Saturday, April 30, 2011

5.3.2. The external context – what’s outside the door?

ISO31000 includes an important step for 'Establishing the External Context' and suggests some of the issues that are important. With with a scant 125 words however, it doesn't really tell us much about what that might look like. So that's where this article comes in.

Establishing the external context starts with a broad scan of the external environment with a specific focus on those factors that could effect the organization or are otherwise related to the organizations activities and objectives. And it’s not a one-time process - organizations need to constantly monitor the external environments as well as the agendas and views of external stakeholders. One useful tool or prompt for analyzing the external context is a tool referred to as PESTLE.

PESTLE is an acronym for Political, Economic, Societal, Technological, Legal and Environmental factors. PESTLE analysis allows the external environment to be investigated systematically by use of an easy to apply acronym. It’s not overly concerned with an organizations internal context nor it’s strengths and weaknesses. Important though these are, they are covered in the Internal Context phase.  It can be used in a variety of ways but one simple approach is to start with a bullet point list around the following factors, which you can then develop them into a narrative.  For a larger risk assessment it may even be appropriate to use each of the following as section heading:

  • Political factors are the extent to which governments or political influences are likely to impact or drive global, regional, national, local and community trends or cultures.  They can include political stability, foreign policy, trade practices and industrial relations. 
  • Economic factors include global, national and local trends and drivers, financial markets, credit cycles, economic growth, interest rates, exchange rates, inflation rates and cost of capital.
  • Societal factors include culture, health consciousness, demographics, education, population growth , career attitudes and emphasis on safety. 
  • Technological factors include computing, technology advances or limitations, artificial intelligence, robotics, automation, technology incentives, the rate of technological change, research and development, etc
  • Legal – Legislative or regulatory issues and sensitivities 
  • Environmental factors include global, regional and local climate, adverse weather, natural hazards, hazardous waste and related trends 
For those of you not familiar with PESTLE analysis, a simple example of a basic PESTLE for a resources company operating in the mythical land of Panaland, might look something like the following table.

External factors
Media and intelligence reports indicate civil war is likely if the general elections do not go well
Civil war would increase our security costs and potentially lead to cessation of operations
A change of government by force may nullify our existing mining leases
The handling of the election by the UN will largely determine the potential for civil war
The organization has influential relationships with the existing government but limited relationships with the opposition party
Gold price is increasing
Operating costs remaining steady
Profitability is likely to increase, allowing further exploration for additional resources this year
Gold price is inversely linked to global financial markets
Cost of labor & fuel need to remain steady
Education, healthcare and income for local populace is generally improving
Cost of labor may increase however availability of skilled labor is showing a corresponding increase.
Political stability will be the key dynamic to increase the supply of skilled labor
Communication infrastructure in Panaland has grown exponentially in recent years with mobile telephony and 3G internet now widespread
This is likely to reduce operating costs in the field and improve safety significantly. It also allows us to deploy a number of additional technologies for advanced field analytics.
The timing or delays of mobile phone towers in our lease area will be the key determinant of our benefit from these technologies.
Legislative changes planned for the mining act this year.
Corruption continues to be widespread
It is likely that the changes to the act will involve additional costs for the organization.
As the company grows we are increasingly a target for a) demands for bribes and b) scrutiny by legislators and shareholders.
Any legislative changes are likely to be dependent on the outcomes of the election.
Poverty and low public service wages are the key drivers of corruption in Panaland. Any changes in these are likely to correspondingly effect our ability to operate.
Panaland has limited environmental legislation however XYZ is a global operator and environmental protection compliance legislation continues to increase.
XYZ operations in all countries need to meet minimum standards for environmental compliance globally.
This is likely to necessitate additional budget for monitoring and compliance, and may also require additional budget for operating changes.
Global environmental awareness and demands for higher standards are likely to be driven by the G8 nations.

It can also be useful to draw up a list of the key factors in each category, consider their implications for the organization and then consider the following dynamics using the RUSE model:

  • Relevance: Will they become more or less important over time?
  • Urgency: Will they impact in the short-term, medium-term and/or long term?
  • Significance: How critical are they to the organization
  • Effect: Will they have a positive or negative impact on the organization?

Depending on your context and the nature of the organization, another model, which might be worth using for detailed context studies, is VUCA. VUCA is an acronym used to describe or reflect on the volatility, uncertainty, complexity and ambiguity of general conditions and situations. The term VUCA came into use in the late 1990s in the military and has been subsequently adopted in strategic leadership. One way to phrase the questions would be:

  • Volatility. How volatile is our current situation? What are the nature and dynamics of change, and the change catalysts that effect our organization?  What is the nature and speed of  those change forces?
  • Uncertainty. How much predictability do we have and in particular which areas of our business have the least levels of certainty? What issues around lack of predictability, the prospects for surprise, and the sense of awareness and understanding of issues and events should we be concerned about?
  • Complexity. How complex is our context, our business model and the environment we operate in? What are the multiplex of forces, the confounding of issues and the chaos and confusion that surround our organization?
  • Ambiguity. What level of ambiguity are we facing now or in the future? In what areas are we facing them and how are they likely to effect us?  Specifically, what are the key issues around any haziness of reality, potential for misreads, or mixed meanings of conditions and cause-and-effect confusion?

These elements can help us understand the context in which organizations operate and in particular their current and future state. Used as discussion or analysis questions, they provide not only a better understanding of the current environment, but can offer insights into to how people view the conditions under which they make decisions, plan forward, manage risks, foster change and solve problems. In particular, it can help people:

  • Anticipate the issues that shape conditions
  • Understand the consequences of issues and actions
  • Appreciate the interdependence of variables
  • Prepare for alternative realities and challenges
  • Interpret and address relevant opportunities

There are obviously any number of ways to analyze external context so I'm not by any means suggesting that PESTLE, VUCA or RUSE are the only, or even the best way, to do so.  You might for example, choose to simply include a few paragraphs, or even a longer discussion much like the following example.


External Context

XYZ Organization (XYZ ), based in Panaland is a 100% owned subsidiary of the UK based, ABC Megagroup Ltd.  The principal activity of XYX is mining and exploration for minerals in a lease area in western Panaland.

 Figure 1: Map of Panaland

The United Republic of Panaland comprises approximately 245,087 km² in central America bordered by Gonga Gonga to the north, Dirkistan to the west, and Zamawi to the south. The country's eastern borders lie on the Deepblue Ocean.  

Shortly after achieving independence from Chipan in the early 1860s, Panaland established a one-party political system which came to an end in 1985 with the first democratic elections held in the country since the 1770s. Panaland has a five-level judiciary combining the jurisdictions of traditional and British common law. 

The population of Panaland is approximately 38,000,000, with an estimated growth rate of 2 percent. Population distribution is extremely uneven, with density varying from 1 person per square kilometer to 81 per square kilometer in the mainland's well-watered highlands, to 134 per square kilometer in the capital city region. More than 80 percent of the population is rural. Sydbourne, the largest city is the commercial centre, seaport and the new capital.

The economy is mostly based on agriculture, which accounts for more than half of the GDP, provides approximately 85 percent of exports, and employs 80 percent of the workforce. Topography and climate, though, limit cultivated crops to only 4 percent of the land area.

Panaland has significant amounts of natural resources including gold, diamonds, coal, iron ore, uranium, nickel, chrome, tin, platinum, coltan, niobium and natural gas. It is the third-largest producer of gold in the Americas after Gonga Gonga and Lawali. Lack of infrastructure and development has hampered the extraction of these various resources however efforts are being made at the national level to address this.

Panaland is part of the American Economic Community.  Recent public sector and banking reforms, and revamped or new legislative frameworks have all helped increase private-sector growth and investment. Short-term economic progress also depends on curbing corruption and cutting back on unnecessary public spending.

According to the Transparency International Corruption Perceptions Index, Panaland at a ranking of 126 is the least corrupt country in Central America with a corruption incidence of 17.8%. 
Prolonged drought during the early years of the 21st century has severely reduced electricity generation capacity as the majority of Panalands electricity supplies are hydro-electric. Plans to increase gas and coal-fired generation capacity are likely to take some years to implement, and growth is forecast to be increased to seven per cent per year.

Health and sanitation are ongoing issues in Panaland where malaria is the leading cause of death in children who survive the neonatal period and HIV/AIDS is the leading cause of death in adults.

1 comment:

  1. Great blog! I'm studying OHS at Uni and your blog has been more helpful in understanding risk management than my text book.