urban
and suburban sites. It is important that an organisation’s strategists consider each of the
key drivers for change, looking to minimise threats and, where possible, seize opportunities.

Chapter 2 Macro – environment analysis

2.3 Forecasting

In a sense, all strategic decisions involve forecasts about future conditions and outcomes. Thus
a manager may decide to invest in new capacity because of a forecast of growing demand
(condition), with the expectation that the investment will help capture increased sales
(outcome). PESTEL factors will feed into these forecasts, for example in tracking economic
cycles or mapping future technologies. However, accurate forecasting is notori ously di©-
cult. After all, in strategy, organisations are frequently trying to surprise their competitors.
Consequently, forecasting takes three fundamental approaches to the future based on
varying degrees of certainty: single-point, range and multiple-futures forecasting. This
section explains these three approaches and also introduces some key concepts that help
explore the direction of future change.

2.3.1 Forecast approaches

The three approaches to forecasting are explored in the following and illustrated in
Figure 2.8:17

• Single-point forecasting is where organisations have such confidence about the future
that they will provide just one forecast number (as in Figure 2.8 i). For instance, an
organisation might predict that the population in a market will grow by 5 per cent in the
next two years. This kind of single-point forecasting implies a great degree of certainty.
Demographic trends (for instance the increase in the elderly within a particular popula-
tion) lend themselves to these kinds of forecasting, at least in the short term. They are
also often attractive to organisations because they are easy to translate into budgets:
a single sales forecast figure is useful for motivating managers and for holding them
accountable.

• Range forecasting is where organisations have less certainty, suggesting a range of
possible outcomes. These di�erent outcomes may be expressed with di�erent degrees
of probability, with a central projection identified as the most probable (the darkest
shaded area in Figure 2.8 ii), and then a range of more remote outcomes given decreasing
degrees of likelihood (the more lightly shaded areas). These forecasts are often called
‘fan charts’, because the range of outcomes ‘fans out’ more widely over time, reflecting
growing uncertainty over the longer term. These ‘fan charts’ are often used in economic
forecasting, for example economic growth rates or inflation.

Figure 2.8 Forecasting under conditions of uncertainty

Probable

Possible

Unlikely

Possible
Unlikely

Time Time Time

Outcomes OutcomesOutcomes

(i) Single-point forecast (ii) Range forecast (iii) Alternative futures

A
B

Uncertainty

Low High

2.3 Forecasting

• Alternative futures forecasting typically involves even less certainty, focusing on a set of
possible yet distinct futures. Instead of a continuously graduated range of likelihoods,
alternative futures are discontinuous: they happen or they do not, with radically di�erent
outcomes (see Figure 2.8 iii). These alternatives might result from fundamental policy deci-
sions. For example, for a country facing possible exit from a currency union (for instance
the Euro), outcome A might reflect the consequences for growth or unemployment of
staying in the union; outcome B might reflect the consequences of exiting the union;
and outcome C would be a further alternative outcome, consequent on a decision that
followed the initial decision pointing towards outcome B (for instance, to adopt trade
barriers as well as to exit the currency union). For a business, outcome A might represent
expected sales if a competitor business did not invest in a new machine or similar capacity;
outcome B is a consequence of the competitor making that investment; and outcome
C is a consequence of the competitor both making that investment and then slashing
prices to make full use of the new capacity. It is possible to put probabilities to each of
these outcomes too: for example, outcome A might have a 40 per cent probability, while
outcomes B and C would be 30 per cent each. These kinds of alternative futures are often
fed into scenario analyses (see Section 2.4), though not as simple forecasts.

2.3.2 Directions of change

It is helpful in forecasting to keep an eye on the fundamental directions of likely change.
Managers need to check their forecasts are consistent with major trends and to be alert to
possible turning points. Three concepts help focus both on major trends and on possible
turning points that might invalidate existing forecasts:

• Megatrends are large-scale political, economic, social, technological, ecological or legal
movements that are typically slow to form, but which influence many areas of activity,
possibly over decades.18 A megatrend typically sets the direction for other factors. Thus
the social megatrend towards ageing populations in the West influences other trends in
social care, retail spending and housing. The megatrend towards global warming a�ects
agriculture, tourism and, with more extreme climatic events, insurance. It is important to
identify major megatrends because they influence so many other things. Forecasts should
be checked for consistency with such trends.

• Inflexion points are moments when trends shift in direction, for instance turning sharply
upwards or downwards.19 For example, after decades of stagnation and worse, in the
early twenty-first century sub-Saharan Africa may have reached an inflexion point in
its economic growth, with the promise of substantial gains in the coming decade or so.
Internet retailing may also have put urban shopping on a path to significant decline in
advanced economies. Inflexion points are likely to invalidate forecasts that extrapolate
existing trends. Clearly it is valuable to grasp the inflexion point at the moment when
trends just start to turn, in order either to take advantage of new opportunities early or
to act against escalating decline as soon as possible.

• Weak signals are advanced signs of future trends and are particularly helpful in identi-
fying inflexion points.20 Typically these weak signals are unstructured and fragmented
bits of information, often perceived by observers as ‘weird’. A weak signal for the world-
wide financial 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 first entry of the Hong Kong University of Science and Technology into the

Chapter 2 Macro – environment analysis

Financial Times’ ranking of the top 50 international business schools in the early 2000s. It is
important to be alert to weak signals, but it is also easy to be overwhelmed by ŉoise’, the
constant stream of isolated and random bits of information without strategic importance.
Some signs of truly significant weak signals (as opposed to mere noise) include: the repe-
tition of the signal and the emergence of some kind of pattern; vehement disagreement
among experts about the signal’s significance; and an unexpected failure in something
that had previously worked very reliably.

2.4 Scenario analysis

Scenarios o�er plausible alternative views of how the macro-environment might develop
in the future, typically in the long term. Thus scenarios are not strategies in themselves,
but alternative possible environments which strategies have to deal with. Scenario analysis is
typically used in conditions of high uncertainty, for example where the environment could go
in several highly distinct directions.21 However, scenario analyses can be di�erentiated from
alternative futures forecasting (Section 2.3.1), as scenario planners usually avoid presenting
alternatives in terms of finely calculated probabilities. Scenarios tend to extend too far into
the future to allow probability calculations and besides, assigning probabilities directs atten-
tion to the most likely scenario rather than to the whole range. The point of scenarios is
more to learn than to predict. Scenarios are used to explore the way in which environmental
factors inter-relate and to help keep managers’ minds open to alternatives possibilities in
the future. A scenario with a very low likelihood may be valuable in deepening managers’
understanding even if it never occurs.

Illustration 2.4 shows an example of scenario planning for the world of work to 2030,
published by the international advisory firm PwC. The scenarios start from five megatrends
covering a range of factors from technology to natural resources. PwC then identifies two
drivers which are clearly di�erentiated on the dimensions of the scenario cube in terms of
having (i) high potential impact; (ii) high uncertainty; (iii) high independence from each other
(see Figure 2.9 and below). The first of these two drivers is political, i.e. collectivism versus indi-
vidualism, referring to the roles of government. The second of these key drivers addresses the
nature of business, i.e. integration versus fragmentation, pointing to the relative importance

Figure 2.9 The scenario cube: selection matrix for scenario key drivers

Low
Low
Low

Select key drivers in the high-impact, high-uncertainty, high-independence box

High
High
High

Independence

Impact

Uncertainty

2.4 Scenario analysis

Wanting to provide its clients with long-term advice about the
future evolution of work, PwC cooperated with researchers at
the James Martin Institute for Science and Civilisation at the Saïd
Business School, University of Oxford, to produce four scenarios
each named after a distinct colour. The researchers drew on
a specially commissioned survey of 10,000 people in China,
India, Germany, the UK and the US and built on the concept of
megatrends.

The five megatrends underpinning all the scenarios were:

1. Rapid advances in technological innovation, particularly au-
tomation, robotics and artificial intelligence.

2. Demographic shifts, especially aging populations and work-
forces.

3. Rapid urbanisation, from about 5bn people to 8bn by 2030.
4. Shifts in global economic power, with today’s rapidly devel-

oping nations such as China gaining particularly, while within
nations new technologies will threaten employment for the
traditional middle classes.

5. Resource scarcity, as demand for energy and water will in-
crease respectively by 50 per cent and 40 per cent by 2030.

On this basis, the PwC-Oxford team developed two main axes
upon which to di�erentiate their scenarios: collectivism versus
individualism and fragmentation versus integration. Collectivism
implies a strong role for governments in society, individualism
more self-reliance. Integration implies an advantage for big busi-
nesses able to integrate and coordinate many activities; fragmen-
tation implies an important role for small firms and organisations.

These two axes yielded four scenario stories, as summarised
in the figure above:

Briefly, the four scenarios for 2030 were as follows:

1. Yellow World, in which social enterprises and community
businesses flourish. Crowdfunded capital flows towards eth-
ical brands. Meaningful work is important. Artisans and craft
production thrive. Human values have priority.

2. Red World, in which consumers are dominant, and organisations
and individuals race to serve them. Regulation cannot keep up with
innovation. Competition tends towards ‘winner takes all’ results.
However, specialists and niche businesses do well.

3. Green World, in which social responsibility and trust are cru-
cial for large corporations and demographic and climate
changes are key drivers for business.

4. Blue World, in which big business dominates, and individual
wants have priority over social responsibilities.

Source: ‘Workforce of the future: The competing forces shaping 2030’,
PwC, 2018: www.pwc.com/us/en/hr-management/pwc-workforce-
of-the-future-the-competing-forces-shaping-2030

Questions
1 What other megatrends might have been considered

beyond the five considered here?

2 What are the di�erent implications of these scenarios
for an international consulting firm such as PwC? Which
scenario would it like best; which would it like least?

Illustration 2.4 Colouring the World
In 2018, PwC’s People and Organisation’s consulting practice published a major report
on four scenarios for the world of work in 2030.

Fragmentation

Integration

Collectivism Individualism

Yellow World
– humans come first

Red World
– innovation rules

Green World
– companies care

Blue World
– corporate is king

Adapted from: PWC US (2018), ‘The competing forces shaping 2030’, https://www.pwc.com/us/en/services/hr-management/workforce-of-the-
future.html

Chapter 2 Macro – environment analysis

of big and small firms. Both of these drivers may produce very di�erent futures, which can be
combined to create four internally consistent scenarios for the next decade or so. The various
scenarios draw in distinct ways on the megatrends: for example, Green World assumes a
di�erent response to resource scarcity than Blue World; Red World is less optimistic than
Green World about the capacity of government regulators to keep up with techno logical
change. PwC does not predict that one scenario 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 over this period of time.

While there are many ways to carry out scenario analyses, the process often follows five
basic steps (summarised in Figure 2.10):22

• Defining scenario scope is an important first step in the process. 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 education). Scenario time spans can be either a decade or so (as in Illustration
2.4) or perhaps just five years ahead. The appropriate time span is determined partly by
the expected life of investments. In the energy business, where oil fields 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
market. In the information technology, key drivers range from regulation to innovation.
The scenario cube (Figure 2.9) helps identify the most significant key drivers. As well as
the size of impact, the scenario cube underlines two additional criteria for key drivers:
uncertainty, in order to make di�erent scenarios worthwhile (there’s no point in devel-
oping alternative scenarios when only one outcome is likely); and mutual independence,
so that the drivers are capable of producing significantly divergent or opposing outcomes
(there’s no point in considering factors individually if they lead to the same outcome
anyway). In the oil industry, for example, political stability in the oil-producing regions
is one major uncertainty; another is the development of new exploration technologies,
enabling the quick and e©cient identification of new oil fields. 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 films, 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. These stories are often
encapsulated with striking titles: for example, oil company Shell launched two opposing
scenarios entitled simply ‘Oceans’ and ‘Mountains’, the first describing a more free-market
world with solar power important, the second a more government-led world, with gas
power important.23 Striking titles help to communicate scenarios and embed them in
strategic discussions (see also Illustration 2.4).

Figure 2.10 The scenario process

Define
scope

(industry,
region,
years)

Identify
key drivers

(PESTEL,
forecasts,
cube)

Develop
distinct
scenario
‘stories’
(name
scenarios)

Identify
impacts

(check and
adapt
strategies)

Monitor
progress

(early
warning
indicators)

Thinking di�erently the crowdsourced forecast

• Identifying impacts of alternative scenarios on organisations is the next key stage of
scenario building. For example, in Illustration 2.4, a Blue World would pose major
challenges for small and ethical businesses. It is important for an organisation to carry
out robustness checks in the face of each plausible scenario and to adapt strategies that
appear vulnerable and develop contingency plans in case they happen.

• Monitor progress. Once the various scenarios are drawn up, organisations should
monitor progress over time, to alert themselves to whether and how developments
actually fit scenario expectations. Here it is important to identify indicators that might
give early warning about the final direction of environmental change, and at the same
time set up systems to monitor these. E�ective monitoring of well-chosen indicators
should facilitate prompt and appropriate responses. In Illustration 2.4, the diminishing
likelihood of a Red World would be growing regulation of technology firms such as Uber
and airbnb.

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 o�.

We usually think of forecasts (Section 2.3) as the product
of small groups of experts. But there is a di�erent way.
Forecasts can be ‘crowdsourced’, using the collect ive
judgement of many di�erent kinds of people, not just
exper ts. There are two principal ways of using the
wisdom of crowds in forecasting: prediction markets and
internet media analysis.

Prediction markets are markets designed specifically
to combine the scattered information of many partici-
pants into values (for instance, market prices or betting
odds) that can be used to make predictions about specific
future events.24 An example is the Iowa Electronic Market
(IEM) for betting on the outcome of American Presiden-
tial elections. Market participants buy a contract that
pays a dollar if, for instance, a Democrat wins the elec-
tion. The more money participants are prepared to pay
for that contract, the more likely it appears that a Demo-
crat will indeed win that election. Google uses similar
prediction markets to forecast the success of possible
new products: if many people within the company are

prepared to bet on their success, then probably the new
products will indeed turn out well. The bets of many
employees may be more reliable than the self-interested
forecasts of the product’s own developers.

Internet media such as Twitter and Google can also
provide forecasts, drawing on the inputs of many thou-
sands of users. For example, Google Trends analyses the
frequency with which people search about flu symptoms
to predict the onset of flu epidemics. Others analyse the
mix of positive and negative sentiments expressed by
ordinary people in Twitter feeds to forecast the direc-
tion of financial markets, up or down.25 Data about what
people are interested in, or how they feel, provides valu-
able clues to what will happen next.

Question
Why might experts make bad forecasters in the case of
i. Presidential elections; ii. new product developments?

Thinking di�erently The crowdsourced forecast
Do we need experts to forecast anymore?

Chapter 2 Macro – environment analysis

Summary
• Environmental influences can be thought of as layers around an organisation, with the

outer layer making up the macro-environment, the middle layer making up the industry
or sector and the inner layer strategic groups and market segments.

• The macro-environment can be analysed in terms of the PESTEL factors – political, economic,
social, technological, ecological and legal.

• Macro-environmental trends can be forecast according to di�erent levels of uncertainty,
from single-point, through ranges to multiple-futures.

• A PESTEL analysis helps identify key drivers of change, which managers need to address in
their strategic choices. Alternative scenarios about the future can be constructed according
to how the key drivers develop.

Work assignments
✱ Denotes more advanced work assignments.
* Refers to a case study in the Text and Cases edition.

2.1 For an organisation of your choice, carry out a PESTEL analysis and identify key
opportunities and threats. Use Illustration 2.1 as a model. For simplicity, choose an
organisation that is focused on a limited number of industries.

2.2 For your own country, or any other country with which you are familiar, look up the
political risk as assessed by Aon, the Economist Intelligence Unit or similar (see refer-
ences in endnote 4). How far do you agree with this assessment?

2.3 For the last year or two, review the forecasts for national or global economic growth
made by key forecasting organisations such as the OECD or the World Bank (see
references in endnote 5). How accurate were they? What accounts for any di�erence
between forecast and outcomes?

2.4✱ For the same organisation as in assignment 2.1, and using Illustration 2.4 or Siemens
A as a model, construct four scenarios for the evolution of its macro-environment
(or main industry or sector). What implications are there for the organisation’s strategy?

Integrative assignment

2.5 Carry out a full analysis of an industry or sector of your choice (using for example
PESTEL and scenarios). Draw also on the five forces and strategic groups analyses of
Chapter 3. Consider explicitly how the industry or sector is a�ected by globalisation
(see Chapter 9, particularly Figure 9.2 on drivers) and innovation (see Chapter 10,
particularly Figure 10.2 on product and process innovation).

Recommended key readings

• An overview of techniques for thinking ahead is in P.
Tetlock and D. Gardner, Superforecasting: the Art and
Science of Prediction, Crown, 2015. For approaches
to how environments change, see K. van der Heĳden,
Scenarios: The Art of Strategic Conversation, 2nd
edition, Wiley, 2005 and R. Ramírez, J.W. Selsky and K.
Van der Heĳden (eds), Business Planning for Turbulent

Times: New methods for applying scenarios, Taylor &
Francis, 2010.

• A collection of academic articles on PEST, scenarios
and similar is the special issue of International Studies
of Management and Organization, vol. 36, no. 3
(2006), edited by Peter McKiernan.

References

1. PESTEL is an extension of PEST (Politics, Economics,
Social and Technology) analysis, taking more account
of ecological (‘green’) and legal issues. PEST is some-
times called STEP analysis. PESTEL is sometimes called
PESTLE and is also sometimes extended to STEEPLE in
order to include ethical issues. For an application of
PEST analysis to the world of business schools, see H.
Thomas, ‘An analysis of the environment and compet-
itive dynamics of management education’, Journal
of Management Development, vol. 26, no. 1 (2007),
pp. 9–21.

2. J. Doh, T. Lawton and T. Rajwani, ‘Advancing
nonmarket strategy research: institutional perspec-
tives in a changing world’, Academy of Management
Perspectives, August (2012), pp. 22–38; S. Dorobantu,
K. Aseem and Z. Bennet, ‘Nonmarket strategy research
through the lens of new institutional economics: An
integrative review and future directions’, Strategic
Management Journal, vol. 38, no. 1 (2017), pp. 114–40.

3. I. Alon and T. Herbert, ‘A stranger in a strange land:
micro political risk and the multinational firm’, Busi-
ness Horizons, vol. 52, no. 2 (2009), pp. 127–37; J.
Jakobsen, ‘Old problems remain, new ones crop up:
political risk in the 21st century’, Business Horizons,
vol. 53, no. 5 (2010), pp. 481–90; Sottilotta, C. ‘Polit-
ical risk assessment and the Arab Spring: What can we
learn?’ Thunderbird International Business Review, vol.
57, no. 5 (2015), pp. 379–90.

4. Organisations such as the insurance company Aon,
and economic media such as the Economic Intell-
igence Unit and Euromoney, publish regular rankings
of country political risk.

5. Macroeconomic forecasts can be found at: www
.oecd.org/eco/outlook/; www.imf.org/external/;
www.worldbank.org/

6. M.E. Porter, ‘Clusters and the new economics of compe-
tition’, Harvard Business Review, vol. 76, no. 6 (1997),
p. 7790.

7. A useful review of research on this topic is: R. Suddaby,
K.D. Elsbach, R. Greenwood, J.W. Meyer and T.B. Zilber,
‘Organizations and their institutional environments –
Bringing meaning, values, and culture back in: Intro-
duction to the special research forum’, Academy of
Management Journal, vol. 53, no. 6 (2010), pp. 1234–40.
For a more general review see G. Johnson and R.
Greenwood, ‘Institutional theory and strategy’, in Stra-
tegic Management: a Multiple-Perspective Approach,
edited by Mark Jenkins and V. Ambrosini, Palgrave, 3rd
edition, 2015.

8. R.S. Burt, M. Kildu� and S. Tasselli, ‘Social network
analysis: foundations and frontiers on advan-
tage’, Annual Review of Psychology, vol. 64 (2013),
pp. 527–47; R.S. Burt and G. Soda, ‘Social Origins of

Great Strategies’, Strategy Science, vol. 2, no. 4 (2017),
pp. 226–33.

9. M.A. Sytch, A. Tatarynowicz and R. Gulati, ‘Toward
a theory of extended contact: the incentives and
opportunities for bridging across network communi-
ties’, Organization Science, vol. 23, no. 6 (2012), pp.
1658–81.

10. J. Hagedoorn and M. Cloodt, ‘Measuring innovative
performance: is there an advantage in using multiple
indicators?’ Research Policy, vol. 32, no. 8 (2003),
pp. 1365–79.

11. Z. Zhao, ‘China No 1 in world patent applications for
graphene tech’, China Daily, 2 February 2018.

12. J.H. Lee, H.I. Kim and R. Phaal, ‘An analysis of factors
improving technology roadmap credibility: a
communications theory assessment of roadmap-
ping processes’, Technological Forecasting and Social
Change vol. 79, no. 2 (2012), pp. 263–80.

13. S.L. Hart and G. Dowell, ‘A natural-resource-based view
of the firm: Fifteen years after’, Journal of Manage-
ment, vol. 37, no. 5 (2010), pp. 1464–79.

14. J. Cantwell, J.H. Dunning and S.M. Lundan, ‘An evolu-
tionary approach to understanding international busi-
ness activity: the co-evolution of MNEs and the institu-
tional environment’, Journal of International Business
Studies, vol. 41, no. 4 (2010), pp. 567–86. See also M.
Peng, H. Nguyen, J. Wang, M. Hasenhüttl and J. Shay,
‘Bringing institutions into strategy teaching’, Academy
of Management Learning & Education, Vol. 17, No. 3
(2018), pp. 259–78.

15. M.A. Witt and G. Redding, ‘Asian business systems:
institutional comparison, clusters and implications
for varieties of capitalism and business systems
theory’, Socio-Economic Review, vol. 11, no. 2 (2013),
pp. 265–300, and M.R. Schneider and M. Paunescu,
‘Changing varieties of capitalism and revealed
comparative advantages from 1990 to 2005: a test of
the Hall and Soskice claims’, Socio-Economic Review,
vol. 10, no. 4 (2012), pp. 731–53.

16. R. Vecchiato, and C. Roveda ‘Strategic foresight in
corporate organizations: handling the effect and
response uncertainty of technology and social drivers
of change’, Technological Forecasting and Social
Change, vol. 77, no. 9 (2010), pp. 1527–39.

17. U. Haran and D.A. Moore, ‘A better way to forecast’,
California Management Review, vol. 57, no. (2014),
pp. 5–15; H. Courtney, J. Kirkland and P. Viguerie,
‘Strategy under uncertainty’, Harvard Business Review,
vol. 75, no. 6 (1997), pp. 67–79.

18. R.A. Slaughter, ‘Looking for the real megatrends’,
Futures, October (1993), pp. 823–49.

19. A. Grove, Only the Paranoid Survive, Profile Books,
1998.

Chapter 2 Macro – environment analysis

20. S. Mendonca, G. Caroso and J. Caraca, ‘The strategic
strength of weak signals’, Futures, 44 (2012), pp. 218–28;
and P. Schoemaker and G. Day, ‘How to make sense of
weak signals’, Sloan Management Review, vol. 50, no. 3
(2009), pp. 81–9.

21. For a discussion of scenario planning in practice, see
R. Ramirez, S. Churchhouse, A. Palermo and J. Ho�-
mann, ’Using scenario planning to reshape strategy’,
MIT Sloan Management Review, vol. 58, no. 4 (2017),
pp. 31–37. For how scenario planning fits with other
forms of environmental analysis such as PESTEL, see
G. Burt, G. Wright, R. Bradfield and K. van der Heĳden,
’The role of scenario planning in exploring the
environment in view of the limitations of PEST and its
derivatives’, International Studies of Management and
Organization, vol. 36, no. 3 (2006), pp. 50–76.

22. Based on P. Schoemaker, ‘Scenario planning: a tool for
strategic thinking’, Sloan Management Review, vol. 36
(1995), pp. 25–34.

23. www.shell.com/global/future-energy/scenarios/
new-lens-scenarios.html

24. G. Tziralis and I. Tatsiopoulos, ‘Prediction markets: An
extended literature review’,The Journal of Prediction
Markets, vol.1, no. 1 (2012), pp. 75–91; K. Matzler, C. Grabher,
J. Huber and J. Füller, ‘Predicting new product success with
prediction markets in online communities’, R&D Manage-
ment, vol. 43, no. 5 (2013), pp. 420–32.

25. P. Wlodarczak, ‘An Approach for big data technologies
in social media mining’, Journal of Art Media and Tech-
nology, vol. 1, no. 1 (2015), pp. 61–66.

Alibaba: the Yangtze River Crocodile

Case example
Alibaba: the Yangtze River Crocodile
Richard Whittington

In late 2018, Jack Ma, founder of China’s largest
e-commerce company Alibaba, announced shock news: in
the coming year, he would step aside as company Chairman
in favour of the Chief Executive, Daniel Zhang. Jack Ma had
been Alibaba’s charismatic leader for two decades. But Ma
made it clear that he was not disappearing altogether: he
remained a major shareholder and would be a permanent
member of the 36 strong ‘partnership’ that nominated
the majority of the company’s board of directors. A senior
banking analyst observed of Ma: ‘He has been the spiritual
leader of the company since he founded it, and everyone
looks up to him. People call him Teacher Ma. That means
people are not looking at him as manager or chief execu-
tive or chairman – they are looking to him for guidance.’

The new Chairman and Chief Executive Daniel Zhang
was more of a professional manager than the entrepre-
neurial Ma. Educated in China, he had begun his career
in the accounting firms Arthur Andersen and PwC before
joining Alibaba in 2007. One of Zhang’s great successes
at Alibaba had been the idea of making Singles’ Day in
November a national festival of shopping, all served
by Alibaba’s online commerce businesses of course.
Recently Zhang has rolled out Singles’ Day internationally,
backed by his experience in international firms. During a
company-wide strategy session soon after becoming Chief
Executive in 2015, he said: ‘We must absolutely globalize.
We will organize a global team and adopt global thinking
to manage the business and achieve the goal of global buy
and global sell.’

Jack Ma and colleagues had launched Alibaba in 1999
as China’s first business-to-business portal connecting
domestic manufacturers with overseas buyers. Since
then, the Group has grown in many directions. 1688.com
was founded for business-to-business trade within China.
Alibaba’s Taobao Marketplace serves small businesses and
individuals. Tmall.com provides electronic shop fronts to
help overseas companies such as Nike, Burberry and
Decathlon to reach Chinese consumers. Juhuasuan o�ers
daily deals on everything from toys to laptops. Behind
all this are Alibaba’s enormous server farms, which form
the basis for another market-leading business, cloud
computing. There is also Alipay, e�ectively under Ma’s
personal control but functioning as the Group’s equivalent
to PayPal, which processes most Group transactions. One
way or another, it is possible for Alibaba’s customers to
trade almost anything: the American security services have
even set up a sting operation on Alibaba to catch traders
selling uranium to Iran. In 2018, Alibaba had approaching
58 per cent of the e-commerce market in China, the largest
e-commerce market in the world. In 2015, Alibaba had
invested in the Indian e-commerce business Snapdeal and
the following year it bought a majority stake in the Singa-
pore e-commerce business, Lazada. The company also
had strong positions in Brazil and Russia. International
e-commerce represented nearly 7 per cent of the
company’s sales in the last quarter of 2018 (about $1,247m
out of total quarterly sales of $17,057m: see also Table 1).

Alibaba had always had an international bent. Jack
Ma had started his career as an English language teacher
in the city of Hangzhou, capital of the prosperous prov-
ince of Zhejiang and not very far from Shanghai. Ma had
discovered the Internet on his trips to the United States in
the mid-1990s. As early as 2000, Ma had persuaded both
the leading American investment bank Goldman Sachs
and the Japanese internet giant Softbank to invest. The
then ascendant American internet company Yahoo had
bought nearly a quarter of the Group in 2005. Even after
Alibaba went public in 2015, SoftBank still held 32.4 per
cent of the shares and Yahoo 15 per cent. The Alibaba
Group board counted as members Yahoo’s founder Jerry
Yang, Softbank’s founder Masayoshi Son and Michael
Evans, former vice-chairman of Goldman Sachs. Even so,
Jack Ma was ambivalent about Western investors: ‘Let
the Wall Street investors curse us if they wish!’, Ma had

Jack Ma, founder of Alibaba.
Source: Eugenio Loreto/EPA-EFE/Shutterstock

Chapter 2 Macro – environment analysis

proclaimed at a sta� rally. ‘We will still follow the principle
of customers first, employees second and investors third!’

Strictly, overseas investors do not directly own stakes
in the Alibaba Group, instead owning shares in a shell
company – a so-called variable interest entity (VIE) – that
has a contractual claim on Alibaba’s profits. This VIE struc-
ture is a common way for Western-listed Chinese firms to get
around Beĳing’s foreign-ownership rules. But the Chinese
government could close the loophole at any time, and it
gives foreign shareholders limited recourse against abuses
by Chinese companies’ managers. Ironically, the most notor-
ious VIE controversy so far involved Alibaba’s Jack Ma, who
in 2011 separated Alipay from the rest of the Group without
board approval. Ma said new Chinese regulations forced him
to make the move. Yahoo was only told about the spin-o�
five weeks after it had happened. A fundraising round for
Alipay’s new parent company valued Alipay at nearly $50bn.

Jack Ma cultivated important relationships within China
as well as abroad. Early on he socialised with a group of
businessmen known as the Zhejiang Gang, because of
their common roots in the province whose capital was
Ma’s home city of Hangzhou. Prominent members of this
group included some of China’s most successful entrepren-
eurs: for example, Guo Guangchang of the huge divers-
ified Fosun Group; Shen Guojun of China Yintai Holdings,
a retail property developer; and Shi Yuzhu, of the online
gaming company Giant Interactive.

Alibaba’s relationship with the Chinese government is
hard to read. Jack Ma insists that he has never taken loans
or investment from the Chinese government or its banks:
he had gone to overseas investors instead. However, given
that a third of Chinese business activity is carried out
within state-owned enterprises, the government is bound
to be in close liaison with the dominant national player in
e-commerce. Ma explained his philosophy as: ‘Always try to
stay in love with the government, but don’t marry them.’
The Alibaba Group has built up its political connections.
Tung Chee-hwa, Hong Kong’s first chief executive after its
return to China, served on its board of directors. Alibaba

has also allied with several so-called ‘princelings’, children
of important political leaders. Princeling investors include
Winston Wen, son of a former Chinese premier; Alvin
Jiang, grandson of a former Chinese President; He Jinlei,
son of a former Politburo member and a senior manager
of the state Chinese Development Bank; and Je�rey Zang,
son of a former vice premier and a senior manager at
China’s state sovereign wealth fund, Citic Capital.

Given Chinese President Xi Jinping’s sweeping political
and economic reform campaign, there are no guarantees
of Alibaba’s position domestically. In 2015, princeling
investor He Jinlei’s older brother was placed under house
arrest because of accusations of corruption. 2015 had also
seen the publication of an investigation by China’s State
Administration for Industry and Commerce into counter-
feit goods and fake listings on the Group’s Taobao site,
leading to a 10 per cent fall in Alibaba’s share price. Jack
Ma commented on his relations with Chinese regulators:
‘Over the past two years, not only was I a very controver-
sial figure, but also these days, the disputes are bigger
and bigger.’ He continued, ‘I, too, felt puzzled, sometimes
wronged – how did things become this way?’ Nonetheless,
Ma promised to clean up the site. In 2018, in an apparent
reproof, Chinese state media let out the news, previously
withheld, that Jack Ma was a longstanding member of the
Chinese Communist Party.

President Xi Jinping’s reform campaigns were partly
in response to changing economic conditions in China.
After three decades of double-digit growth, China’s
growth rate has slowed to around 7 per cent a year more
recently (see Table 1). Such growth is very respectable
by world standards. Besides, faced with rising domestic
concern about the environment, President Xi was happy
to restrain the expansion of high polluting industries such
as cement, coal and steel. At the same time, the Chinese
government was promoting e-commerce as a key area for
future economic growth. However, there were causes for
concern. Many local authorities and firms had borrowed
heavily on expectations of higher growth, and there

2010 2012 2014 2015 2016 2017 2018

Alibaba Group Sales Yuan bn 6.7 20.0 52.5 76.2 101.1 158.3 250.3

Chinese GDP Yuan Tr. 40.4 53.4 64.4 68.9 74.4 82.7 90.0

Chinese online retail sales Yuan Tr. 0.5 1.3 2.8 3.9 5.2 7.2 n.a.

Per cent of Chinese using Internet 34.3 41.0 46.0 50.3 52.2 55.8 n.a.

Sources: Statistical Report on Internet Development in China; InternetLiveStats.com; Statista.com. One Yuan = €0.13; $0.15; £0.11.

Table 1 Key statistics

Alibaba: the Yangtze River Crocodile

were fears that financial institutions had over-lent. Some
warned of a consequent crash. Moreover, it was hard to
see China’s growth rate picking up again, on account of
an aging population and the drying up of the traditional
supply of young labour from rural villages: the Chinese
labour force participation rate has dropped from a high
of 79 per cent in 1990 to 69 per cent by 2017. Although
the government relaxed the famous one-child per family
rule in 2013, Chinese parents are still reluctant to have
more children because of the cost of housing and good
education in the main urban centres. It is predicted that by
the early 2030s, about a quarter of China’s population will
be over 65 (against 17 per cent in the United Kingdom).
Slower economic growth in China overall is being
matched by a slowing in the rate of growth of the Chinese
e-commerce market (see Table 1).

At the same time, Alibaba faces greater competition
in its home market. A decade ago, Alibaba had seen o�
an attack by American rival eBay in the Chinese market
with a fierce price-war. Jack Ma had proclaimed: ‘EBay is
a shark in the ocean; we are a crocodile in the Yangtze
River. If we fight in the ocean, we will lose, but if we
fight in the river, we will win.’ A combination of cultural,
linguistic and government policy factors kept Western
internet companies at arm’s length in the Chinese
market: Google has been reduced to a market share of
about 1 per cent, while Amazon eventually chose to list
on Alibaba’s TMall site after a decade pushing its own
venture in China.

But now Alibaba’s home-market dominance is facing
a local challenge from the aggressive JD.com. JD.Com’s
founder and chief executive Richard Liu has declared a
goal of beating Alibaba to the top position: ‘The compe-
tition makes the two companies stronger. I’m actually
enjoying competing.’ While Alibaba depended for a long
time on China’s unreliable postal service to get its goods
to customers’ doors, JD.com has been more like Amazon
in investing heavily in its own distribution centres and
delivery services. By 2018, JD.com had 16.3 per cent of
China’s e-commerce market. Tencent, China’s largest
social networking and online games company, has taken
a 15 per cent stake in JD.com, giving the challenger access
to more than 890 million users of its WeChat phone
messaging app. WeChat allows users to scan product bar

codes with their smartphone cameras to make instant
purchases through JD.com. Mobile commerce is increas-
ingly important in China, with 788 million people being
mobile users, 98 per cent of the country’s total user base
in 2017. Mobile has been a challenge for Alibaba’s tradi-
tional PC-based retail model, but the company has been
catching up with about 80 per cent of its e-commerce
business on mobile devices by 2017.

In a context of slower Chinese growth and increased
domestic competition, the internationalisation strategy
of Alibaba’s new Chairman Daniel Zhang seemed to make
sense. However, Zhang faced one major challenge: resist-
ance in the world’s second largest e-commerce market,
the United States. In January 2017, the first month of the
new American Presidency, Jack Ma had met Donald Trump
in New York and promised that Alibaba’s investment
in the United States would bring one million new jobs
to America. Alibaba invested in two large data centres
for its expanding cloud computing business. However,
the United States was the home of Amazon, Micro-
soft and Google, all with vast cloud businesses of their
own. Besides, nationalist Donald Trump was imposing
boycotts on Chinese technology companies and threat-
ening tari�s. At the end of 2018, Alibaba announced the
winding down of its cloud computing operations in the
United States. For the Yangtze River crocodile, attacking
the ocean sharks in their home seas may have been a step
too far.

Main case sources: China Daily, 8 and 13 May 2015; Financial Times,
9 September 2014 and 14 September 2018; South China Morning Post,
12 February 2015; Washington Post, 23 November 2014; Wall Street
Journal, 4 December 2018.

Questions
1 Carry out a PESTEL analysis of Alibaba at the time of the

case. Evaluate the balance of opportunities and threats,
using the same kind of figure as in Illustration 2.1.

2 Draw a basic sociogram of Alibaba’s network (see
Section 2.2.3 and Figure 2.5): some simplification may
be necessary. Explain why Alibaba’s network might be
useful.

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