PESTEL Analysis as One of the Most Important Frameworks of Macro-Environment - Essay Example

?PESTEL Report PESTEL is an acronym which stands for Political, Economical, Social, Technological, Environmental and Legal. “A PESTEL Analysis is oneof the most important frameworks of macro-environment, which comprises the most important factors used in environmental scanning, as part of advanced strategic management.” (Marketing Minefield 2012). It is mainly used to determine the risks and opportunities that accompany these factors in the macro environment of a business. This analysis provides an insight for the business towards the various issues and external pressures in order to mitigate the risks and execute specific tactics for the business development. Political, Economic, Social, Technological, Environment and Legal issues greatly differ in respect to domestic as well as the global structure. PESTEL analysis provides an overview towards the different external factors that the business or organization has to take into consideration. The Political environment of the country highly contributes to the stability of the nation which is as vital aspect to consider regarding the business development. Political factors include intervention of government policies, labor laws, trade restrictions and tax policies. The Economic influences of a nation or the global environment provide a great impact on the business operation and decision making. These factors include the growth of the economy, inflation rate, exchange-rate, globalization, GDP and GNP growth. The Social and cultural aspects of a region contribute considerably to the products demand and business market. The social factors include population growth rate, career attitudes, age distribution safety measures, educational infrastructure and cultural taboos. Technological aspect of the business determines the production level and affects the cost and quality of the products. Technological factors include R&D activity, automation, rate of technological change, emergence of new technologies and impact of communication. Environmental issues directly or indirectly affect the business well-being in regard to its kind. Environmental factors include ecological and environmental aspects such as climatic change, weather. Also environmental awareness creates an impact towards the production of products either positively or negatively. Legal issues are widely taken into consideration when establishing a business in a particular region. Legal factors include consumer law, discrimination law, employment law, and health and safety law. Depending on these factors, a PESTEL analysis should provide a context for the business in relation to its external environment. After having a brief introduction about all these factors, let us take a deeper discussion on the effect and influence of economic factors in business growth and development. Influence of Economic factors on business: The economic environment of a country greatly influences the businesses and their market. Though economic factors are out of control for business, it shows a profound effect on the performance and marketing of the business products. It contributes to the product demand, cost structure, pricing strategies, profitability and various other issues within the concern. In addition, it provides a direct impact on the behavior of the consumer in buying the business products. In case of international business, it is a vital one to consider the economic environment of the region or country as it provides a prominent influence over the business growth and its products market. On the whole, “the strengthening of an economy will generally benefit industries, but the extent of its effect will vary according to which economic factors are most affected.” (Henry 2008). One of the major aspects that impact business and economy is the Gross Domestic Product rate (GDP). A constant and positive level GDP is essential to sustain a good business economy. A business GDP has to be on a constant check and appropriate measures have to be taken to maintain the same. Appropriate changes to the policies will facilitate better economic sustainability for the businesses. For example, “If the Federal Reserve determines that GDP growth will soon slow down to a significantly lower growth rate, it can reduce interest rates today to stimulate future economic growth and try to maintain real GDP growth in the future.” (Colorado University). Inflation is another key factor that has to be considered in order to maintain stability in economy. Inflation is the sustained rise of prices without raise of productivity. Minimal inflation will encourage investments by businesses, increase competitiveness as well as the consumers spending power. So, the governments tend to maintain a minimum level of inflation in order to help the businesses. For instance, in UK, “The government sets targets for inflation between narrow bands (CPI of 2%, + or - 1%) and requires the Monetary Policy Committee to maintain inflation between these bands by the use of interest rate policy.” (NGFL Wales 2009). In the modern economy, the fiscal and monetary policies counteract with the business cycle. The changes in monetary policies have a quick and strong impact on the business as well as the consumers. Similarly, change in monetary policies will also show up changes in interest rates that will cause to minimize the inflation level. In case of large industries like automobiles and vehicle manufacturers, the increase in interest rates will lead to decrease in sales as it prevents the customers from buying these products and services. On the other hand, high interest rates discourage the investors in new capital and expansion of business. On the flip side of the business cycle, is the recession. A booming economy may tend to have a low employment and higher spending power for consumers while economic recession often leads to high rate of unemployment and low stockholder confidence. In effect of this, during recession, the spending power of the consumers tends to be low. Conversely, these spending habits of the consumers show a significant positive impact on the purchase of staple business products. That is, it favors retail commodity sales. For instance, Discount retailers are thriving as Canadians try to score a bargain with the economy in recession. Canadian dollar store chain Dollarama announced that profits rose nine per cent in its fourth quarter. (CTV 2009). In addition, Changes in exchange rate have considerable effects upon the businesses. The value of the US dollar compared to other foreign currencies affects on the import or export products of a company. For example, in UK, the increase in value of Pound affects the export of goods out of UK by a downfall, on the other hand, increases the imports into UK. “In industries that are heavily reliant on foreign raw materials and processing, such as the clothing industry, the entire sector can be lifted or depressed with a strengthening or weakening of the dollar.” (Mohr). Conclusion: On the result of this PESTEL analysis, the objective of the business concern is to make the effective utilization of the opportunities in the environments, at the same time, to minimize the risks by strategic planning and appropriate tactics. On the part of the economic factors, the business has to take efficient control of the current economy and make necessary alterations and policy changes within the organization to meet the consequences of the recession or growth of the economy. This will facilitate better performance of the business along with increase its productivity and growth. Thus, an economy of the country and its consumer confidence can effectively spur the business growth or conversely harm it, if ignored. References: Colorado University. The Business Cycle, Aggregate Demand and Aggregate Supply. [Online] Available from http://www.colorado.edu/Economics/courses/econ2020/section7/section7- main.html(Accessed on November 10, 2012) CTV., 2009. Discount retailers see rising profits during recession. [Online] Available from http://www.ctvnews.ca/discount-retailers-see-rising-profits-during-recession- 1.390230(Accessed on November 10, 2012) Henry, A., 2008. Understanding Strategic Management. Oxford University Press. Marketing Minefield., 2012. PESTLE Analysis. [Online] Available from < http://www.marketingminefield.co.uk/pestle-analysis/(Accessed on November 10, 2012) Mohr, A. “Factors Affecting Economic Development and Growth. [Online] Available from http://smallbusiness.chron.com/factors-affecting-economic-development-growth- 1517.html (Accessed on November 10, 2012) NDFL Wales Business Studies., 2008. Inflation and it’s impact on business. [Online] Available from http://www.ngfl-cymru.org.uk/inflation.pdf (Accessed on November 10, 2012) Read More