BUS501: Strategic Management

The PESTEL framework highlights six critical factors for management to consider when approaching the general business environment.

LEARNING OBJECTIVES

• Assess opportunities and threats within the context of external factors

• Use the PESTEL framework to categorize the macro-environmental factors managers must consider for short-term and long-term success in a given environment

KEY POINTS

• Politics play a role in business, as there is a balance between free markets and systems of control.
• Economic factors are metrics which measure and assess the health of a given economic region or environment.
• Social factors, or demographic factors, assess the mentality of the individuals/consumers within a given market.
• Recognizing the potential technologies available to optimize internal efficiency, or to avoid letting a product or service become technologically obsolete, is a large challenge for management.
• Consumers and governments both penalize companies who have a large adverse affect on the environment (or reward those who have a positive impact).
• Understanding the varying laws and regulations in a given region of operation is critical to avoiding unnecessary legal costs.

TERMS

• macro environment

  As pertaining to the macro-environment, these factors are indicative of the entire business environment as a whole.

• gross domestic product

  A fiscal measure of an entire region's economic production over a specific time frame.

• anti-trust

  A set of laws that ensures no company dominates an industry (i.e. creates a monopoly).

Organizations are faced with a variety of external factors that provide potential opportunities and threats for short-term and long-term success in any given environment. Encompassing a macro-environmental perspective, these factors can be effectively summarized with the acronym PESTEL.

PESTEL stands for the political, economic, social, technological, environmental, and legal influences a business encounters as it pursues its objectives. Analyzing the entirety of the macro-environment is an extensive and complex task, but understanding the framework of basic influences allows for an organized and strategic approach to isolating each opportunity or threat. It is common to conduct a PESTELassessment before any serious decisions are made or any large projects are undertaken. Understanding each of these influencing factors is the first step to addressing them properly.

Political

Politics play a role in business, as there is a balance between free markets and systems of control. Political factors affecting business specifically revolve around taxes, import and export tariffs, environmental and labor laws, potential subsidies, and the stability of a given operational region. As global economics now supersede domestic economics for many businesses, companies must consider a number of opportunities and threats when expanding into new regions or identifying optimal areas for production, sales, or corporate headquarters.

Economic

Economic factors are metrics that measure and assess the health of a given economic microcosm within the entire global economy. These factors incorporate exchange rates, gross domestic product (GDP), consumer purchasing indices, interest rates, inflation, and a number of other indicators of economic health or direction. These indicators are critical to management, as they can reveal a good time to borrow, as well as whether an economy will be friendly to an industry where businesses fluctuate substantially with GDP or spending power, etc.

Social

Social factors could loosely be defined as a demographic analysis, where specific groups display preferences or tendencies that can be leveraged or that can threaten a given incumbent. For example, in the United States, consumers are becoming more health-conscious. This trend affords the food industry opportunities to create products that meet this social desire; as a result, candy manufacturers may want to consider diversification. The social movement of living "green" is another example of this kind of macro-environmental opportunity or potential threat.

Technological

Technology plays a larger and larger role each year in business and will continue to do so as research and development drive new innovations. Recognizing the potential technologies available to optimize internal efficiency is a powerful asset in management. Technology also presents a number of threats, as CD-player manufacturers and Blockbuster Video can attest. These companies were hurt by "disruptive innovations" such as the MP3 player and Netflix. Keeping pace with technology and adapting accordingly are important strategies to sidestep threats and embrace opportunities.

Environmental

The impact of business upon the environment is a growing concern, and companies must consider both the social and political segments of PESTEL in conjunction with environmental factors. Consumers and governments both penalize companies that adversely affect the environment. Governments levy enormous fines upon companies that pollute beyond given specifications, and consumers are more than willing to switch brands if they perceive that a business is ignoring its environmental responsibilities. The environment can also be a source of benefit to a company, such as running water for a hydro-power plant.

Legal

The last factor in PESTEL concerns legal elements, which can also be tied to the political framework. Legal issues such as affirmative action, patent infringements (a recent example being Apple vs. Samsung), antitrust laws (see Microsoft), health regulations, and safety regulations can all significantly affect a company that does not act responsibly. Understanding this legal landscape is important for businesses that want to avoid legal pitfalls and remain within the confines of established regulations.

Source: Boundless
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