Strategic Management

UNIT 3 Lecture 5: PESTEL FRAMEWORK

August 2023
LESSON STRUCTURE
 3.1 Learning Objectives
 3.2 Introduction
 3.3 The PESTEL Environment
 3.3.1 Political
 3.3.2 Economic
 3.3.3 Social cultural
 3.3.4 Technological
 3.3.5 Environmental
 3.3.6 Legal
 3.4 Summary
 Model Questions
Lesson Objectives
At the end of the session you should be able to:
 Explain each of the intricacies of each component of the PESTEL
framework and the interplay between these factors and their
combined influence on business operations
 Evaluate the significance of the PESTEL factors in different contexts
and identify where certain factors have stronger influence than
others.
 Apply the PESTEL framework to real –world scenarios.
 Discuss how businesses can proactively position themselves to adapt
to dynamic external changes.
What is the PESTEL FRAMEWORK?
PESTEL FRAMEWORK
Introduction
The PESTEL framework is a strategic tool used in business and strategic
management to analyse and assess the external macro-environmental
factors. By examining these factors, businesses and organisations can
gain insights into potential opportunities and threats, allowing them to
make informed decisions and develop effective strategies.
It is important to note that while the framework does not provide
definitive answers, it guides organisations in gathering relevant
information for better decision making.
PESTEL Framework
 The Political Environment
 Politics is a dominant and pervasive feature of our lives:
 The most powerful and influential office in a nation, that of a Head of
State, is controlled/occupied by a politician
 Politicians control the most important organs of governance, namely,
the legislature, the executive and the judiciary
 Politicians usually have some influence on institutions and organs that
affect every day lives, such as, educational, health, religion or even
recreational activities.
 Major national and international events are initiated, presided over or
controlled by politicians, such as
a nation’s stability
 national disasters
 war/peace
 sports events
 major contracts: airports, roads, telecommunications, bridges,
The Political Environment Cont’d
The political environment can be influenced by three factors;
Ideology, the Law and Ethics

The Governments Ideology towards Business Activity

 Governments may have an ideology of participating in the
business environment by establishing state owned enterprises.

 The other way is through playing a role as regulator of

sensitive sectors of the economy.

 Government ideology is also manifested through the

economic systems that the government of the day may adopt
i.e. command economy, free-market economy and mixed
economy.
Government Role in the Economy
Governments and political institutions impact on the business environment through:
 Ownership and participation in the economy
 Regulator: government regulates business conduct, exploitation of
opportunities, and sets the business tone of a nation.
 Client: government is a major client of business and government contracts are
perceived to be most lucrative.
 Political Stability: Political stability creates a conducive environment for
business.
 Political sovereignty: The quest for political sovereignty could for example lead
to interference and hostile regulations against foreign businesses.
 Changes in political leadership, government regulations, or geopolitical tensions
can significantly impact businesses.
 THE ECONOMIC ENVIRONMENT
Economic factors such as economic growth, inflation rates, exchange rates, interest
rates, unemployment rates, and disposable income impact on consumer spending,
demand for products/services, and overall business performance.

The following are some of the economic factors of direct influence on business;
 Income Levels
Income levels have a strong bearing, for the amount of disposable income individuals
receive determines the amount of goods and services that consumers demand.
A better description of a country’s wealth can be found in its “per capita” income, which
is the total national income divided by its population.
 Inflation
Inflation erodes the purchasing power of money and causes other problems for
organizations in areas such as pricing and the accurate estimation of demand.
Governments all over the world try to reduce inflation rates in order to stabilize the
economy and make easier for international trade to take place.
The rate of inflation is often an indicator of how economically stable the economy of a
country is.
 Distribution of Income
The way income is distributed is important to most organizations and this is reflected in
the segmentation (dividing the market into specific groups of consumers) as part of the
marketing strategy.
Reflection!
 Explain the significance of analysing the Gross National Product (National
Income) of a country in formulating effective strategies
 Investigate emerging trends in each PESTEL category. Discuss the implications
of these trends for future business strategies.
Significance of Economic Environment in
Strategy Formulation

An effective strategy involves the following:

 A forecast of economic trends (scanning the environment) in order to find
market opportunities.
 A determination of where to play, and how to play
 Market size and market growth
 A determination of production levels in the respective markets.
 The allocation of resources across activities.
 The Social Environment

The social environment can be divided into two categories; demographic

and behavioural.

 Demographic aspects include; population size (which determines the

size of the market), Age distribution (which affects changing tastes and
needs and therefore marketing activities need to adapt over time.

 Behavioural aspects include; cultural values, people grow up in societies

which shape their beliefs i.e. alcohol is forbidden in most Moslem
countries, which may consequently affect the marketing of alcoholic
beverages.
 Aesthetic Values: What one society rates as attractive, another may find
unattractive or distasteful. This applies particularly to colour, design,
styling, music, and fashion. For example sunsets, landscapes, flora and
fauna result in pleasure for some societies.
 The Cultural Environment

 Factors of cultural environment revolve around common beliefs, values

or capability.

 Elements of the cultural environment include language, social norms,

religion, ethics, socio economics, nationalism, aesthetics, material
culture, attitudes, values and social organisation.

 A group culture can be an opportunity or a threat to a firm. For example

demand for sugar free diet for health reasons.

 The American dream is about affluence or materialism. This is an

opportunity for new investments. Lack of desire for material things
means no demand to drive investment.

 Understanding the cultural factors helps businesses tailor their offerings

to match customer preferences and societal shifts.
Technological Environment

Technological factors encompass the impact of innovation and advancements on

the business environment. This includes automation, digitalisation, research and
development, technology adoption rates, and disruptive technologies. Firms have
to stay updated with technological trends to remain competitive and adapt their
processes and offerings.
Examples of digitalisation include:
 Automation of business processes with the help of digital technology
 Digitalisation of financial services and banking
 Digitalisation of healthcare systems and patients records.
Examples of disruptive technology include:
 The cell phone, Electric cars, Work from home revolution, AI
 New-market disruption – targeting customers who didn’t use a similar product
before.
 Technological Environment
Other areas where we have noticed emerging technological
advancements include;
 New Processes
New ways of doing things are constantly emerging i.e. satellite
broadcasting involves consumers purchasing satellite dishes; EFTPOS-
Electronic Funds Transfer at The Point of sale- has been developed for
retailers.
 New Materials
New materials have become available; optic fibres and carbon fibres are
examples. The laser compact disc (CD) has replaced vinyl records.
 The Internet
There are a lot of E-Commerce activities like, selling online, Online
Banking and using the internet to research and gather information, are a
normal part of life in the developed world. The internet is more widely
available through mobile telephones and wireless networks
 Technological Environment Cont’d

Some technological advances have resulted in the following:

 Longer life due to vaccinations, better health care

 Proliferation of use of artificial intelligence (AI) in the
work; computer systems able to perform tasks normally
requiring human intelligence, simulation of human
intelligence
 The impact of mechanization in agriculture, for example
Zambia Sugar).
 Use of VAR (video assistant referee) in soccer
Environmental

Environmental factors highlight the ecological and environmental concerns that

can affect an organisation. These involve issues such as climate change,
sustainability, resource availability, environmental regulations, and corporate
social responsibility
Businesses are increasingly expected to consider and mitigate their
environmental impact. Compliance to environmental requirements is crucial to
avoid penalties.
The Legal Environment

Legal factors involve the regulatory and legal framework within

which a business operates.
 The legal environment of a business is the activities of respective
government towards the trade and commerce of that country.
 It includes among others the current trends of economic controls,
policies of taxation, historical development reports of business,
License & investment laws
 It includes laws that regulate competition of the market such as
laws governing mergers, and acquisitions. For example the
Competition and Consumer Protection Commission (CCPC).
Legal Environment cont’d

 The political, legal, and regulatory environment can be very

influential insofar as the way business is conducted For
example, the Zambia Environmental Management Agency (ZEMA)
 Many industries are heavily regulated to safeguard stakeholder
such as:
- Banking & Finance
- Utility such as ZESCO, Energy
- Transportation - Aviation
- Mining
Limitations and Benefits of the PESTEL Framework

 The merits of the PESTEL framework is it facilitates an

understanding of the wider business environment.
 It fosters the development of external and strategic
thinking
 It enables an organisation to anticipate future business
threats by taking into account key assumptions.
 Helps mitigate risks and take advantage of opportunities
to remain competitive.
LIMITATIONS & BENEFITS OF PESTEL ANALYSIS

 Limitations: Oversimplification of data used in the analysis

can lead to bad decisions.
 It is easy to use insufficient data
 Risk of capturing too much data can lead to paralysis by
analysis
 Some assumptions used may be based on unproven data.
 The macro environment can be difficult to predict and
may change rapidly e.g. COVID pandemic
McDonald's PESTEL Analysis
REFLECTION: Sum up
Model Questions
 Apply the sociocultural component of the PESTEL framework to evaluate the
challenges and opportunities a fast food chain such as Hungry Lion may face
in adapting its menu to suit local preferences in a new market.
 Konkola Copper Mines (KCM) has been facing increasing pressure from
environmental activists and regulatory authorities to reduce water pollution,
and carbon emissions and adopt sustainable manufacturing practices.
 Apply the environmental component of the PESTEL framework to assess the
impact of these external pressures on KCM’s business operations and
reputation.
 Suggest strategies KCM could implement to align with environmental
expectations
Model Questions
 Zambeef is considering entering the Southern DRC market given its promising
growth potential. However, the political landscape of the DRC is known for its
instability and frequent changes in governments.
 Assess the potential impact of political factors on the company’s market entry
strategy using the PESTEL framework.
 Provide recommendations on how the company can mitigate political risks.
 Mwape and his colleague have developed a groundbreaking software application.
Mwape and his colleague are considering expanding into international markets but
are concerned about intellectual property theft and lax enforcement, and copyright
laws in the neighbouring countries.
 Using the legal aspects of the PESTEL framework, analyse the legal challenges the
startup might face in protecting its intellectual property rights.
 Provide recommendations for navigating these challenges.