PESTEL FRAMEWORK

STEEP ANALYSIS

A firm's external environment consists of all factors that can affect its potential to gain a competitive advantage. It is advisable during strategic planning to analyze the external environment In order to mitigate threats and leverage opportunities. To understand how this external forces affect the business,one must know the source and nature of these forces,for example external forces in the general environment from where the natural environment and economic environment can be found is often out of the direct control or influence of the company,but the task environment are the ones that a business has some influence over.

The pestel analysis is a useful tool for understanding market growth or decline, ans as such the position,potential and direction of a business. The analysis examines each of the factors (which would be discussed later) on the business. The results can be used to take advantage of opportunities and to make contingency plans for threats when preparing business and strategy plans (Byars,1991). Kotler (1998) claims that Pestel analysis is a useful strategic tool for understanding market growth or decline, business position,potential and direction for operations. The use of pestel analysis can be seen effective for business and strategic planning,marketing planning,business and product development and research reports.

The pestel model groups the forces in the firm's general environment into six segments which are : Political, economic, socio-cultural, technological, ecological, and legal.

Political-Legal Factors

These two factors are usually grouped together in the analysis since they are closely related. The political environment describes the actions,processes and policies of government bodies that may influence the decisions and behaviour of firms.The legal environment captures the official outcomes of political processes as manifested in laws,mandates,regulations and court decisions.These factors might have a direct influence on a firm's profit making potential. Industry's tend to look out for regulatory changes because they may make or mar firms within that industry. That is why some firms lobby so that new laws being made would be favourable to them. Of recent,governments tend to deregulation as a strategy for creating new entrants into industries for increased competition,innovation and value for money spent by consumers or customers.

Some of the variables that affect the political-legal environment include:

a) Form of government

b) Political ideology

c) Tax laws

d) Stability of government

e) current legislations

f) Future legislations

g) Government policies

h) Trading policies

I) Foreign policies

j) Legal system

k) Terrorist activities

l) Immigration laws

m) Global warming laws.

n) home market lobbying

o) International pressure groups.

Economic Factors

Economic factors are largely macroeconomic ,affecting economic wide phenomena There are five major factors that can influence a firm's strategy:

Growth rates: The growth rate is the measure of the rate of change that a nation's domestic product goes through from one year to another. The growth rate indicates the stage of the business cycle the economy is in,if it is in a stage of boom or recession.

In a periods of boom,the economy the company usually witnesses increased demand for products, and decreased competition . During the period of boom,companies take on expansionary strategies in order to satisfy increasing demand and maximize the increased profit making potential the economy presents to it.The reverse is the case in recessionary periods.

Interest rate: An interest rate is the rate at which interest is paid by a borrower(debtor) for the use of money that they borrow from a lender (creditor). This is another key macroeconomic factor,and companies need to track its interest rates for its capital structure decisions and also investment decisions

Levels of Employment: The state of the economy directly affects the level of employment. In a period of boom,unemployment is increasingly low and skilled human capital becomes a scarce and more expensive resource. In periods of recession,unemployment is high and skilled human capital becomes abundant and this lowers the wages.

Price stability: price levels of goods and services frequently change,so this is one thing companies must learn to deal with.for example if it is a multinational firm with foreign branches and in the countries of the foreign branches,the general price level rises and is sustained and constant. If the price of the good for some reason does not rise,then the value of the profit would be way lower than usually when compared with the head office and this might reduce the profits earned by the company.

Currency Exchange Rates:The currency exchange rate determines how many dollars one must pay for a unit of foreign currency.The currency exchange rate is very important to companies because a company needs to gauge this during international transactions so as to maximize profits.

Socio-cultural Factors

Sociocultural factors encapsulates a society's cultures,norms and values. Sociocultural factors are not always the same,they differ across groups,so there is a need to monitor socio cultural changes amongst groups and how it can affect the strategic position of the firm. Take for example in US there is a shift in the demand of healthy food,because of the obesity issues prevalent there,consumers are starting to demand healthy lines of food,so this becomes an opportunity or threat to fast food companies such as McDonalds, pizzahut, Domino's and so on.

Demographic trends are also important trends in external analysis,because it captures characteristics such as age,gender,ethnicity,family size religion,socioeconomic class to mention a few. Developing Countries would continue to have more young people than old,but the reverse would be the case in industralized nations. For example the economic bulge in the U.S population caused by the baby boom in the 1950's continues to affect market demand in many industries.

Variables that affect the socio-cultural environment includes:

a) Lifestyle changes

b) Career expectation

c) Consumer activism

d) Media views

e) law changes affecting social factors

f) Major events and influences

g) Buying access and trends

h) Ethnic/ religious factors

I) Advertising and publicity

Technological Factors

it covers the application of knowledge to create new processes and products. some of the recent innovations in process technology include lean manufacturing, six sigma quality ad biotechnology.

The nano technological revolution which is just beginning,promises major upheaval for a vast array of industries ranging from tiny medical devices to new age materials for earthquake resistant buildings.

Some of the variables affecting Technological factors include:

a) Total government spending for R&D

b) Total industry spending for R&D

c) Focus of technological efforts

d) Competing technological developments

e) Maturity of technology

f) Manufacturing maturity and capacity

g) Patent protection

h) New products

I) Productivity improvements through automation

J) Internet availability

k) Consumer buying mechanisms or technology.

Ecological Factors

Ecological factors deals with broad environmental issues such as the natural environment,global warming and sustainable growth. There is an interdependent relationship among organizations and the natural environment. Managing these resources in a responsible and sustainable way directly influences the continued existence of human societies and organizations we create. Managers can no longer separate the business worlds,they are inextricably linked.