When appraising the external environment of the organization you will typically start with its general environment. But what does this mean? The general environment is composed of dimensions in the broader society that influence an industry and the firms within it. We group these dimensions into six segments: political, economic, social, technical or technological, environmental, and legal. You can use the simple acronym, PESTEL, to help remind you of these six general environment segments. Examples of elements analyzed in each of these segments are shown in Table 3.1.
|How stable is the political environment?||What are current and forecasted interest rates?|
|What are local taxation policies, and how do these affect your business?||What is the level of inflation, what is it forecast to be, and how does this affect the growth of your market?|
|Does the government have trade agreements such as EU, NAFTA, ASEAN, or others?||What are local employment levels per capita and how are they changing?|
|What are the foreign trade regulations?||What are the long-term prospects for the economy gross domestic product (GDP) per capita, and so on?|
|What are the social welfare policies?||What are exchange rates between critical markets and how will they affect production and distribution of your goods?|
|Social or Socio-cultural||Technical or Technological|
|What are local lifestyle trends?||What is the level of research funding in government and the industry, and are those levels changing?|
|What are the current demographics, and how are they changing?||What is the government and industry’s level of interest and focus on technology?|
|What is the level and distribution of education and income?||How mature is the technology?|
|What are the dominant local religions and what influence do they have on consumer attitudes and opinions?||What is the status of intellectual property issues in the local environment?|
|What is the level of consumerism and popular attitudes toward it?||Are potentially disruptive technologies in adjacent industries creeping in at the edges of the focal industry?|
|What pending legislation is there that affects corporate social policies (e.g., domestic partner benefits, maternity/paternity leave)?||How fast is technology changing? How is its pace impacting the industry?|
|What are the attitudes toward work and leisure?||What role does technology play in competitive advantage?|
|What are local environmental issues?||What are the regulations regarding monopolies and private property?|
|Are there any ecological or environmental issues relevant to your industry that are pending?||Does intellectual property have legal protections?|
|How do the activities of international pressure groups affect your business (e.g., Greenpeace, Earth First, PETA)?||Are there relevant consumer laws?|
|Are there environmental protection laws? What are the regulations regarding waste disposal and energy consumption?||What is the status of employment, health and safety, and product safety laws?|
Firms cannot directly control the general environment segments and elements. Accordingly, successful companies gather the information required to understand each segment and its implications for the selection and implementation of the appropriate strategies. For example, the terrorist attacks in the United States on September 11, 2001, surprised businesses throughout the world. This single set of events had substantial effects on the U.S. economy. Although individual firms were affected differently, none of them could control the U.S. economy. Instead, companies around the globe were challenged to understand the effects of this economy’s decline on their current and future strategies. A similar set of events and relationships was seen around the world as financial markets began to struggle one after the other starting in late 2008.
Example 3.1 Impact of PESTEL Factors on an Entire Industry
As coronavirus’s impact continued to expand, regulators in countries such as the U.K. began urging companies to conduct risk assessments. The outbreak has caused damage to supply chains in China and internationally. The debt and asset positions of many companies have been affected, the share prices of international companies, and the volume of business in China have fallen sharply. The PESTEL analysis confirms its importance. The whole business environment will be affected by similar emergencies in the future, and companies need to make strategic plans according to PESTEL to reduce their risks after emergencies.
Source: The Wall Street Journal ,U.K. Regulator Urges Companies to Report Coronavirus Risks, Zhiyi Qin 2020Wi
Although the degree of impact varies, these environmental segments affect each industry and its firms. The challenge to the firm is to evaluate those elements in each segment that are of the greatest importance. Resulting from these efforts should be a recognition of environmental changes, trends, opportunities, and threats.