report

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Strategy in 3D

Essential Tools to Diagnose,

Decide, and Deliver By

Greg Fisher John Wisneski Rene Bakker

Pre-published excerpt

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--- Chapter 6 ---

STEEP Purpose and Objective The purpose of a macro environmental (STEEP) analysis is to capture and interpret what is happening (and what is likely to happen) in the environment in which a business operates. STEEP stands for Social, Technical, Economic, Ecological, and Political, and does not prioritize one environmental factor over another. It provides a structured way to account for the trends, forces, and changes beyond the boundaries of the firm, which may impact the operations and markets of the firm. Underlying Theory The STEEP framework has been around for a number of decades and has gained widespread recognition. Rather than being intrinsically tied to one distinct theoretical perspective, STEEP analysis, in its various forms, has touchpoints with multiple strands of business and management research that are broadly interested in understanding, monitoring and shaping the organizational environment. As such, STEEP has conceptual connections to theories that place a heavy emphasis on the environment like Resource Dependence Theory1 and Population Ecology2. However, such relations are relatively loose and STEEP analysis should mainly be viewed as a broad, encompassing heuristic for strategically classifying and monitoring the organizational environment, i.e. “the broad set of forces emanating or operating from outside the organization that can affect its competitive performance.”3 A central assumption in theories of the organizational environment is that organizational performance and survival depend, at least in part, on an organizational environment that can withhold or supply critical resources on which organizations depend. Pfeffer and Salancik (1978) defined environmental dependence as a combination of the importance of a resource to the organization and the number of sources from which the resource is available, as well as the number, variety, and relative power of organizations competing for the resource.4 The earliest reference to STEEP analysis specifically is a study by Francis J. Aguilar that dates back to 1967, who discussed ‘ETPS’ as a taxonomy of the environment: Economic, Technical, Political, and Social.5 Since then, authors have jumbled these

1 Pfeffer, J. & Salancik, G., The external control of organizations: A resource dependence perspective. (Palo Alto, CA: Stanford University Press, 2003). 2 Hannan, M. T., & Freeman, J. The population ecology of organizations. American Journal of Sociology, (1977) 82(5), 929-964. 3 Fleisher, C. S., & Bensoussan, B. E., Strategic and competitive analysis: methods and techniques for analyzing business competition. (Upper Saddle River, NJ: Prentice Hall, 2003) (p. 269). 4 Pfeffer, J. & Salancik, G., The external control of organizations: A resource dependence perspective. (Palo Alto, CA: Stanford University Press, 2003). 5 https://rapidbi.com/history-of-pest-analysis/ (accessed July 31, 2017).

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letters into several orderings (not necessarily related to any specific order of importance) and added Ecological as a separate factor in its own right, leading to the common use of the term STEEP. The environment can be conceptually divided in three levels: internal environment (forces inside the organization), operating environment (meso-level forces that are external to the organization but which have direct and relatively immediate relationships with the organization, like customers, suppliers, competitors, and strategic partners), and the general environment (broad, macro-level forces external to the organization, which have more long-term influences and which are generally beyond the control of the organization). STEEP factors are generally at play at the level of the general environment.6 Core Idea Macro environmental (STEEP) analysis acts as a checklist for evaluating the trends, forces, and changes beyond the boundaries of the firm that may create opportunities or threats for a firm or industry. Each letter in the STEEP acronym accounts for a major macro environmental factor that may impact a business or industry, now or in the future. These macro environmental factors are as follows: (1) Sociocultural factors, (2) Technological factors, (3) Economic factors, (4) Ecological factors, and (5) Political and legal factors. By covering each of these major factors in a macro environmental analysis, a strategist can be somewhat confident that the majority of major macro environmental issues that may impact the strategy and performance of a firm have been considered. Here is a summary of the macro environmental factors that are considered in a STEEP analysis.

Factors Description Considerations Sociocultural factors

Sociocultural factors capture societies’ cultures, norms, beliefs, and behaviors; as well as demographic shifts in population distribution.

• Ideological issues and concerns • Lifestyle and fashion trends • Population growth and segmentation • Age distribution • Media views and influence

Technological factors

Technological factors account for technology changes and trajectories, including the emergence of new technologies that may disrupt a firm or industry.

• Technology maturity • Emergent technology developments • Pace of technological change • Research funding and focus • Licensing and patenting norms and

regulations Economic factors

Economic factors account for shifts in economic indicators and trends and the impact of those indicators and trends on a firm and industry.

• GDP growth rates • Interest rates • Employment levels • Price stability (inflation & deflation) • Currency exchange rates • Income distribution

6 Fleisher, C. S., & Bensoussan, B. E., Strategic and competitive analysis: methods and techniques for analyzing business competition. (Upper Saddle River, NJ: Prentice Hall, 2003) (p. 269).

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Ecological factors

Ecological factors concern broad environmental issues pertaining to the natural environment, global warming, and sustainable economic growth.

• Consumer preferences and demands for sustainable products and services

• Environmental regulation and incentives • Access to sustainable resources (e.g.

natural resources) Political and legal factors

Political and legal factors account for the processes and actions of government and for changes in relevant laws, regulations, policies, and incentives.

• Industry laws and regulations • Political party policies & power

distribution • Ability to influence political decisions • Voting rates and trends • Power and focus of regulatory agencies

Depiction

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Process 1. For each major macro-economic factor (sociocultural, technological,

economic, ecological, political and legal) spend time brainstorming and researching major trends, forces, and changes.

2. Identify and describe the most salient trends, forces, and changes under each factor. Collect extra data on each salient trend, force, or change, if necessary.

3. Examine salient trends, forces, and changes for each factor alongside one another. Identify interconnections and dependencies between them.

4. Forecast future directions and implication for each salient trend, force, or change.

5. Derive implications for the strategy of the firm from each salient trend, force, or change identified.

Insight or Value Created A macro environmental (STEEP) analysis provides perspective and insight on significant environmental issues that may have impacted a firm’s level of competitiveness in the past and/or may impact competitiveness in the future. As such it may serve as a key input into a strategic diagnosis and discussion. The activity prompts managers to think about issues that exist beyond a firm’s boundaries and outside its immediate concerns and activities. It provides a big- picture perspective for evaluating what has happened and what is likely to happen with a firm in relation to its environment. Risks and Limitations A macro environmental (STEEP) analysis is highly dependent on a manager’s interpretation of salient trends, forces, and changes. It helps managers consider trends, forces, and changes under different major categories, but does not really provide a way for them to assess which issues have had, or will have, the most significant impact on the business. Different managers may interpret different issues under each of the major STEEP factors very differently. A macro environmental (STEEP) analysis requires a long-term orientation, yet many managers are assessed on short-term performance. Therefore, some managers may feel that the issues that arise from a STEEP analysis will take too long to affect the performance of a firm, and hence are beyond the scope of issues that they wish to consider as a means to impact firm performance.