PESTEL Analysis (external)

Class Handout

Managers have to identify changes in macro-environment that influence strategic position of the
organization.
PESTEL Analysis can be used for the assessment of strategic position of the organization in macro-
environment in which the organization operates.
Change in PESTEL factors requires organization to change its strategic position. Failure to change
its strategic position can lead to loss of competitive advantage in the long term.
PESTEL factors cannot be controlled in the short term. Therefore, organization has to change its
strategy to respond to change in PESTEL factors.
Trying to change PESTEL factors even in the long term may prove costly, instead there is no
guarantee that organization will succeed.

Political
Political environment is associated with government policies and actions.
Following are some of the ways in which political factor can affect organization.
• Government can improve economic environment by providing grants and loans to organizations.
• Government can encourage or impose quality standards by devising award schemes or legislations
respectively.
• Government can attract or resist foreign investment by devising policies such as monetary and
fiscal policies.
• Government can raise compliance costs to organization if it frequently revises its policies and
legislations.
• Organizations may have to change their processes to comply with revised policies and legislations.
• Government changing hands frequently can upset investors due to uncertainty regarding policies of
new government, while stable government can attract new investors.
• Whether rules and regulations made by the government are polite or stringent this indicates the
venerability of the organization to legal risk such as fines and penalties (it can also be discussed
under legal factor).
• Government can protected or damage home industry by setting import & export duties and quotas.
• Government can create new employments in under developed areas by investing its own revenue
(tax income).
• Government can improve technological environment for organization by providing infra-structure
such as sewerage, transportation, energy, wireless networks etc.

Economical
Economic environment includes financial performance, employment levels, customers, suppliers,
supply & demand in markets. Both profit making and non-profit making organizations needs to be
economically (financially) sound.
Not for profit making organizations exist to pursue non-financial objectives rather than economic
growth. However, they need to be economically sound to achieve those objectives.
Economic factors can deteriorate or improve due to deterioration or improvement in other factors
such as political and legal factors etc.

Following are some of the ways in which economic environment can affect organization.
• Business cycle affects revenue and market growth of the organization in the short term depending
on the stage from which the business is suffering. The stages are depression, recession, recovery
and boom.
• Industrial cycle, affects revenues and market growth of organization in the long term depending on
the stage from which the industry is suffering. The stages are introduction, growth, maturity and
decline.
• Economic strength of organization depends on access to resources such as finance, human
resource, materials and equipment at reasonable cost. In addition, material needs to be available in
time when required and equipment along with after sales service.
• Availability of suppliers and their bargain power affects organizational economic strength.
• Market demand for goods or services which organization offers.
• Taxation policies i.e. direct or indirect taxation and tax rates.
• Inflation, interest rate and foreign exchange rate.
• National income can also influence market demand for the organization’s goods or services.
• Level of unemployment in the country, high unemployment puts employer in dominant position and
can negotiate low wage rate with workers.
• Stock market condition such as investor confidence in stock exchange affects demand for shares
of the organization. Rising demand of shares in the stock market may lead to easy availability of
finance at reasonable cost.

Social
Social environment is includes with age, sex, race, culture, language, individual income, taste,
fashion and behaviours of human beings etc. These factors can influence political factors.

Following are some of the ways in which social factor can affect organization.
• Demand, taste and behaviour of the society affect quality and specification of the goods or services
of the organization.
• Society can support or boycott organizational goods or service depending on how society
perceives its impact upon them. These perceptions can be improved by good public relation
practice.
• Increasing or decrease population affects organization’s decision on investment or divestment to
particular industry in it operates.
• Attitudes of workers affect cost and profitability of the organization.
• Healthy workers are more productive than overstressed workers. Health of the workers depends on
society from which organization recruits them.
• Income distribution affects the organization choice of market segment and customer group. Income
distribution means how wealth in the country is scattered among individuals. Even distribution
suggests that most of the people may buy products offered by the organization. However, people
may not afford highly priced product. On the other hand, uneven distribution suggests that only
minority of the people can buy product offered by the organization. However, minority of the people
may afford highly priced product.
Technological
Technological environment is associated with learning and innovation. Social environment can
influence technological environment, while technological environment can influence environmental
and social environment in turn.
• Organizational capital expenditure, quality of products and selling prices depends on either
technological environment is stable or rapidly changing. Rapidly changing environment suggests
shorter product life cycles and higher replacement cost of plant & machinery while stable
environment suggests opposite.
• Technological developments may permit doing organizational activities more efficiently,
economically and effectively. Organization may automate its activities, this is turn may affect other
factors such as social and economic factors.
• Innovation can lead to boom in the economy and it can affect society as well.

Environmental
Environment factor includes natural resources, climate, wildlife, catastrophes etc.
Environmental deterioration or improvement is related with technological advancement,
environmental legislations (legal factor) and people attitudes toward environment (social factor).

Following are the ways in which environment can affect organization.

Legal
Legal environment includes rules and regulations. These factors are related with political or social
factors.

Following are the ways in which legal factor can affect the organization.
• Competition law imposes restriction of mergers and acquisitions to promote competition.
Competition encourages organization to operate efficiently to sustain in market and achieve
competitive advantage. Competitive advantage is the ability to earn profits above industry average.
• Employment legislation protects rights of workers by setting minimum wage requirements,
antidiscrimination and anti-harassment legislation, health & safety legislation etc to protect workers.
It changes the way organization deploys their workers.
• Imposing high import duties to protect home industries. It limits organizational profitability from
imported goods or manufacturing of finished goods require imported raw materials.
• Licensing requirements enforce organizations to maintain quality of standard set by the law in order
to get license to operate in particular industry. Licensing requirements also affect the level of
competition in the market.