Fillable Printable PESTEL Analysis of the Macro-environment

PESTEL Analysis of the Macro-environment

PESTELanalysis 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:

FactorCould include:

Politicale.g. EU enlargement, the euro, international trade, taxation policy

Economice.g. interest rates, exchange rates, national income, inflation,

unemployment, Stock Market

Sociale.g. ageing population, attitudes to work, income distribution

Technologicale.g. innovation, new product development, rate of technological

obsolescence

Environmentale.g. global warming, environmental issues

Legale.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:

LOCALNATIONALGLOBAL

POLITICALProvision of services by

local council

UK government policy

on subsidies

World trade

agreements e.g. further

expansion of the EU

ECONOMICLocal incomeUK interest ratesOverseas economic

growth

SOCIALLocal population growthDemographic change

(e.g. ageing population)

Migration flows

TECHNOLOGICALImprovements in local

technologies e.g.

availability of Digital TV

UK wide technology e.g.

UK online services

International

technological

breakthroughs e.g.

internet

ENVIRONMENTALLocal waste issuesUK weatherGlobal climate change

LEGALLocal licences/planning

permission

UK lawInternational

agreements on human

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.