Objectiveof Pestel and where origins are coming from:PESTEL analysis origins remain till today relativelyunclear. However, many specialists consider that the first traces of itsappearance can be found in the book by Francis J. Aguilar, Scanning theBusiness Environment (1967).
At the time, the model was called the PESTanalysis. It started being used and perfected during the 1970s and 1980s. The twoadditional variables of ‘legal’ and ‘environmental’ were inserted whichresulted in the PESTEL model which is used even today. (KINDLE)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 mentionedmacro-economic variables that are included in the model. (Kindle). The primary objective of the PESTEL analysis is the reconnaissanceof inevitable macroeconomic changes that might have a huge impact on acompany’s growth and development (in regards with the products, brand name oreven the entire organisation). ( Kindle) It also provides a detailed list ofinfluences 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 themanagers an understanding of changes that may be occurring within a givenmarket. Knowing in advance that a change may occur will help in making betterbusiness decisions (https://www.brightonsbm.com/news/pest-analysis-important-for-a-business/) Explanationof the 6 PESTEL Analysis variables:The purpose of the PESTLE analysis is to identifyissues related to the external environment according to the below criteria:1.
Thatare outside of the organization’s control2. Theywill have a level of impact on it.(PESTLE analysis strategy skills, team FME)Each factor may have an impact on the organizationand therefore it becomes the manager’s responsibility to separate between thevariables that may have a major impact in the organisation and those that willonly have a minor. (kindle)POLITICALIt includes the role of and changes inGovernment.
Changes in the political variable usually means changes in Policy.For example in case of general elections if a company that relies on Governmentfunds and a possible elected political party may reduce the funding, this meansthat the company’s funds will also be reduced as a result. So the managers mustmake up their plans. (Killeen J., Understanding your business environment). Changes to trade regulations andtaxation 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 strategyskills, team FME)A Country’s political trends (government pressure,monetary policy, etc.) hugely influence the plans of a company that may beestablished in that Country. The Country’s established public authorities havea 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 interventionshould also be considered. (kindle)ECONOMICAlthough it is not possible for a company to changethe economic situation, certain preparations can be made so that fluctuationscan be dealt with.
Monitoring the Country’s GDP, tax rates and the inhabitants’purchasing power will prove crucial in possessing all the factors necessary formanagerial decision-making. The economic success of a business also includesthe monitoring of key figures adjective to the sector and the analysis ofconsumer trends. A reduce in the purchasing power will help the company toadapt its strategy and minimise its losses. (Kindle)SOCIAL In order to the protagonist in a marketit is of vital importance that details such as the characteristics of apopulation (demographics, age distribution), history (roots and traditions) andreligious and socio-cultural influences (fashion, media, means ofcommunication) to be known. This will help the company to orient its strategicanalysis to the needs of the market and the parties involved.
As example,nationals of Mediterranean countries have different needs comparing to theBaltic countries due to their culture, climate and religion. (kindle) Other factors such as Population growthrate, employment levels, income statistics, education and career trends mustalso be considered. The Social variable is a very important one and thesuccess will depend on the depth of research for each marker that the companywants to make business in. ((PESTLE analysis strategy skills, team FME)TECHNOLOGYA majorfactor for every company. Because of the fast development nowadays, everycompany must keep up with the latest technological developments in order not tolose its position in the market. By using the PESTEL analysis, organization may maketheir plans in advance and prepare or the future. What seems impossible todaymay become common in the nearest future.
The technological variable may divide in twocategories. Manufacture and infrastructure. Every opportunity must be exploitedin order for every organization to change their way of production or evenupdate the end products. In this way it can gain market share and of courseattaining a strong competitive advantage. Such activities may include:- Automation- Cost savings- Use of outsourcing to control costs and offergreater flexibility(PESTLE analysis strategy skills, team FME)One of the greatest discoveries was of course the internet which onthe one hand helped the business world but those who didn’t exploit is as itshould, lost a great market share or even went bankrupt.
Althoughtoday we still need and still read books, many of the paperwork has beendigitalized and is available in the internet. Back in the 90’s the traditionalbookshops didn’t see the AMAZON with its KINDLE app coming. (Killeen J.,Understanding your business environment).Another example is the networking sector. Mobilephones made their appearancein the mid-90s and that was a huge discovery.
Mobile phones tycoonmanufacturers like NOKIA, MOTOROLA and ERICSSON were partying as from mid-90still mid-2010s. And then APPLE and SAMSUNG came with their smartphones. Theseorganization that failed to keep up with the technological advances gave theopportunity to other smaller producers or even entrants to enter the market andoffer something new. ((PESTLE analysis strategy skills, team FME)By continually reassessing a product as well as theprocess involved is the key to successful technological observation.
(kindle)ENVIRONMENTOne of the most important factors inrecent years. It has become even more significant because of the globalizationsince failure to meet the latest instructions and regulations can result tocatastrophic penalties. The environmental variable is related to weather,climate and geographical location.
These factors are connected to facts suchas: – Natural disasters and extreme weatherphenomena may prohibit operating on particular regions.- The physical conditions andinfrastructure level of a country may become uneconomic for an organization- Logistical problems may occur because ofthe weather conditions. ((PESTLE analysis strategy skills, teamFME) As with the technology sector, companies that applygreen technologies in their daily operation such as recycle, may gain acompletive advantage from their competitors. There are also new players thattook advantage of these green technologies and created a whole new marker suchas organic foods. (Killeen J.
, Understanding your business environment).LEGAL It is very important for acompany to have a clear picture about the local legislation of the country thatis or will be located. The sufficient understanding and knowledge of thelegislation will protect the company from legal claims. (kindle) Usually thepossible changes in Law are known before hand and the best the monitoring ofthe possible changes, the best the preparation will be.
((Killeen J.,Understanding your business environment). Such legal factors that changes must beanticipate are areas like employment, competition, health and safety. (PESTLEanalysis strategy skills, team FME) Other factors that a manager mustconsider before proceeding with the final decision for the country that acompany may be located include: – Taxationon investments and earnings- Tradingrestrictions – Employeewelfare, etc… All these factors have an impacton the way each organization will work and must be taken into account whenformulating the business strategy. Many of the previously mentioned variables arelinked together. The technology developments can affect the economic factors(creating the need for more sophisticated job positions), the political withthe economic variables (change in the taxation scheme) and so on.
(Johnson G.,Whittington R. & Scholes K.
, 2008, ExploringCorporate Strategy) ADVANTAGES & DISADVANTAGESOne thing that the PESTLE analysis cannot do forsure is to predict the future. What it can do though is to provide thenecessary means for proactive and constructive discussions for the future ofthe company. Using this tool correctly and on a regular basis will makepossible the identification of potential opportunities and threats for thecompany which can also turn to be a competitive advantage.
PESTLE offers alsothe opportunity to go a step back and lots of flexibility. (kindle) Although there a lot of advantages the overdoingwith the tool can lead to disadvantages too. Disadvantages can be listed as perbelow:- The managers using this tool may oversimplifythe information used for making decisions. – The PESTEL tool must be used on a regular basisto be effective and many organizations do not apply it as it should, most for cost savingpurposes.- ‘Too much analysis is paralysis’.
Many usersoften gather too much information to process, forgetting that the main objective of PESTEL is to takeidentify certain issues so that corrective actions can be taken. – Anotherimpact of cost saving is the access to quality external information. (PESTLE analysis strategy skills, team FME) ExternalEnvironment and PESTEL use.As has been already mentioned the external environment – also called macroenvironment – includes the political, economic, social.
Technology, environmentand legal factors. In order for a business to identify all the threats andopportunities must proceed with an external analysis. This is a criticalcomponent of strategic management since it produces much of the informationthat is required to get prepared for the future. (Dr. Abhishek Gupta, (2013) Environmental and PEST analysis: Anapproach to external business environment).The external analysis must be directed and purposeful since there is always the chance that theanalysis may become an endless process resulting to a descriptive report. Inevery business it appears that the material that is available seems to have noend. It needs discipline and direction from the side of all managers to avoidthe gathering of unnecessary material.
(Aaker A. D, McLoughli D.,(2010), Strategic Market Management: Global Perspectives,) Furthermore thematerial and information collected must be approached by quantity rather thanquality (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 mustcheck its ground truth by constantly comparing the gathered information withthe updated market data. (kindle)The analysis must be future oriented in order to have a corrective actioncharacter which will allow to the company to have enough response time and timeto plan its direction.
The environmental analysis is divided to 3 major steps:- Scanning and forecasting- Ensure that information is available for thesubject environment- Transform the information into forms that becomeuseful 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 meansto affect the company’s strategy in total. By doing this the analysis can havea huge impact on the strategy by suggesting strategic decision alternatives orby recommending a choice among the alternatives.
In order for this to work outa manager must question itself whether the company should enter in new businessareas, 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 PESTELanalysis is appropriate is on the following situations:- Launchof a new business: Is used by a manager to create a plan necessary to help himconvince the shareholders to invest in the company. The PESTLE analysis canprove to possible investors that the external environment is appropriate forthe development of a company on a certain market. – Developmentof new products: PESTLE helps the manager to understand if the macroenvironment is ready to accept a new product.- Reassessthe organization of the company: The choices and decisions that were takenduring the creation of the company may be adequate in the face of evolution anddevelopment of most markets.
The strategy of the company should be continuallyrenewed by regularly updating the PESTLE tool.- Athreat to every manager is the environmental uncertainty because it obstructsthe ability to make long range plan and strategic decisions to keep the companyin balance with the external environment. A way to fight this is the scenarioanalysis. (Dr.
Abhishek Gupta, (2013)Environmental and PEST analysis: An approach to external business environment).Ascenario is a theoretical projection of the near or distant future.(kindle) It is an alternative view ofa future environment which appears because of an alternative answer to a strategicuncertainty. (Aaker A. D, McLoughli D., (2010), Strategic MarketManagement: Global Perspectives,) Scenario planning was pioneered inShell. It involves the creation of two to four complete scenarios of thefuture, each of which is self-consistent but significantly different form theothers.
(Dr. Abhishek Gupta, (2013)Environmental and PEST analysis: An approach to external business environment). One importantexample of PESTEL analysis is the entrance of IKEA into Russian market. IKEA wasfounded in 1943 in Sweden by Ingvar Kamprad. IKEA currently is the leader inretail furniture and decoration kit. It offers a wide choice of furnitureproducts and decorative which are well designed, functional and affordable. Asof November 2017, the group own and operates 411 stores in 49 countries.
By2016 its revenue was €35.074billion and the net income €4.200 billion. It employs 194.000 people. The first storeof IKEA in Russia opened on March 2000. The plan was to invest in a marketwhich can give a big profit in a long-term.
Although other foreign companies werestopping their business activities from Russia, Mr.Kamprad saw a bigopportunity there, and started investing in the Russian market. The fact that hewas the only owner who wanted to keep his company in Russia gave his company morepower and a better competitive advantage in the future. By proceeding with PESTEL analysisthe following results appeared.Political: Russia is a federal republic very unstable steered by Vladimir Putinwith a Government that is considered to be hugely corrupted. Economic: It has the 8thlargest GDP the world in by 2009 with almost 2 trillion $.
Russia’s main income depends onexporting its natural resources like natural gas and oil. Itis 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 thecountry is between 65-70 years of age. The inhabitants face many problems suchas alcoholism and violence.
Technological: Although their mainexports are natural gas and oil, they can’t run their own oil companies without Westernhelp. They are very competent though in the nuclear weapons sector.Environmental: Russia is considered to have huge environmental pollution like toxicwaste, air pollution, soil contamination and agricultural chemicals. Most ofthe environmental pollution is considered to come from the waste leftovers ofCold War and World War 2. Furthermore, electricity is not available in all thecountry.Legal: The legal sector is sufferingfrom injustice and bribery troubles. Even the country’s local press iscontrolled.In general after establishing in Russia, IKEA had a lot of problems to face.
Asalready mentioned it was the bribery problem. In 2009, despite theiranti-bribery policy, the company had to fire two executives because ofcorruption even if it was very common in the country. For Ikea this isconsidered to be unethical. Because of that, the group made thought tocompletely stop moving in Russia. In the end Mr. Kamprad said he was very optimisticon managing the Russian market and the expansion continued.
There was also a controversy withthe 2013 December catalogue showing a female couple which was not included inthe Russian one. IKEA explained that it avoided it in order not to go against theRussian law about homosexual propaganda. ???? proposedseveral ideas to come up against bribery troubles like:- Proposed and overall anti-corruptioncompliance program for employees. – They created a policy to be forcedfrom top management that the company will not engage in corrupt practice. – Executives will don’t accept anydeviation from the rule as from the employee’s side.
Allin all the PESTEL analysis showed the group the IKEA the ways to adapt theirstrategy to the external environment of Russia. . IKEA successfully changed theRussian consumers thinking towards furniture and showed them that the Swedishfurniture design suited their traditionally small living spaces.