PESTEL analysis of the macro-environment

There are many factors in the macro-environment that will effect the decisions of the managers
of any organisation. Tax changes, new laws, trade barriers, demographic change and government
policy changes are all examples of macro change. To help analyse these factors managers can
categorise them using the PESTEL model. This classification distinguishes between:

 Political factors. These refer to government policy such as the degree of intervention in
the economy. What goods and services does a government want to provide? To what
extent does it believe in subsidising firms? What are its priorities in terms of business
support? Political decisions can impact on many vital areas for business such as the
education of the workforce, the health of the nation and the quality of the infrastructure
of the economy such as the road and rail system.

 Economic factors. These include interest rates, taxation changes, economic growth,

inflation and exchange rates. As you will see throughout the "Foundations of
Economics" book economic change can have a major impact on a firm's behaviour. For
example:

               - higher interest rates may deter investment because it costs more to borrow
               - a strong currency may make exporting more difficult because it may raise the price in
terms of foreign currency
               - inflation may provoke higher wage demands from employees and raise costs
               - higher national income growth may boost demand for a firm's products

 Social factors. Changes in social trends can impact on the demand for a firm's products
and the availability and willingness of individuals to work. In the UK, for example, the
population has been ageing. This has increased the costs for firms who are committed
to pension payments for their employees because their staff are living longer. It also
means some firms such as Asda have started to recruit older employees to tap into this
growing labour pool. The ageing population also has impact on demand: for example,
demand for sheltered accommodation and medicines has increased whereas demand for
toys is falling.

 Technological factors: new technologies create new products and new processes. MP3
players, computer games, online gambling and high definition TVs are all new markets
created by technological advances. Online shopping, bar coding and computer aided
design are all improvements to the way we do business as a result of better technology.
Technology can reduce costs, improve quality and lead to innovation. These
 developments can benefit consumers as well as the organisations providing the
products.

 Environmental factors: environmental factors include the weather and climate change.

Changes in temperature can impact on many industries including farming, tourism and
insurance. With major climate changes occurring due to global warming and with
greater environmental awareness this external factor is becoming a significant issue for
firms to consider. The growing desire to protect the environment is having an impact on
many industries such as the travel and transportation industries (for example, more
taxes being placed on air travel and the success of hybrid cars) and the general move
towards more environmentally friendly products and processes is affecting demand
patterns and creating business opportunities.

 Legal factors: these are related to the legal environment in which firms operate. In recent
years in the UK there have been many significant legal changes that have affected
firms' behaviour. The introduction of age discrimination and disability discrimination
legislation, an increase in the minimum wage and greater requirements for firms to
recycle are examples of relatively recent laws that affect an organisation's actions.
Legal changes can affect a firm's costs (e.g. if new systems and procedures have to be
developed) and demand (e.g. if the law affects the likelihood of customers buying the
good or using the service).

Different categories of law include:

 consumer laws; these are designed to protect customers against unfair practices such as
misleading descriptions of the product
 competition laws; these are aimed at protecting small firms against bullying by larger
firms and ensuring customers are not exploited by firms with monopoly power
 employment laws; these cover areas such as redundancy, dismissal, working hours and
minimum wages. They aim to protect employees against the abuse of power by
managers
 health and safety legislation; these laws are aimed at ensuring the workplace is as safe as
is reasonably practical. They cover issues such as training, reporting accidents and the
appropriate provision of safety equipment

Typical PESTEL factors to consider include:

Factor Could include:

Political e.g. EU enlargement, the euro, international trade, taxation policy
Economic e.g. interest rates, exchange rates, national income, inflation,
unemployment, Stock Market
Social e.g. ageing population, attitudes to work, income distribution
Technological e.g. innovation, new product development, rate of technological
obsolescence
Environmental e.g. global warming, environmental issues
Legal e.g. competition law, health and safety, employment law

By using the PESTEL framework we can analyse the many different factors in a firm's macro
environment. In some cases particular issues may fit in several categories. For example, the
creation of the Monetary Policy Committee by the Labour government in 1997 as a body that
was independent of government but had the ability to set interest rates was a political decision
but has economic consequences; meanwhile government economic policy can influence
investment in technology via taxes and tax credits. If a factor can appear in several categories
managers simply make a decision of where they think it best belongs.

However, it is important not to just list PESTEL factors because this does not in itself tell
managers very much. What managers need to do is to think about which factors are most likely
to change and which ones will have the greatest impact on them i.e. each firm must identify the
key factors in their own environment. For some such as pharmaceutical companies government
regulation may be critical; for others, perhaps firms that have borrowed heavily, interest rate
changes may be a huge issue. Managers must decide on the relative importance of various
factors and one way of doing this is to rank or score the likelihood of a change occurring and
also rate the impact if it did. The higher the likelihood of a change occurring and the greater the
impact of any change the more significant this factor will be to the firm's planning.

It is also important when using PESTEL analysis to consider the level at which it is applied.
When analysing companies such as Sony, Chrysler, Coca Cola, BP and Disney it is important to
remember that they have many different parts to their overall business - they include many
different divisions and in some cases many different brands. Whilst it may be useful to consider
the whole business when using PESTEL in that it may highlight some important factors,
managers may want to narrow it down to a particular part of the business (e.g. a specific division
of Sony); this may be more useful because it will focus on the factors relevant to that part of the
business. They may also want to differentiate between factors which are very local, other which
are national and those which are global.
For example, a retailer undertaking PESTEL analysis may consider:

 Local factors such as planning permission and local economic growth rates

 National factors such as UK laws on retailer opening hours and trade descriptions
legislation and UK interest rates
 Global factors such as the opening up of new markets making trade easier. The entry of
Bulgaria and Rumania into the European Union might make it easier to enter that
market in terms of meeting the various regulations and provide new expansion
opportunities. It might also change the labour force within the UK and recruitment
opportunities.

This version of PESTEL analysis is called LoNGPESTEL. This is illustrated below:

LOCAL NATIONAL GLOBAL

POLITICAL Provision of services UK government policy World trade
by local council on subsidies agreements e.g. further
expansion of the EU
ECONOMIC Local income UK interest rates Overseas economic
growth
SOCIAL Local population Demographic change Migration flows
growth (e.g. ageing
population)
TECHNOLOGICAL Improvements in local UK wide technology International
technologies e.g. e.g. UK online services technological
availability of Digital breakthroughs e.g.
TV internet
ENVIRONMENTAL Local waste issues UK weather Global climate change
LEGAL Local UK law International
licences/planning agreements on human
permission rights or environmental
policy

In "Foundations of Economics" we focus on the economic environment. We examine issues such

as the effect of interest rate changes, changes in exchange rates, changes in trade policy,
government intervention in an economy via spending and taxation and economic growth rates.
These can be incredibly important factors in a firm's macro-environment. The growth of China
and India, for example, have had massive effects on many organisations. Firms can relocate
production there to benefit from lower costs; these emerging markets are also providing
enormous markets for firms to aim their products at. With a population of over 1 billion, for
example, the Chinese market is not one you would want to ignore; at the same time Chinese
producers should not be ignored either. However, the relative importance of economic factors
compared to other factors will depend on the particular position of a business. Exchange rate
fluctuations may be critically important to a multinational but less significant to a local window
cleaner. Rapid economic growth or economic decline may be very significant to a construction
business that depends heavily on the level of income in the economy but may be slightly less
significant to a milk producer whose product is less sensitive to income. So whilst the economy
is important to all firms on both the supply side (e.g. unemployment levels affect the ease of
recruitment) and demand side (e.g. income tax affects spending power) the relative importance
of specific economic factors and the relative importance of the economy compared to, say,
regulation or social trends will vary. Whilst we hope this book provides a good insight into the
economy and the possible effects of economic change on a business these must be considered in
the light of other macro and micro factors that influence a firms' decisions and success.

© OxfordUniversity Press, 2007

Business Environment Analysis

Background
Environmental analysis is a systematic process that starts from identification of
environmental factors, assessing their nature and impact, auditing them to find
their impact to the business, and making various profiles for positioning. A
common process of environmental analysis or scanning is discussed in the
following section.
Environmental Analysis Process
A business manager should be able to analyze the environment to grasp
opportunities or face the threats. Organizations need to build strength and
repair their weakness available in the business environment. Therefore, this
process consists not only a single steps but a process of various steps.
Environmental analysis comprises scanning, monitoring, analyzing, and
forecasting the business situation. Scanning is to get the relevant information
from the information overload. It is to focus on the most relevant information.
Monitoring is to check the nature of the environmental factors. Analyzing
requires data collection and use of different required tools and techniques.
Forecasting is to find the future possibilities based on the past results and
present scenario.
Environmental analysis process is not static but a dynamic process. It may
differ depending on the situation. However, a general process with few
common steps can be identified as the process of environmental analysis
these are a) Monitoring or identifying environmental factors, b) Scanning and
selecting the relevant factors and grouping them, c) Defining variables for
analysis, d) Using different methods, tools, and techniques for analysis, e)
Analyzing environmental factors and forecasting, f) Designing profiles, and g)
Strategic positioning and writing a report. Brief discussion is made on each of
the step of this environmental analysis process.
Identifying environmental factors
First of all a strategist should identify all the relevant factors that might affect
his or her business. In this process, one should first know what the internal
areas of the business are. This includes all the systems, internal structure,
strategies followed, and culture of the organization. All these areas can be
covered into the five functional areas in classical approach. Similarly, a
business daily interacts with the close environmental components outside the
business such as customer, competitor, and supplier. It might cover all other
stakeholders such as trade union, media, and pressure group. Furthermore,
general such business environment factors as political-legal, economic, sociocultural,
and technological factors are to be identified
Scanning and selecting relevant and key factors
Out of all the business environmental factors, a strategist should focus only on
the relevant factors for further analysis. All the factors are not equally
important and affecting to the business. In this context, a strategist has to scan
the environmental trend to select only the most affecting environmental factors
from the information overload. This step paves the way of environment
analysis and forecasting.
Defining Variables for Analysis
Selected environmental factors are to be further specified into the variables. A
concept can be interpreted into different variables. For example, political
situation can be measured using few variables such as instability, reliability,
and long-term effect. Economic environment might cover many variables such
as Per Capita, GDP, and Economic policies that can be further classified into
many other variables. Variables are the basis of measurement in
environmental analysis process. Variables can be compared, grouped,
correlated, and predicted to find the clearer picture of the broader concept. It
is, therefore, necessary to define the variables first in any kind of analysis
including the environmental analysis.
Using Different Methods, Techniques, and Tools
Different types of methods, tools, and techniques are used for analysis. Some
of the major methods of analysis can be Scenario Building, Benchmarking,
and Network methods. Scenario presents overall picture of its total system
with affecting factors. Benchmarking is to find the best standard in an industry
and to compare the one’s strengths and weakness with the standard. Network
method is to assess organizational systems and its outside environment to find
the strength and weakness, opportunity and threats of an organization.
...
Some of the techniques of primary information collection can be Delphi,
Brainstorming, Survey, and Historical enquiry. Delphi technique collects
independent information from the experts without mixing them. Brainstorming
is information collection technique being open minded without criticizing
others. Survey is to design questions and to ask them to the participants
whereas the historical enquiry is a kind of case analysis of past period.
Analysis tools can be statistical such general descriptive tools as mean,
median, mode, frequency. Tools can be inferential as ANOVA, correlation,
regression, factor, cluster, and multiple regression analysis. There are many
tools of analyzing functional areas. Finance and accounting use mostly
profitability, leverage, fund flow and other similar accounting and financial tools
for analysis. Human resources use employee turnover, training, satisfaction
and many others as the basis of evaluating strength and weakness.
Production area is assessed using quality control, productivity, breakdown,
and many others. Similarly, marketing effectiveness is judged from the sales
volume and market coverage. Research and development is perceived
successful if it can really develop the strength in an organization.
Forecasting Environmental Factors
Collecting relevant information from the selected areas and to identify the
variables in such areas are the basics of analysis. Analyzing the past
information to predict the future is the main objective of this step. As discussed
earlier, use of different methods, techniques, and tools comes under the
analysis process. It is, therefore, a comprehensive process that analyzes
collected information using different tools and techniques.
Designing Profiles
After analyzing the environmental factors they are recorded into the profiles.
Such profiles record each component or variables into left side and their
positive, negative, or neutral indicators including their statement in the right
side. Internal areas are recorded in Strategic Advantages Profile (SAP) and
external areas are recorded in Environmental Threat and Opportunity Profile
(ETOP). Strength, Weakness, Opportunity, and Threat (SWOT) profile can be
designed combining both of these two profiles into one.
There are varieties of reporting formats or profiles used for external and
internal business environment analysis. Environmental Threat and Opportunity
Profile (ETOP) is commonly used to report the external environmental situation
whereas Strategic Advantages Profile (SAP) to report the internal
environmental situation1. Both of these profiles can be merged into Strength-
Weakness-Opportunity-Threat (SWOT) profile.2 (See: annex...). David used
External Factor Evaluation (EFE) Matrix to present weighted score of external
environmental factors. Similarly, he used Internal Factor Evaluation (IFE)
Matrix to make the reporting of internal environmental audit. (See: annex-...).
Whellen & Hunger used External Factors Analysis Summary (EFAS) and
Internal Factors Analysis Summary (IFAS) that are presented in annex- ....
Environmental threats and opportunities profile (ETOP) is a commonly used
profile related to external business environment. Strategic advantages profile
(SAP) is related to internal business environment. Nowadays, strength &
weakness and opportunities & threats (SWOT) profile has become very
popular. Present writing pursued the approach of reporting external and
internal business environment using the same approach.
...
Preparing ETOP
Environmental threat and opportunity profile is referred as ETOP profile. It
identifies the relevant environmental factors. Such factors might be general
environmental factors and task environment factors. Thereafter, it is necessary
to identify their nature. Some factors are positive to the organization whereas
1 see Jauch, Gupta, and Glueck, 2003
2 see Jauch, Gupta, and Glueck, 2003; Johnson & Scholas, 2003
others are negative. Therefore, it is necessary to find out their impact to the
organization. Positive, neutral, and negative sign in ETOP denotes the
relevant impact of environmental fa