PESTEL ANALYSIS

 

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PESTEL ANALYSIS

Introduction

Business models are established by businesses to create value to customers, deliver products and services better than competitors as well as capture the best mechanisms for the business. They are meant to entice customers to pay for the added value and convert these payments into profits. Therefore, business models are determined by the needs of the customers, how they want these needs met and the strategies that a firm can use to best meet these needs. They are thus paid for meeting the need and make profits in the process. The business models are very significant in business growth; they are integrated in the business strategies, innovation and economic theories.

Business models have been by managers to improve their knowledge on the business process. Theyare used by the management to improve skills and technologies in an effort to create value for the customer. Organizations have identified knowledge as source of competitive advantage. Such technologies are applied in the production process, in learning the customers and the market needs as well as the supply market. Knowledge determines a firm’s competence and capabilityto differentiate it from its competitors and give it power to enter into new markets. Through a business model, an organization establishes a learning process to come up with a hidden form of knowledge which makes it different from the competitors. Models enable managers to build capabilities that cannot be replicated, transferred or lost to competitors with ease(Teece, D2012).The PESTEL (Political, Economic, Social,Technological,Environmental,and Legal) model defines how managers can use the immediate environment to create value of the business. This paper will discuss this model and its influence on decision making. It will also analyze this model to establish its strengths and weakness in strategic management.

Importance of Business Models in Decision Making

                A business environment is determined by the internal and external factors that affect life, growth and development. These are embedded in a firm’s mission statement; therefore, there is a need for the management to stay abreast with the factors in the business environment and the upcoming trends in business features. Models focus on the environmental factors to determine the course of actionthat management should undertake depending on the changing environmental factors. The external factors pose threats that exist in a business while the internal analysis focusses on the threats and weaknesses within an organization. The model covers both areas and provides adequate guidance on how the organization can coexist with both factors to maximize its potential. The PESTEL analysismodel focuses on the environmental factors and how they can be managed to promote business growth.

Business models provide management with a valuable structural template that stimulates creative decision making. Models offer a clear sequence of steps that help managers to determine the likely repercussions of decisions made. They use the models to establish limitations that may come up during a management practice such as legitimacy. They use this guideline to create balance within the organization (Hacklin & Wallnofer, 2012).When managers are guided by a business model, they can understand the business logic and communicate it to the rest of the team in the organization. Such logic include the ideas on innovation, changes in the management structure, investment, finance and the strategies in place for the defined periods. These decisions are established based on the value that they create in the organization. For example additional staff by the human resource may imply increased production translating to more revenue. This should be based on the expected costs once this decision is made. Information technology infrastructure plays a crucial role in all the organizations, therefore the business model determines the changes that may be implemented and the additional value that is obtained form these changes. Physical resources also need to be included in the business model to ensure that any alteration is in line with the business and consumer needs in value creation(Lambert, 2008).

Information system developers also make up a subset of decision makers who are also affected by the business model. They establish how the organization’ssystem requirements for engineering, managing knowledge, work flow and defining goals.They determine how communication flows in the various departments and how the new decisions are implemented in the system (Lambert, 2008). The main objective of a business model is to assist users in understanding the business logic that underlies the organization’s existence and the infrastructure required in the operations. Decisions are made to determine the user groups that are targeted by the model or whetherthe model should serve all the users in the organization. The information system developers often require views that are more detailed than management teams. However based on the e-commerce initiative, the management plays the major role in modeling business initiatives to the rest of the members in the organization(Lambert, 2008).

In decision making models are used in accomplishing goals that are set and agreed on. They are, therefore, a guide towards solving problems that are formulated and defined precisely.They help the decision maker in gather complete information and consider all the alternatives available. This enables the decision maker o predict the potential results and make proper calculations for each prediction before they can be implemented. The main aim for these decisions is to add value to the organization. In most cases, this is based on the economic value. Therefore, the model should help the decision maker in considering the alternatives that help in the maximization of the economic returns. Models offer managers the rationale to assign values, put the preferences in order, evaluate the available alternatives and make a decision that maximizes the attainment of the set goals. Models are most useful when applied on programmed decisions since it offers managers with the option to calculate the probabilities and risks that may come up. For example, airlines may use models in optimizing decisions on pricing seats, scheduling flights and assigning crews (Daft, 2011).

The PESTEL Model

                The PESTEL model offers a framework for analyzing the main factors that affect the market place. Macro economic changes can take place so fast that t business are forced to plan and prepare for the impact of external events on the organization. An example of a significant external event is the September 11th attack in the US. Such an event had a huge impact on the economy and business and this explains why business should stay in readiness for unexpected events. Other changes may be gradual and may only be felt in the organization when they are already advanced to dangerous levels. When a business fails to respond to the external changes of the business environment, this can affect the profitability of the business and the quality of service offered to the customers(Botten & Harris, 2008).This model was constructed to help managers make sense of out of the environment in which businesses operate. It is a formula to simplify the relationships that exist between the business and the environment (Needle, 2010).

PESTEL comprises of the political factors which influence business in terms of shaping laws and business governance. They influence stakeholder groups such as the share holders, trade unions and political groups (Needle, 2010). Some of the political effects may affect the operations of a business significantly. For instance, campaigns to ban smoking not only affects the businesses involved in the production of tobacco products but also the social marketing groups which promote this product. Currently, there have been extensive campaigns by healthy living groups to discourage people from taking junk and eliminate obesity. This consequently affects the fast food businesses.Governments influence a country’s economy by dancing the taxation rates for individuals and companies, education and technological factors through policies. Changes in governments impact the macro environment for instance privatization and nationalization policies. International politics are felt on occasions wherecompanies are mediated by trade organizations like the WTO. Firms not only consider the local politics but also regional ones (Botten & Harris, 2008).

Economic factors are also significant for business since they provide data for marketers on the retail price indices. They reflect how people live and their spending patterns. Exchange rates are determined by a country’s economy. Stronger economies have an advantage over the weaker ones. Wealth creation determines the living standards, the more the wealth, the higher the purchasing power and this determines a firm’s potential for growth. Social factors influence the decisions made by consumers. For example daily papers are moving from broadsheet format to tabloid to enable their consumers to read even in the crowded public transport. Today mobility has increased and the society consists of groups with diverse international and cultural differences. Which businesses must consider before targeting a given market. Customers have become sensitive to issues like waste and packaging, they go for the least wasteful and recyclable packages thus business move with the fast changing market needs. There is also a need to engage in corporate social responsibility projects which add value to a firm’s products (Botten & Harris, 2008).

Technology defines information and communication. Issues such as data protection and censorship are very significant in business operations. Some of the technological aspects that influence business include research and development through knowledge generation, automation in production, data sharing between the various departments in the organization, and advertising. These technologies are used in creating barriers to entry by competitors, locking in the consumers, adding value to products through efficient production. They affect the cost of operation, quality, innovation and an added advantage in competition. Technology stimulates an organization to invent further to keep exciting the consumer with new and diverse products.

The legal environment is significant in a business in areas like stock market regulation mergers, corporate laws covering issues like taxation. Business laws governing relationships with customers and suppliers or even the laws protecting employees. Some of the laws affecting business are consumer law, discrimination law, laws on health and safety and employment law. These affect a company’s operation, the cost and demand forits products. The environment in which a business operates is part of the modelthat influences a business’s operations. Climatically changes, weather and climate affect industries like tourism and farming. They play a great role in the determination of a business model and planning. Ecological factors may create new markets or diminish the existing ones and are sensitive to business. They include waste disposal, the use of energy and the role that an organization plays in promoting sustainable development. Ethical issues are also significant in determining how customers are treated, their rights and the role of the organization in creating a difference in the lives of the immediate communities(Needle, 2010).

The factors in the PESTEL model are interrelated and work together for an organization to achieve its goals. A business has no direct control over the external factors affecting business but integrating these factors in strategic plans helps a business survivethat challenges involved. The business model helps in planning and anticipates for the dynamics expected in business. They are also essential in adding value to a business in terms of performance and the customer in terms of the quality of the products offered. Consumers have shifted their attention for products that simply meet their needs to look for products that exceed their expectations. The way a product or service is delivered determines whether a value attaches the values and may be used to build loyalty in future (Botten & Harris, 2008).

Model Strengths

PESTEL analysis helps in the identification of long term change drivers. For instance, in the modern world, markets are becoming global and technology has been a major aspect in this process. Given that consumers want products and services at their convenience and at the right time. Technology has been used to respond to consumer needs in the shortest time possible. For a manager to use technology to create an added advantage there is a need to plan for future events and identify the use of technology in adding value. There is also a worldwide similarity in the changing tastes by consumers. For example, customers tend to prefer similar electronic products, sport or even soft drinks. While using PEST, there is an opportunity to create a global approach for marketing and manufacturing such products. PEST model is used to create business opportunities through the observation of the changing trends among the consumers (Gregory, 2001).

PEST gives managers an opportunity to identify how external influences can impact on the organization in different ways. For instance an organization that obtains its raw materials from a number of different countries is less prone to political crisis than a company that sources its raw materials from a single country. Although the country may be cheaper than others, there are also other factors to be considered like the political stability. This explains why globalization has been driven by the fact that companies are aware of the threats that come with specializing in single source suppliers and markets in a single location. Focusing on a wider variety of suppliers and markets reduces the threat to fluctuations in exchange rate. The model helps managers to focus on wider factors and not limit themselves to cost saving strategies which are vulnerable to external changes. Other changes like climatic changes may also affect a particular market or supply source. Therefore managers can plan for an alternative option by keeping external factors in mind. Through PEST, management plans with the broad organizational context in mind. It highlights factors such as the public opinion and mood, stakeholder aspirations and the changing political, social and economical aspectsin the business.

According to Partridge & Sinclair-Hunt (2005), the PESTEL model is very effective for organizations that experience a high level of uncertainty. The model promotes scenario building in which plausible pictures are created or case studies are analyzed for a future based studies to explore a range of possibilities. These scenarios in turn aid in creative thinking to help managers expand their view points and also challenge any assumptions that may exist in their planning. This is done by co0llecting views from experts and reaching for a consensus view. Alternatively cross impact analysis can be used to calculate the probability of key events happening, their repercussions and how response can be given to the consequences. While carrying out these procedures, managers can an opportunity to increase their knowledge on planning while considering the likely range of possibilities, this prepares them for calamities and they are likely to come up with effective response mechanisms in times of emergency (Gregory, 2001).

PEST model has also been identified as a means to studyan industry’s weak and strong points as defined by the external environment. This can be used by managers to gain a competitive advantage through preparation for unexpected or anticipated events. For example, a business can prepare a small project or initiative to develop competence among the staff to be used when the need arises. They include preparing employees to be flexible in case events occur that force them to step in for their colleagues during crisis. It keeps all the available options open in the face of uncertainty. Such projects and initiatives develop an insight for management teams on the need for change and are very useful in eliminating the possibilities of change resistance by employees. These events are based on a manager’s expertise, knowledge and judgment. Although they may be time consuming, they help a manager in understanding how the forces in the external environment can be combined and interrelated to create change. They offer a wider perspective on the business, the position it stands and where it is headed (Partridge & Sinclair-Hunt 2005).

The PESTEL model is a useful tool in establishing whether the target market is growing or declining. This defines the organization’s position, potential and offers guidance towards positive growth. It is therefore a tool for business measurement tool which gives managers the ability to alter plans and decisions so as to ensure that the organization keeps the focus on meeting its goals. The model is very simple and is a cheap way to analyze a business given that time is the only resource that it consumes. This make it for managers to maximize its use by integrating it in activities like planning, they can also use it to brain storm during meetings. It is like a reference tool which is utilized at a manager’s convenience. It serves in many areas of the organization. To most organizations, it is a tool that can be consulted in any activity that is carried out. Such activities include marketing planning, strategic planning, public relations planning, product development, team building games and in research reports among others.

PESTEL has the advantage of meeting the modeler where they are unlike other models which require the modeler to reformulate the problem so as to meet the optimization process. It replaces the non linear parameter estimation since it serves a wider range of people and allows for the application to serve a broader range of problems. Its ability to adapt to other models has resulted in a better understanding of computer modeling. Users can interpret data in a broad many fields of study even on cases where the users are not well conversant with the topics they are handling. Experience has shown that PESTEL can transform a messy model by making minimal changes in a single control variable. It increases the ability for users to calibrate other models and interpret data. On some occasions, organizations experience a very fast growth which is then followed by a sudden decrease in profitability and this may cause or threaten to collapse a business. There is a need for management to keep the organization’s ongoing profitability in check. This raises awareness of threats in good time before the problem advances to a dangerous level. It is relevant for complex businesses which may have multiple procedures and process which may be interlinked and therefore difficult to address each on its own. It provides a tool for collective analysis and decisions can be made on tangible results and not assumptions. It is also useful in small enterprises and may be used to identify small yet significant issues which may otherwise be missed.

Model Weaknesses

PEST offers an adequate framework which covers a wide area in the external factors influencing business. However, it tends to place these influences into compartments and separates them to represent individual areas. The influences operate together and cannot be fully understood on their own. For instance, political and economic environments are linked and are used interchangeably in most business setting. It is difficult for managers to address each single factor on its own without the need to refer to the rest. It can be argued that the legal environment is part of the political environment while the environment aspect deals with all the issues categorized in the PEST model. Managers using this model to come up with strategic plans may experience challenges in determining the areas of concern while making decisions. The model is based on the fact that these factors operate on the firm. It does not adequately acknowledge that the organizations through the managers and or owners can influence the environment in which they operate. It is therefore difficult to make decisions based on the changes that the organization will impact on the environment(Needle, 2010).

External factors affecting business change rapidly and this prompts management to review and revise the study constantly. For example, the government may decide to increase taxes which affect a company’s profitability. The company prepares itself to make changes on its pricing only for the government to extend a subsidy. This affects the company’s position positively and therefore the initial plan has to be withdrawn. These changes may be multiple occurring in the same time and therefore there is a need to keep a constant check since delays may risk profitability. This consequently affects decision making and it is hard to make long term decisions and plans based on PESTEL analysis. It is biased towards short term decisions unlike longterm ones which determine the future of the business. For instance, technology, which is very significant in creating a competitive advantage, is changing fast. This forces the management to change plans rapidly for it to keep up with the dynamics involved.

PESTEL is also limited in that;it requires numerouspeople to be involved in the exercise. This is because it requires knowledge from different domains for the results to be accurate. A big number is required because people are diverse and have a tendency to view a similar situation differently. It requires varied perspectives and diverse points of view for it to include all the areas of the organizations operations. This consumes a lot of time which could be directed towards other productive activities considering that the exercise is frequent. Once an analysis is done, evaluations follow to interpret the results and establish the course of action. Different people have different interpretations and therefore the results are highly subjective. There is the risk of a wrong interpretation and a company may suffer losses due to misinterpretation. The exercise is also very cumbersome considering that the team has to spend a lot oftime and effort in acquiring data from external resources. This data may not be adequate to serve the intended purpose; it therefore poses a challenge in incorporating the idea into the organization’s operations or products (Yuksel, 2012).

To an extent, the business may influence its stakeholders. However, this model does not allow decisions to be made based on the way the business influences the stake holders. It focusses on responding to external factors even though some factors can be changed by the organization. There is a risk that the model focusses on the current known factors. Considering these influences in the future provides a more useful analysis since a business potential to grow or fail depends on the coming events. However it is difficult to make precisepredictions in regards to the events expected in the future (Needle, 2010).Capturing too much data is also a risk because the data may be too complicated to paralyze the analysis. Given that the data is based on people’s opinions and points of view, thedata used by rely too much on assumptions and consequently proof to lack a foundation.The model does not adopt a quantitative approach since the factors havea qualitative structure. Therefore (Yuksel, 2012).

Conclusion

Businesses are operating within a wide economic and social environment. The events happening in any given environment are largely determined by the country in which a firm is based or in which its products and services are sold. The world economies and societies have become increasingly interconnected such that events in one country have serious repercussions on the operations of organizations in other countries.

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