Objective therefore it becomes the manager’s responsibility to separate

Objective
of Pestel and where origins are coming from:

PESTEL analysis origins remain till today relatively
unclear. However, many specialists consider that the first traces of its
appearance can be found in the book by Francis J. Aguilar, Scanning the
Business Environment (1967). At the time, the model was called the PEST
analysis. It started being used and perfected during the 1970s and 1980s. The two
additional variables of ‘legal’ and ‘environmental’ were inserted which
resulted in the PESTEL model which is used even today. (KINDLE)

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PESTEL stands for Political, Economic, Social,
Technological, Environmental and Legal impact on a company. (https://www.brightonsbm.com/news/pest-analysis-important-for-a-business)
PESTEL analysis name was created after the acronyms of the six mentioned
macro-economic variables that are included in the model. (Kindle). 

The primary objective of the PESTEL analysis is the reconnaissance
of inevitable macroeconomic changes that might have a huge impact on a
company’s growth and development (in regards with the products, brand name or
even the entire organisation). ( Kindle) It also provides a detailed list of
influences that may affect the possible success of particular strategies
(Johnson G., Whittington R. & Scholes K., 2008, Exploring Corporate Strategy).

The PESTEL analysis target is to give to the
managers an understanding of changes that may be occurring within a given
market. Knowing in advance that a change may occur will help in making better
business decisions (https://www.brightonsbm.com/news/pest-analysis-important-for-a-business/)

 

 

Explanation
of the 6 PESTEL Analysis variables:

The purpose of the PESTLE analysis is to identify
issues related to the external environment according to the below criteria:

1.      That
are outside of the organization’s control

2.      They
will have a level of impact on it.

(PESTLE analysis strategy skills, team FME)

Each factor may have an impact on the organization
and therefore it becomes the manager’s responsibility to separate between the
variables that may have a major impact in the organisation and those that will
only have a minor. (kindle)

POLITICAL

It includes the role of and changes in
Government. Changes in the political variable usually means changes in Policy.
For example in case of general elections if a company that relies on Government
funds and a possible elected political party may reduce the funding, this means
that the company’s funds will also be reduced as a result. So the managers must
make up their plans. (Killeen J., Understanding your business environment).

 

Changes to trade regulations and
taxation may also be introduced which include:

 

–         
Employment Laws

–         
Consumer protection laws

–         
Environmental regulations

–         
Taxation regulations

–         
Trade restrictions or reforms

–         
Health and safety requirements

(PESTLE analysis strategy
skills, team FME)

A Country’s political trends (government pressure,
monetary policy, etc.) hugely influence the plans of a company that may be
established in that Country. The Country’s established public authorities have
a direct impact on daily operations and the prospects of a company’s financial
(notional interest, etc.) and social (employment assistance, subsidies, etc.)
aspects. Elements such as conflict, corruption, degree of state intervention
should also be considered. (kindle)

ECONOMIC

Although it is not possible for a company to change
the economic situation, certain preparations can be made so that fluctuations
can be dealt with. Monitoring the Country’s GDP, tax rates and the inhabitants’
purchasing power will prove crucial in possessing all the factors necessary for
managerial decision-making. The economic success of a business also includes
the monitoring of key figures adjective to the sector and the analysis of
consumer trends. A reduce in the purchasing power will help the company to
adapt its strategy and minimise its losses. (Kindle)

SOCIAL

 

In order to the protagonist in a market
it is of vital importance that details such as the characteristics of a
population (demographics, age distribution), history (roots and traditions) and
religious and socio-cultural influences (fashion, media, means of
communication) to be known. This will help the company to orient its strategic
analysis to the needs of the market and the parties involved. As example,
nationals of Mediterranean countries have different needs comparing to the
Baltic countries due to their culture, climate and religion. (kindle)

 

Other factors such as Population growth
rate, employment levels, income statistics, education and career trends must
also be considered.

 

The Social variable is a very important one and the
success will depend on the depth of research for each marker that the company
wants to make business in. ((PESTLE analysis strategy skills, team FME)

TECHNOLOGY

A major
factor for every company. Because of the fast development nowadays, every
company must keep up with the latest technological developments in order not to
lose its position in the market.

By using the PESTEL analysis, organization may make
their plans in advance and prepare or the future. What seems impossible today
may become common in the nearest future.

The technological variable may divide in two
categories. Manufacture and infrastructure. Every opportunity must be exploited
in order for every organization to change their way of production or even
update the end products. In this way it can gain market share and of course
attaining a strong competitive advantage. Such activities may include:

–         
Automation

–         
Cost savings

–         
Use of outsourcing to control costs and offer
greater flexibility

(PESTLE analysis strategy skills, team FME)

One of the greatest discoveries was of course the internet which on
the one hand helped the business world but those who didn’t exploit is as it
should, lost a great market share or even went bankrupt.

Although
today we still need and still read books, many of the paperwork has been
digitalized and is available in the internet. Back in the 90’s the traditional
bookshops didn’t see the AMAZON with its KINDLE app coming. (Killeen J.,
Understanding your business environment).

Another example is the networking sector. Mobile
phones made their appearance
in the mid-90s and that was a huge discovery. Mobile phones tycoon
manufacturers like NOKIA, MOTOROLA and ERICSSON were partying as from mid-90s
till mid-2010s. And then APPLE and SAMSUNG came with their smartphones. These
organization that failed to keep up with the technological advances gave the
opportunity to other smaller producers or even entrants to enter the market and
offer something new. ((PESTLE analysis strategy skills, team FME)

By continually reassessing a product as well as the
process involved is the key to successful technological observation. (kindle)

ENVIRONMENT

One of the most important factors in
recent years. It has become even more significant because of the globalization
since failure to meet the latest instructions and regulations can result to
catastrophic penalties. The environmental variable is related to weather,
climate and geographical location. These factors are connected to facts such
as:

 

–         
Natural disasters and extreme weather
phenomena may prohibit operating on particular regions.

–         
The physical conditions and
infrastructure level of a country may become uneconomic for an organization

–         
Logistical problems may occur because of
the weather conditions.

((PESTLE analysis strategy skills, team
FME)

 

As with the technology sector, companies that apply
green technologies in their daily operation such as recycle, may gain a
completive advantage from their competitors. There are also new players that
took advantage of these green technologies and created a whole new marker such
as organic foods. (Killeen J., Understanding your business environment).

LEGAL

 

It is very important for a
company to have a clear picture about the local legislation of the country that
is or will be located. The sufficient understanding and knowledge of the
legislation will protect the company from legal claims. (kindle) Usually the
possible changes in Law are known before hand and the best the monitoring of
the possible changes, the best the preparation will be. ((Killeen J.,
Understanding your business environment). Such legal factors that changes must be
anticipate are areas like employment, competition, health and safety. (PESTLE
analysis strategy skills, team FME)

 

Other factors that a manager must
consider before proceeding with the final decision for the country that a
company may be located include:

 

–         
Taxation
on investments and earnings

–         
Trading
restrictions

–         
Employee
welfare, etc…

 

All these factors have an impact
on the way each organization will work and must be taken into account when
formulating the business strategy.

 

Many of the previously mentioned variables are
linked together. The technology developments can affect the economic factors
(creating the need for more sophisticated job positions), the political with
the economic variables (change in the taxation scheme) and so on. (Johnson G.,
Whittington R. & Scholes K., 2008, Exploring
Corporate Strategy)

 

ADVANTAGES & DISADVANTAGES

One thing that the PESTLE analysis cannot do for
sure is to predict the future. What it can do though is to provide the
necessary means for proactive and constructive discussions for the future of
the company. Using this tool correctly and on a regular basis will make
possible the identification of potential opportunities and threats for the
company which can also turn to be a competitive advantage. PESTLE offers also
the opportunity to go a step back and lots of flexibility. (kindle)

Although there a lot of advantages the overdoing
with the tool can lead to disadvantages too. Disadvantages can be listed as per
below:

–         
The managers using this tool may oversimplify
the information used for making decisions.

–         
The PESTEL tool must be used on a regular basis
to be effective and many organizations do not apply it as it should, most for cost saving
purposes.

–         
‘Too much analysis is paralysis’. Many users
often gather too much information to process, forgetting that the main objective of PESTEL is to take
identify certain issues so that corrective actions can be taken.

–         
Another
impact of cost saving is the access to quality external information.

(PESTLE analysis strategy skills, team FME)

 

External
Environment and PESTEL use.

As has been already mentioned the external environment – also called macro
environment – includes the political, economic, social. Technology, environment
and legal factors. In order for a business to identify all the threats and
opportunities must proceed with an external analysis. This is a critical
component of strategic management since it produces much of the information
that is required to get prepared for the future. (Dr. Abhishek Gupta, (2013) Environmental and PEST analysis: An
approach to external business environment).

The external analysis must be directed and purposeful since there is always the chance that the
analysis may become an endless process resulting to a descriptive report. In
every business it appears that the material that is available seems to have no
end. It needs discipline and direction from the side of all managers to avoid
the gathering of unnecessary material. (Aaker A. D, McLoughli D.,
(2010), Strategic Market Management: Global Perspectives,) Furthermore the
material and information collected must be approached by quantity rather than
quality (Dr. Abhishek Gupta, (2013)
Environmental and PEST analysis: An approach to external business environment).
Since much of the material collected may be unreliable the manager must
check its ground truth by constantly comparing the gathered information with
the updated market data. (kindle)

The analysis must be future oriented in order to have a corrective action
character which will allow to the company to have enough response time and time
to plan its direction. The environmental analysis is divided to 3 major steps:

–         
Scanning and forecasting

–         
Ensure that information is available for the
subject environment

–         
Transform the information into forms that become
useful for planning.

(Dr. Abhishek Gupta, (2013)
Environmental and PEST analysis: An approach to external business environment).

The external analysis must not be considered as the final step but a means
to affect the company’s strategy in total. By doing this the analysis can have
a huge impact on the strategy by suggesting strategic decision alternatives or
by recommending a choice among the alternatives. In order for this to work out
a manager must question itself whether the company should enter in new business
areas, what the strategies and programmes should be used and so on… (Aaker A. D, McLoughli D.,
(2010), Strategic Market Management: Global Perspectives,)

The most common that the PESTEL
analysis is appropriate is on the following situations:

–         
Launch
of a new business: Is used by a manager to create a plan necessary to help him
convince the shareholders to invest in the company. The PESTLE analysis can
prove to possible investors that the external environment is appropriate for
the development of a company on a certain market.

–         
Development
of new products: PESTLE helps the manager to understand if the macro
environment is ready to accept a new product.

–         
Reassess
the organization of the company: The choices and decisions that were taken
during the creation of the company may be adequate in the face of evolution and
development of most markets. The strategy of the company should be continually
renewed by regularly updating the PESTLE tool.

–         
  

A
threat to every manager is the environmental uncertainty because it obstructs
the ability to make long range plan and strategic decisions to keep the company
in balance with the external environment. A way to fight this is the scenario
analysis. (Dr. Abhishek Gupta, (2013)
Environmental and PEST analysis: An approach to external business environment).
A
scenario is a theoretical projection of the near or distant future.(kindle) It is an alternative view of
a future environment which appears because of an alternative answer to a strategic
uncertainty. (Aaker A. D, McLoughli D., (2010), Strategic Market
Management: Global Perspectives,) Scenario planning was pioneered in
Shell. It involves the creation of two to four complete scenarios of the
future, each of which is self-consistent but significantly different form the
others. (Dr. Abhishek Gupta, (2013)
Environmental and PEST analysis: An approach to external business environment).

 

One important
example of PESTEL analysis is the entrance of IKEA into Russian market. IKEA was
founded in 1943 in Sweden by Ingvar Kamprad. IKEA currently is the leader in
retail furniture and decoration kit. It offers a wide choice of furniture
products and decorative which are well designed, functional and affordable. As
of November 2017, the group own and operates 411 stores in 49 countries. By
2016 its revenue was €35.074
billion and the net income €4.200 billion. It employs 194.000 people.

 

The first store
of IKEA in Russia opened on March 2000. The plan was to invest in a market
which can give a big profit in a long-term. Although other foreign companies were
stopping their business activities from Russia, Mr.Kamprad saw a big
opportunity there, and started investing in the Russian market. The fact that he
was the only owner who wanted to keep his company in Russia gave his company more
power and a better competitive advantage in the future.  

By proceeding with PESTEL analysis
the following results appeared.

Political: Russia is a federal republic very unstable steered by Vladimir Putin
with a Government that is considered to be hugely corrupted.

Economic: It has the 8th
largest GDP the world in by 2009 with almost 2 trillion $. Russia’s main income depends on
exporting its natural resources like natural gas and oil. It
is the 9th bigger country in the world with more than 140 million inhabitants.
The inflation rate is 12% high with a stable rise of unemployment. Furthermore,
the Russia economy suffers of an aging population.

Sociological: The average income per person is $640. The life expectancy of the
country is between 65-70 years of age. The inhabitants face many problems such
as alcoholism and violence.

Technological: Although their main
exports are natural gas and oil, they can’t run their own oil companies without Western
help. They are very competent though in the nuclear weapons sector.

Environmental: Russia is considered to have huge environmental pollution like toxic
waste, air pollution, soil contamination and agricultural chemicals. Most of
the environmental pollution is considered to come from the waste leftovers of
Cold War and World War 2. Furthermore, electricity is not available in all the
country.

Legal: The legal sector is suffering
from injustice and bribery troubles. Even the country’s local press is
controlled.

In general after establishing in Russia, IKEA had a lot of problems to face. As
already mentioned it was the bribery problem. In 2009, despite their
anti-bribery policy, the company had to fire two executives because of
corruption even if it was very common in the country. For Ikea this is
considered to be unethical. Because of that, the group made thought to
completely stop moving in Russia. In the end Mr. Kamprad said he was very optimistic
on managing the Russian market and the expansion continued.

There was also a controversy with
the 2013 December catalogue showing a female couple which was not included in
the Russian one. IKEA explained that it avoided it in order not to go against the
Russian law about homosexual propaganda.

???? proposed
several ideas to come up against bribery troubles like:

–         
Proposed and overall anti-corruption
compliance program for employees.

–         
They created a policy to be forced
from top management that the company will not engage in corrupt practice.

–         
Executives will don’t accept any
deviation from the rule as from the employee’s side.

All
in all the PESTEL analysis showed the group the IKEA the ways to adapt their
strategy to the external environment of Russia. . IKEA successfully changed the
Russian consumers thinking towards furniture and showed them that the Swedish
furniture design suited their traditionally small living spaces.