One of our posting themes on the Risks & Ventures blog is STEEPLED.
It’s not a very commonly used expression even within formal risk management practice, although the idea that it expresses – that we should look at the hazards and opportunities of situations in a holistic and comprehensive way – is widely understood in theory, even if not always applied well in practice.
But because we’ve chosen to make STEEPLED one of our themes we thought that we would write some more about what it is, beyond the brief description we give on our themes page. So what does STEEPLED mean in risk management?
STEEPLED is an idea that is derived from the concept of PEST Analysis. PEST Analysis, has nothing to do with actual pests, but rather it’s a mnemonic for a type of typically strategic (or macro) analysis that encourages people to take into account a broad range of factors effecting any particular issue, environment or decision.
It’s a technique that can be applied effectively to almost any size of commercial decision, whether or not that decision involves a physical element, from the smallest, least risky ideas to the largest and most complicated and expensive most ventures you can think of. For example the difference between launching a blog called Risks & Ventures and building a new nuclear power plant. Which were the two lowest cost and most expensive things that we could think of off the top of our heads when we were drafting this post.
Obviously the depth and volume of analysis for any decision should be appropriate for the importance of the consequences of the decision and the costs involved. So there would be lots required for nuclear power stations, but not much needed to get a normal blog going.
PEST stands for:
- Social-Cultural, and
This means a PEST Analysis of an issue, environment, situation or opportunity would consider the political, economic, social and technological factors that were relevant to it; and it is important to add that just as it can applied to business decisions, the PEST approach can, in fact should, also be used to analyse policy decisions too.
Let’s quickly look at what these mean:
Political factors concern how a particular place is governed, including the type of political system that is in place and how stable it is; the type of rules and laws they have and the likelihood that those rules could be changed quickly; how welcoming the government is to whatever type of business you are doing there; and what the tax system is like amongst many other factors.
Economic factors are about the way the economy is run, including what interest rates are like and how these are set; what kind of import and export conditions are in place; and what currency is being used and how that currency is being managed.
Social-Cultural factors are about human behaviour, human capital and demographics including cultural attitudes and practices, the relative age or youth of a population, their health, their consumer preferences and their levels of education. These are very important factors to consider if you are looking to sell products into a specific geographic market, or conversely are thinking about starting a business in a particular place and want to know what the potential workforce is going to be like.
Technological factors are everything to do with how technology effects an environment or issue. For example, does an opportunity rely on certain technologies or technical processes, and how fast are these relevant technologies changing? Also, how will automation and the growing use of Artificial Intelligence effect the issue, environment or opportunity?
Let’s illustrate this with an example.
Imagine you have been tasked by a car manufacturer to find a new site to built an electric car production plant, which for a larger company in this sectors could be a decision worth over US$1bn.
Your political analysis would including thinking about things like:
- How stable the political systems are in the countries you are considering?
- What concessions or benefits would you get to set up a plant in one country versus another?
- Are these countries involved in external or internal conflicts? and,
- Would a change in government mean a completely different outlook on foreign investment and foreign companies? And how likely is this?
In a worst case scenario you might spend your billion dollars and then with a change of government you might have your factory nationalised taken away from you, or be made to give away a chunk of ownership.
Your economic analysis would look at things like:
- How easy is it to borrow funds to invest in building the production plant?
- Whether the project would still be viable if the local currency fluctuated significantly? And how likely this is this type of fluctuation?
- The cost of importing or sourcing raw materials, and,
- How easily the finished cars could be exported, assuming they were not intended just for the local market.
Your social analysis would include looking at the demographics and culture of the potential workforce. Let’s say there were going to 8,000 new positions in this new facility, and most of them would need to be skilled or semi-skilled trades, this would require enough available workforce at a sufficient level of education to meet this demand. If this wasn’t available in the local area you would have to think about how this demand could met, and this would have a lot of further knock-on effects.
You would also have to consider developing training programmes and work schedules that were appropriate for the local cultural environment, or take on the more challenging proposition of developing a different, new type of working culture inside the facility.
Your technological analysis would consider factors like:
- The reliability and cost of the power supply.
- The types of technologies that would be needed in the factory, where they would come from and,
- How quickly they might need to be updated or changed.
Even more broadly than that technology risk includes analysis of whether the investment you are making in research and development is creating something that your is going to be sufficiently difficult for your competitors to replicate and likely to deliver a sufficient return on investment for you before it becomes obsolete.
PEST Analysis is still a very widely used term across all sort of industries, but over time the PEST has been expanded a little more to become PESTLE or PESTEL, taking into account Environment and Legal factors too.
Environmental factors include everything relating to the environment, climate, ecology, weather and physical geography and what these factors mean for an issue, situation or opportunity.
For example we might not want to situate our new manufacturing plant in a place that experiences frequent earthquakes or has the potential to effected by flooding regularly.
Conversely, we might want to think about setting up in a place where a large portion of the energy the plant needs can be provided by solar power if that was going to significantly reduce long-term costs, in the same way that a country like Iceland which has relatively low temperatures and geo-thermal power sources has attracted the data centres of companies including Google.
Environmental factors also includes the impact of what you are doing on the physical environment too, although certain types of environmental risk could be part of other categories like political risk, social risk and legal risks amongst others.
Legal factors relate to the legal operating environment. These could include restrictions on what was possible to do or not, as well as labour laws, health and safety laws, all kinds of compliance, and more commercial aspects of law such as how companies and ventures could be structured.
Whether or not somewhere is a highly litigious environment where people tend to make claims and sue a lot would also be a legal factor.
STEEPLED is PESTLE with the addition of Ethics and Demographics. (1)
We like the addition of Ethics because we think businesses and policymakers should be thinking about the ethical aspects of an issue, and although it’s kind of covered in Political, Social, Environmental and Legal factors in the other mnemonics, STEEPLED makes it a bit more explicit.
Demographic factors likewise could be part of a Social factors analysis, but we like the separation of slightly more qualitative aspects of the social environment like culture practices and religious beliefs, from the quantitative ones like age, population growth and density.
As we said at the beginning of this post, the concept, whether we label it PEST, PESTEL or STEEPLED, it is a type of analysis can be applied to environments, projects, opportunities and issues of any scale, and the main difference in how it is used is the depth of analysis that is going to be needed for larger and more complex situations.
It’s also an idea that has practical applications for your own personal decisions in daily life. Thinking about the concept of STEEPLED regularly will lead you to also think more comprehensively about the different stakeholders, and the broader factors and implications around the decisions we make.
We’ve chosen to use STEEPLED as a Risks & Ventures blog theme because we felt it would be useful to have a theme that brought together all of our posts that were based on or inspired by the STEEPLED categories. (2)
It also gave us the chance to write about one of the fundamental concepts in risk management. One which it is very important for any business of any size and stage to know about and use.
As we get more content on this blog we may open up all of those categories to have separate themes for each of the STEEPLED categories, but we’re going to keep them together for now and see how it goes.
(1) Some risk management theorists have created some other versions of PESTLE, including SPELIT where Intercultural factors are added, which is used most frequently in business situations where companies are looking at international operations and opportunities; and STEER which drops political risk and brings in Regulatory factors instead.
(2) You can find out more about our themes by following this link.