Strategy Dynamics Briefing 45: Political, Economic, Social and Technological Factors

So far in the Briefings we have shown you can drive your own destiny, but you cannot escape external forces altogether…
Later Briefings will look at the specific impact of competitors, so we will look at the other factors. These are often divided into four categories:

Political Factors
Politics and regulation frequently constrain or enable access to the resources needed to grow a business. Today’s US and Europe airline industries reflect regulatory changes in the 1980s/90s that made it easier for new airlines to start up and offer routes and services. The increasing approval of drugs for over-the-counter (OTC) sale, rather than by prescription only, has grown consumers’ perception that they can purchase drugs directly rather than visiting their doctor. This has changed the rate pharmaceuticals companies can win end-users for their products. Another example concerns the 2006 entry of Google into the Chinese market. Critics felt the company had betrayed its principles by agreeing to limit the functionality of its service, but Google felt it would do more good than harm by offering even a limited service in China. Its subsequent growth, though, was also affected by those restrictions.

All such factors clearly impact on a company’s ability to develop the resources to build a business, and so need to be reflected in any assessment of the dynamics of their strategy and performance.

Economic Changes
Companies’ strategic plans frequently start from economic forecasts to work out likely market growth rates. As we have noted before, though, we can easily go beyond simplistic projections and assess the potential scale and development rate of specific opportunities. To show how this works, figure 1 introduces a new concept—the “ever-likely” market — i.e. the population that could ever buy a product, whatever its functionality or price. For consumer electronic devices, this would exclude those who are too young to use them, or too technically or culturally un-savvy to see the point of owning them. Here we have an ever-likely population of 1 million consumers for a new product that works fine for most people’s needs, and has a fixed price of $234. The only change is that average disposable incomes rise over the five year period.

Figure 1: The impact of rising discretionary income on emergence of a potential market. (click to enlarge)

At first, only a very small fraction of people can afford the product, so a brief initial jump in potential customers quickly dies out. Rising incomes cut the fraction of the average person’s monthly discretionary income needed to purchase the product. However, there is little change until a threshold is reached – very few people will spend 70% of this income on the product. But when incomes have grown to the point where the product costs only half of average discretionary spending, most people find the product affordable and the rate at which customers become potentially available rises quickly to around 20000 per month. The rapid development rate continues until the mid-income majority have come into the market, and only the lowest income segment remains. Note the highly non-linear customer development rate, in spite of the steady income growth, which illustrates a powerful “tipping-point” mechanism.

Social Factors
Social factors also drive change in market opportunity. The ever-likely population may change in size due to population growth, age distribution and other demographic effects, but other social mechanisms reflect behavioral factors – see side-bar. Such mechanisms are not included in Figure 1, but the Bass model from briefing 20 already includes an important social factor, in the interactions between potential customers and those who already buy or own the product.

Social factors also affect the development of potential staff. A notable case concerns the Chinese government’s 2003 decision that every school-leaver would be fluent in English. If this is achieved, English-speaking Chinese will out-number native English speakers by 2025. This change, plus widespread social enthusiasm for learning and personal advancement has already led to fast growth of young professional Chinese able to operate in international companies.

Technological Progress
Technology drives two key dynamics—the improving functionality of products and services, and the reducing unit cost of supplying them. Industry-wide progress clearly gives rise to products that would not have been possible just a few years earlier, and at increasingly affordable prices. The falling cost of photo-voltaic solar cells means that manufacturers of many products – road-signals, for example – can improve what they supply. Technological progress is not, though, entirely an exogenous factor. For manufacturers, much progress in both functionality and cost reduction is in their own hands.

We will show how this works in the next Briefing.

Until next time…

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Strategic Management Dynamics book cover
Social factors matter!

Misunderstanding social issues was a problem for the UK’s successful Internet bank, Egg PLC, when it tried to launch in France a credit card that had been a great success in its home market. French consumers have a quite different attitude to the use of store cards, credit and debit cards than do the British. Convinced of the power of its business model, the company persisted in its business development efforts long after it was clear that the French ever-likely customer base would never be significant.

But taking products and services to new markets can also be surprisingly successful. SMS text-messaging was introduced later in Italy than in other countries, but took off very fast – soon overtaking usage elsewhere – because it perfectly matched the need of young Italians’ to organize their social life. Anyone lacking an SMS-enabled cellphone missed out on meeting up with friends—a powerful force driving word of mouth.

This briefing summarises material from chapter 6 of Strategic Management Dynamics, pages 373-379.

Read more about the book on the Strategy Dynamics website

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