What makes PESTEL and Porter’s Fiver Forces work?
Every company operates in a macro-environment that is composed of main components:
- Political factors: Political policies are made up of various factors that affect the economy. Some of these include tax policy, fiscal policy, and the political climate.
- Economic conditions: The general economic climate includes various factors that affect the country’s growth and development, such as the interest rates, exchange rates, and unemployment rate. These conditions can also affect consumer confidence and spending.
- Sociocultural forces: The cultural forces that influence demand for goods and services vary depending on the region and the population’s size and age. For instance, the growing trend toward a healthy lifestyle can affect spending on health clubs and equipment.
- Technological factors: These factors have the potential to affect society and its various industries. They include the pace at which technological change occurs and the multiple institutions involved in its creation.
- Environmental forces: Various environmental factors such as climate change and weather can affect various industries, including farming, energy production, and insurance. These factors have a significant impact on other industries as well.
- Legal and regulatory factors: These factors are often linked to the regulations and laws that companies have to follow in order to operate. Some of these include labor laws, antitrust regulations, and occupational safety regulations.
How to use the PESTEL Analysis
These components have the potential to affect the firm’s competitive advantage and the overall business environment. An analysis of these components is often referred to as PESTEL analysis.
Since macro-economic factors can affect different industries to different degrees, managers must keep tracking which of these factors have the most strategically relevant impact on their companies.
For example, anti-smoking laws and increasing cultural stigma attached to cigarettes have significantly reduced the profitability of the cigarette industry. As a result, cigarette companies are forced to rethink their business models.
Another example is when companies that compete for a slice of the fast-growing fitness and food processing markets have to keep monitoring the changes in the environment and the habits of their consumers. The environment of a company is often the most significant strategy-shaping influence.
So, companies need to assess their macro-environment factors to avoid any changes that could affect their operations and strategies.
Implementing the Porter’s Five Forces
Similar to the macro-environment, companies should keep tracking the industry-specific micro-environment, and this can be done through Porter’s Five Forces. The five forces are the competitive forces that shape an industry, and they are never the same for different industries. Understanding these forces can help identify the root causes of market volatility. The competitive forces that companies within an industry face are often linked to five sources:
So, companies should conduct PESTEL and Porter Five Forces analysis continuously to keep monitoring the changes in the macro- and the micro-environment and keep identifying the best course of action to reach its vision. Afterwards, they can build on that using SWOT analysis. SWOT analysis alone cannot formulate a strategy as it’s considered a reactive tool that helps organizations come up with a list of additional strategic objectives. These objectives prepare the organization against the various threats and opportunities that they might face in the future.
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- Competition from existing competitors – similar products: There are many forms of rivalry among existing competitors. These include price discounting, new product launches, and service improvements.
- Competition from newcomers – similar products: New entrants can create new capacity and gain market share at the expense of prices and costs. They can also leverage existing capabilities to create new opportunities.
- Competition from substitute products or services: A substitute performs the same function as an industry’s product by a different method. For instance, video conferencing is often a substitute for travel, plastic substitutes aluminum, and email substitutes express mail.
- Bargaining power of suppliers: The powerful suppliers can squeeze more of the value out of their customers by charging higher prices or limiting the quality of their services.
- Bargaining power of buyers: They can capture more value by pushing down prices and demanding better service, resulting in industry participants being outplayed by their competitors.
As organizations attempt to integrate Generation Z into their existing multigenerational work – a mix of Baby Boomers, Gen X, and Millennials – organizations need to understand the job preferences of new generations. Employers often assume that Gen Z workers have the same needs in the workplace as millennials, but that is not the case. Gen Z is a workforce with statistics that suggest that this generation has very different values and career expectations from Millennials.
Preparing the organization
The number of Gen Z workers will make up about 27% of the workplace by 2025. As such, companies should think about how working methods are managed and how employees need to evolve to respond to changing workplace expectations. To attract and retain new talent in the business, organizations need to prepare for upcoming workplace changes, consider what is important for the new generation of employees, and make appropriate changes to processes and corporate culture.
Organizations need to familiarise themselves with the priorities, career expectations, and working methods of the new generations to avoid generational conflicts and ensure lasting business success. According to Jason Dorsey of the Center for Generational Kinetics, it is assumed that Gen Z is the first generation to change the working behavior of previous generations, not vice versa. Stereotypes aside, the most important thing is that the way they learn and work will have an impact.
For this reason, they tend to have very high expectations from their organizations, which leads them to work harder. This generation was also often told by older generations how to be successful, starting with Gen X, the predecessors of Gen Z. This may contribute to Gen Z workers being hyperfocused on “doing well” rather than being focused on the outcomes.
Understanding Gen Z
Gen Z consists of people born between 1997 and 2012 which are a new generation of employees entering the workplace. Their behavior and values are much different than previous generations of young people. It’s important to realize that the characteristics they are exhibiting now are likely to be permanent.
The Gen Z generation employees still consider themselves to be “young adults” in the workplace. Their approaches will evolve and differ from the older generation. With a change in mindset, priorities, and working practices, this group has the potential to bring a wealth of innovation as they enter the labor market.
Just like Millennials during the Economic Crisis in 2008, Gen Z job seekers have their own expectations of what the job should look like. In the future, the workforce will consist of three primary generations: Gen Z, Millennials, and Gen X. As they mature and gain experience, Gen Zs can provide enormous value to their companies and organizations.
What Gen Z wants from an employer
As a younger generation, Gen Z brings new insights and ideas to the workforce and natural digital literacy makes them more willing to try new things and develop new strategies. Gen Z is also aware of how the world of work needs to change: 62% believe that technical and hard skills need to change and 59% believe that their jobs in 20 years will not exist the same way, which shows your company needs to invest in education, skills, and job security to attract them. The following are the types of jobs and skills that Gen Zs are expecting to find within an organization:
- Tasks that allow them to make a positive difference in the world.
- Improvement in brand awareness.
- A sense of purpose beyond the paycheck.
- The flexibility of work hours and the ability to work at their own pace.
- The ability to work in teams.
- A chance to increase skills and creativity
- Non-traditional career opportunities and job roles.
As more employers introduce millennials into non-traditional roles, the Gen Z workforce expects the same consideration in their career path. This makes the workplace of Gen Zers an interesting challenge and opportunity for companies. Companies that can demonstrate a clear career path to Gen Z will be able to retain employees as the generation grows up and ages out of their entry-level roles.
The terms virtual reality (VR) and augmented reality (AR) get thrown around a lot. VR headsets, like the Oculus Quest or Valve Index, and AR apps and games, such as Pokemon Go, are still popular. VR and AR two different concepts, with characteristics that distinguish one from the other, but they look similar. And as these technologies develop, they naturally bleed into each other.
What is virtual reality?
VR headsets completely take over your vision to give you the impression that you’re somewhere else. The HTC Vive Cosmos, the PlayStation VR, the Oculus Quest, the Valve Index, and other headsets are opaque, blocking out your surroundings when you wear them. If you put them on when they’re turned off, you might think you’re blindfolded.
When the headsets turn on, however, the LCD or OLED panels inside are refracted by the lenses to fill your field of vision with whatever is being displayed. It can be a game, a 360-degree video, or just the virtual space of the platforms’ interfaces. You’re taken visually to wherever the headset wants you to go—the outside world is replaced with a virtual one.
What is augmented reality?
AR is one of the biggest technology trends, and it’s only going to get bigger as AR-ready smartphones and other devices become more accessible around the world. AR can make us see the real-life environment right in front of us—trees swaying in the park, dogs chasing balls, or kids playing soccer—with a digital augmentation overlaid on it. A pterodactyl might be seen landing in the trees, the dogs could be mingling with their cartoon counterparts, and the kids could be seen kicking past an alien spacecraft on their way to score a goal.
Considering the advances in AR technology, these examples are not that different from what might already be available for your smartphone. AR is readily available and being used in myriad ways, such as in Snapchat lenses, in apps that help you find your car in a crowded parking lot, and in a variety of shopping apps that let you try on clothes without even leaving home.
Maybe the most famous example of AR technology is the mobile app Pokemon Go, which was released in 2016 and quickly became an inescapable sensation. In the game, players locate and capture Pokemon characters that pop up in the real world—on your sidewalk or in a fountain.
VR and AR in modern learning
The eLearning industry is all about making use of advanced technologies to enhance the learning experience. In the end, the aim is to make learning an easy, enjoyable task. Achieving that target without incorporating the latest technological tools is virtually impossible in the digital era.
Thus, augmented and virtual reality have slowly but surely been edging into the eLearning sector. These techniques have been warmly accepted by modern learners because of the many benefits they offer. If you are still unaware of these trending alternate reality technologies, then here are the five benefits of using them.
1. Make the eLearning process engaging and exciting.
Engaging online learners within the eLearning environment is one of the biggest hurdles eLearning professionals face. The use of augmented and virtual reality makes eLearning programs more innovative and enjoyable.
2. Create scenarios that otherwise are impossible to create.
Augmented and virtual reality technologies have added another dimension to the field of eLearning. They take online learners to another world and allow them to gain experience without any risk. This technology also enables organizations to incorporate environments that would be too costly to recreate in the real world.
3. Focus on a practical approach rather than theory.
The existing education system focuses more on theory than practical approach. That is the reason why people tend to forget rotely learned concepts so easily. On the contrary, augmented and virtual reality make learning a practical experience. And experiences are what stick with online learners and enable them to recall the information for later use. Some concepts that in theory appear to be dry fail to catch online learners’ attention for more than 15 minutes.
However, AR and VR can make them more interesting by adding practical application and immersion to eLearning. This also helps online learners to appreciate the importance of concepts and ideas instead of merely brushing them off as theoretical knowledge that has no correlation with their work duties or responsibilities).
4. Encourage online learners to learn from their mistakes.
Incorporation of alternate reality technologies into the learning environment removes any doubts from the minds of online learners. With these technologies, online learners are able to try out their own ideas and reach their own conclusions. This also ensures that the lesson learned sticks with them and creates an emotional connection.
5. Allow for self-guided exploration.
Augmented and virtual reality technologies can create a safe environment for online learners to experiment and try things that would otherwise be impossible.
The power of alternate reality technologies make eLearning more engaging and productive. As the technology evolves, so too will the applications in eLearning. That’s why it’s essential for eLearning pros to keep up with cutting-edge tech and think of new and innovative uses for modern applications.
The Great Depression of 1929-39, the OPEC oil price shock in 1973, the Asian credit crisis in 1997, and the Great Recession of 2007-08 — these are just some of the most distressing downturns in economic history, and the current pandemic is adding to this list. Apart from these crises, businesses — however small or big — are continuously struggling with the ever-evolving technology. Companies need to deal with disruptive innovations, dynamic consumer likings, pricing, quality, and a high degree of satisfaction in user experience. Such risks arising out of unpredicted conditions coupled with traditional trade risks put a business on tenterhooks with the obvious threat of going into oblivion and give them no choice but to strive for excellence and agility to survive.
The dictionary meaning of agility is quickness, dexterity, alertness, swiftness, responsiveness. While there isn’t a single comprehensive definition vetted by everyone, some authors defined agility as one of the key organizational characteristics that need to be mastered to stay adaptive and competitive in turbulent markets. In the context of the current pandemic and the uncertainty it brings, it calls for an organizational response to the unproductive environment and the ability to convert threats into opportunities. However, the concept of agility was mainly associated with manufacturing industries that too around managing demand-supply variation.
To cope up with a turbulent environment, organizations should have the ability to anticipate the direction and degree of change in a proactive manner. As such, organizational structures should be designed so that they permit greater agility, through flexible response. Enablers like leadership, strategy, people, and business processes play an important role in developing organizational agility. These enablers need to work in cohesion to enhance the agile components of the organization.
The prevailing VUCA (volatility, uncertainty, complexity, and ambiguity) conditions trigger dynamic and continuously changing environments, impacting the organizations. As a response, organizations need to develop the ability to innovate and acquire new knowledge so as to achieve agility for survival. The strategy around flexible HRM empowers organizations or firms to respond to external customers, competitive positions, technology selection and dissemination, creativity, and cycle time reduction. The focus in this paper is on the intangible resource (i.e. human resource) and the important flexibility dimensions of human resource management (HRM).
HRM strategy on agility
The HRM strategy should support reactive agility (organization’s responsiveness), proactive agility (organization’s effectiveness), and innovative agility (organization’s resourcefulness). HRM strategy is required to support the ever-dynamic market so that organizations can respond and achieve decent performance. Organizations paying attention to the HR strategy have been proved more profitable than others.
The key attributes of agility in an organization that HRM should try to focus on and promote in the organization through key leaders are tabulated below. This is not a comprehensive list but can be developed depending upon the organization. As a next step, one should have measures in place around these attributes so that agility can be assessed if not measured. All key frameworks like BEM/EFQM, CMMI, or BSC aim at providing resilience to organizations; therefore, while developing any such framework these attributes can be guiding points.
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The challenge to organizations today is how to imbibe and implement agility drivers and later how to judge the organization’s agility. One possible approach is to develop an agility maturity model in line with a capability maturity model in template form. The template itself needs to be dynamic and able to change with environmental factors. The table above is just guidance to look around such agility drivers so that it can be helpful in developing the template.
Strategic HR plays an important part to ensure that the people in the organization understand and support such agility adoption. In fact, the versatility and the adaptive skills of a person are assessed even as early as the talent acquisition stage as this is an important dimension when recruiting an individual into the organization. The employees’ performance management system (PMS) developed by HR should pay greater attention to agility factors in a person rather than just task accomplishment levels. To conclude, understanding and navigating the complex eco-system in which organizations operate is crucial; at the same time, HR should play a bigger role in developing an agile workforce that can’t be just left to line functions.
Needless to say, innovation has become a necessity for organizations. Innovation influences a firm’s performance and helps them to gain a competitive advantage and become market leaders. Companies claim to exert tremendous efforts in embracing innovation, yet many still do not have a clear innovation strategy and are unable to clearly align it with their overall business strategy. Some would opt to just embed it within their values or cultures, or as a business attribute, without having a clear plan and system for its effective implementation.
PwC’s Innovation Benchmark (2017) showed that 54% of the surveyed companies (>1200 respondents) reported that they are struggling in bridging the gap between business strategy and innovation strategy. Companies would make enormous investments in innovation, however, they do not see the returns from these investments. This is mainly because there is no alignment between their innovation strategies and their business strategies.
There is no such thing as the “right innovation strategy”. Companies need to determine and create their own innovation strategy to fit their business needs such as business strategy, culture, and organizational structure. But why would companies go through all this hustle? Why is there a need for companies to create an innovation culture when they may already have a strong business strategy in place?
The answer is simple: it helps companies to have successful innovation management. Innovation strategy aids organizations to know whether there is a need to innovate, to what extent, and in what areas. Accordingly, a company’s innovation strategy should be communicated across their organization; all the way from the CEO down to the most junior person in the workplace.
Katz, Du Preez, & Schutte (2010) highlighted that innovation strategy can be described in two roles: the first one is an improvement role or, in this case, the “improvement innovation strategy”. The second role is a future business role or the “future business innovation strategy”. For the improvement role, innovation strategy does the following:
- Aligns a firm’s objectives with innovation objectives;
- Acts as a guide for the type, level, and influence of innovation needed to attain a firm’s objectives;
- Allocates a firm’s resources between daily operations and innovation initiatives; and
- Creates a road plan for a firm to effectively utilize resources for innovation.
In relation to the future business role, the innovation strategy aids firms to determine when and how to selectively abort the past (such as old methods and actions). This will also enable firms to direct their attention towards future business. In other words, the future business strategy would oblige a company to alter its pattern, position, or perspective strategy, which, in turn, pushes the firm to move from the current business and develop future business.
Consequently, there is no doubt that firms today need to innovate permanently within their organizations. However, they must do so in a strategic way. Here are some ideas on how you can do that within your firm:
- Revisit your business strategy and make sure it is updated to your current business context.
- Analyze your organization’s assets, competition, market opportunities, and the firm’s culture.
- Consider the following components when defining your innovation strategy: type, level, impact, risks, collaboration, place, maturity, resources, and drivers.
- Determine the right timing for market entrance in case of product or service innovation.
To sum up, there is no such thing as the perfect innovation strategy. It is a strategic management decision that should be carefully taken by the most senior leaders in the workplace. It has to be shared with each and every individual so that it is reflected right from the beginning of the innovation process. Considering the nine components mentioned above is essential to be able to develop your innovation strategy.
The first four components (type, level, impact, and risk) help the company to have the right blend of innovation needed to bolster the firm’s objectives and goals. As for collaboration (impacts the level of financial and human resources), place (assists the balance between the types of resources) and resources (divides the resources between the daily operations, innovation initiatives, and innovation capability improvement), they provide a guideline of the allocation of resources for innovation. The last two components are drivers and maturity which make the company ready to innovate their future business.