External Analysis: PESTEL Framework | Strategic Management

Summary

This video script from 'Business School 101' introduces PESTLE analysis, a tool for assessing a company's macro-environmental factors: Political, Economic, Social, Technological, Environmental, and Legal. It discusses how these factors influence business operations and strategies, using examples like the U.S.-China trade war, the importance of economic indicators, socio-cultural shifts towards health consciousness, technological advancements, environmental sustainability, and legal regulations. The script emphasizes the necessity for managers to conduct regular PESTLE analyses to adapt strategies and stay competitive.

Takeaways

• 📈 PESTLE analysis is a strategic tool used by managers to evaluate macro environmental factors impacting an organization.
• 🏛️ Political factors include government actions that can influence business decisions, such as trade policies and regulations.
• 💹 Economic factors encompass macroeconomic elements like growth rates, employment levels, interest rates, price stability, and currency exchange rates.
• 🌐 Socio-cultural factors reflect societal values and trends, which can affect consumer behavior and business strategy.
• 👥 Demographic trends, such as age, gender, and ethnicity, are crucial for understanding market segments and consumer needs.
• 💡 Technological factors involve innovations that can create new processes, products, and services, influencing competitive advantage.
• 🌱 Environmental factors relate to the organization's interaction with the natural environment and the importance of sustainable practices.
• ⚖️ Legal factors consist of laws, regulations, and court decisions that can directly affect a firm's operations and profitability.
• 🔄 Regular PESTLE analysis is recommended for managers to monitor and adapt to changes in the external environment.
• 🌟 The PESTLE framework is particularly useful for new business ventures or when entering foreign markets, ensuring strategic alignment with environmental shifts.

Q & A

What is PESTLE analysis and why is it important for businesses?

PESTLE analysis is a framework used by managers to analyze and monitor the macro environmental factors that impact an organization, company, or industry. It stands for Political, Economic, Social, Technological, Environmental, and Legal factors. It's important because it helps businesses understand the broader context in which they operate and make informed strategic decisions.

How can political factors influence a firm's decisions and behaviors?

Political factors result from government processes and actions that can influence firm decisions and behaviors. Firms can influence this realm through non-market strategies like lobbying, public relations, and litigation. Political factors can also play a critical role in global trade, as seen with the U.S.-China trade war initiated by President Trump in 2018.

What are the five macroeconomic factors that managers need to consider in a firm's external environment?

Managers need to consider growth rates, levels of employment, interest rates, price stability, and currency exchange rates as the five macroeconomic factors that can affect firm strategy.

How does economic growth rate impact businesses?

During periods of economic expansion, consumer and business demands rise, and competition among firms often decreases, leading to business expansion and profitability. Conversely, during recessions, demand falls, and businesses may face challenges.

What is the significance of interest rates in a firm's economic strategy?

Real interest rates, which adjust for inflation, affect consumer demand and borrowing costs for firms. Low real interest rates can fuel economic growth by making credit cheap and accessible, while high rates can slow demand and make borrowing more difficult.

How do socio-cultural factors like health consciousness impact business strategies?

Socio-cultural factors like health consciousness can lead to a boom for businesses offering healthier choices, while traditional companies may need to adapt their product offerings to meet changing consumer preferences.

What role do demographic trends play in shaping business strategies?

Demographic trends, such as age, gender, and ethnicity, are important for businesses as they capture population characteristics that can influence market size and consumer behavior. For example, the growing Hispanic population in the U.S. has led companies to invest in Spanish-language marketing.

Why are technological factors crucial for a firm's competitive advantage?

Technological factors involve the application of knowledge to create new processes and products. Innovations in technology can bring both opportunities and threats for companies, making it crucial for firms to stay updated and adapt their innovation strategies accordingly.

How do environmental factors affect a firm's operations and strategies?

Environmental factors involve issues like the natural environment, global warming, and sustainable growth. These factors can influence a firm's operations through regulations and consumer expectations, and also present opportunities for businesses to adopt sustainable practices.

What is the impact of legal factors on a firm's profit potential?

Legal factors, including laws, regulations, and court decisions, can directly affect a firm's profit potential. Regulatory changes can influence entire industries, and governments can exert political pressure and legal sanctions that impact firm performance.

How often should managers conduct a PESTLE analysis and why?

Managers should conduct a PESTLE analysis at least every six months to identify changes in the external environment. Regular monitoring allows strategies to remain fluid and current, helping businesses adapt to new conditions.

Outlines

00:00

🌐 Introduction to PESTLE Analysis

This paragraph introduces the concept of PESTLE analysis, a framework used by managers to evaluate a firm's external environmental factors. It explains that PESTLE stands for Political, Economic, Social, Technological, Environmental, and Legal factors, which are macro factors that can influence an organization's operations and performance. The paragraph emphasizes the importance of this analysis for long-term strategic planning and decision-making, especially when entering new markets or starting new businesses.

05:01

💼 Economic Factors in Business Strategy

This paragraph delves into the economic factors that affect a firm's external environment. It discusses the impact of economic growth rates, employment levels, interest rates, price stability, and currency exchange rates on business operations. The summary highlights how these factors can influence consumer demand, the cost of capital, and the competitiveness of firms in both domestic and international markets. The paragraph also provides examples of how economic factors can lead to strategic adjustments within companies, such as the U.S.-China trade war's effect on American businesses.

10:04

🌱 Socio-Cultural and Technological Factors

This paragraph covers socio-cultural and technological factors within the PESTLE framework. It describes how changes in society's culture, norms, and values, as well as demographic trends, can affect business strategies. The paragraph also highlights the relentless pace of technological progress and its potential to create both opportunities and threats for companies. Examples given include the rise of health-conscious consumers leading to a boom for certain businesses and the impact of technological innovations like smartphones and electric vehicles on various industries.

🌱 Environmental and Legal Factors

This paragraph discusses the environmental and legal factors in the PESTLE analysis. It emphasizes the interdependence of organizations and the natural environment, highlighting the importance of managing this relationship sustainably. The paragraph also touches on the significant impact that legal factors, such as laws, regulations, and court decisions, can have on a firm's profitability and operations. It provides examples of how environmental issues like pollution and legal actions, such as BP's oil spill, can have far-reaching consequences for businesses and their stakeholders.

Keywords

💡PESTLE Analysis

PESTLE Analysis is a strategic tool used by managers to assess the macro-environmental factors that can impact an organization. It stands for Political, Economic, Social, Technological, Legal, and Environmental factors. In the video, PESTLE Analysis is presented as a framework to evaluate the external environment of a business, which is crucial for strategic decision-making, especially when entering new markets or launching new ventures.

💡Political Factors

Political Factors refer to the processes and actions of government bodies that can influence business decisions and behaviors. The video discusses how political factors, such as trade policies and protectionism, can significantly affect international business operations, exemplified by the U.S.-China trade war under President Trump, which led to economic repercussions and strategic adjustments for companies on both sides.

💡Economic Factors

Economic Factors include macroeconomic indicators that affect the overall economy and, by extension, businesses. The video mentions growth rates, employment levels, interest rates, price stability, and currency exchange rates as key elements. These factors are crucial for firms to consider when formulating strategies, as they can influence consumer demand, business costs, and international competitiveness.

💡Socio-Cultural Factors

Socio-Cultural Factors encompass the cultural norms, values, and trends within a society. The video highlights how these factors, which are dynamic and can vary significantly across different groups, can influence consumer behavior and business strategy. An example given is the shift towards health consciousness among U.S. consumers, leading to opportunities for businesses that offer healthier food options.

💡Technological Factors

Technological Factors involve the application of knowledge to create new processes and products. The video discusses how technological advancements, such as nanotechnology and innovations in manufacturing processes, can disrupt industries and offer competitive advantages to firms that embrace these changes. Technological progress is portrayed as relentless and accelerating, presenting both opportunities and threats for businesses.

💡Environmental Factors

Environmental Factors pertain to broad issues like the natural environment, global warming, and sustainable growth. The video emphasizes the interdependence of organizations and the natural environment, highlighting the need for responsible management of this relationship. It provides an example of BP's oil spill, which had severe environmental and economic consequences, underscoring the importance of sustainable practices.

💡Legal Factors

Legal Factors include laws, mandates, regulations, and court decisions that can directly affect a firm's operations and profitability. The video points out how legal environments, often a reflection of political will, can influence entire industries through deregulation or the imposition of new regulations. It also mentions how European countries and the EU use legal and political pressure to tax tech companies like Apple and Google, affecting their global strategies.

💡Macro-Environmental Factors

Macro-Environmental Factors are the broader economic, political, social, technological, legal, and environmental forces that can affect an organization's performance. The video uses the PESTLE framework to analyze these factors, which are critical for businesses to monitor and adapt to, in order to maintain competitiveness and strategic alignment with the changing external environment.

💡Strategic Decision-Making

Strategic Decision-Making is the process by which managers make significant decisions that shape the future direction and success of an organization. The video underscores the importance of PESTLE Analysis in informing strategic decisions, particularly when entering new markets or starting new businesses, by providing a comprehensive view of the external factors that can influence outcomes.

💡External Environmental Factors

External Environmental Factors are those outside the control of an organization that can impact its operations and performance. The video discusses how managers should evaluate these factors using PESTLE Analysis to anticipate changes and develop strategies that can help the firm adapt and thrive in a dynamic business landscape.

💡Non-Market Strategies

Non-Market Strategies are actions taken by firms to influence their external environment, especially in the political realm. The video gives examples such as lobbying and public relations, which companies use to shape government policies and regulations in ways that are favorable to their interests, demonstrating the proactive approach businesses can take beyond traditional market strategies.

Highlights

PESTLE analysis is a tool for evaluating a firm's external environmental factors.

Political factors include government actions that influence firm decisions and behaviors.

Firms can influence political factors through lobbying and public relations.

Economic factors are macroeconomic and affect economy-wide phenomena.

Growth rates, employment levels, interest rates, price stability, and currency exchange rates are key economic factors.

Socio-cultural factors reflect society's cultures, norms, and values.

Demographic trends are important for understanding population characteristics.

Technological factors involve the application of knowledge to create new processes and products.

Environmental factors include issues like global warming and sustainable economic growth.

Legal factors are outcomes of political processes and can affect a firm's profit potential.

PESTLE analysis is useful for starting a new business or entering a foreign market.

Managers should conduct a PESTLE analysis at least every six months to monitor external changes.

Monitoring and responding to external changes helps keep strategies fluid and current.

The U.S. - China trade war has caused economic pain on both sides.

Health consciousness among U.S. consumers has led to a boom for health-focused businesses.

Technological progress is relentless and is picking up speed, bringing opportunities and threats.

The plastics industry has the opportunity to move towards a circular model to eliminate waste.

European countries and the EU apply political and legal pressure on U.S. tech companies.

Transcripts

hello everyone

welcome to business school 101

as we know a firm's operation and

performance is inevitably influenced by

its external environment

when managers decide to start a new

business or enter a new market they

should coherently evaluate a firm's

external environmental factors

a pestle analysis is a framework or tool

used by managers to analyze and monitor

the macro environmental factors that

have an impact on an organization

company or industry

pesto is an acronym that stands for

political economic social technological

environmental and legal factors

generally the pesticide focuses on a big

picture and long-term changes of firm's

external environment

so let's take a closer look at each

individual element in the pastel

analysis

first political factors

political factors result from the

processes and actions of government

bodies that can influence the decisions

and behaviors of firms

while political factors are located in

the firm's general environment where

firms traditionally wield little

influence companies nevertheless

increasingly work to shape and influence

this realm

they do so by applying non-market

strategies that is through lobbying

public relations contributions

litigation and more

in ways that are favorable to the

firm besides domestic issues political

factors could also play a critical role

in the arena of global trade

for example while running for the u.s

presidency in 2016

donald trump expressed his disdain for

many current trade agreements promising

to bring manufacturing jobs back to the

united states from other nations where

they had been outsourced such as china

and india

after his election he embarked on a

protectionist campaign

in early 2018 president trump stepped up

his efforts particularly against china

threatening a substantial fine over

alleged intellectual property theft and

significant tariffs

the chinese retaliated with a 25 tax on

over 100 us products

the u.s china trade war has caused

economic pain on both sides and numerous

studies have found that the increased

tariffs forced many american companies

to accept lower profit margins cut wages

and jobs for u.s workers defer potential

wage hikes or expansions

and raise prices for american consumers

or companies

second economic factors

economic factors in a firm's external

environment are largely macroeconomic

affecting economy-wide phenomena

managers need to consider how the

following five macroeconomic factors can

affect firm strategy

number one growth rates

the overall economic growth rate is a

measure of the change in the amount of

goods and services produced by a

nation's economy

in periods of economic expansion

consumer and business demands are rising

and competition among firms frequently

decreases

during economic booms businesses expand

operations to satisfy demand and are

more likely to be profitable

the reverse is generally true for

recessionary periods although certain

companies that focus on low-cost

solutions may benefit from economic

contractions because demand for their

products or services rises in such times

for customers expenditures on luxury

products are often the first to be cut

during recessionary periods for instance

you might switch from a four dollar

venti latte at starbucks to a one dollar

alternative from mcdonald's

number two levels of employment

growth rates directly affect the level

of employment in boom times employment

tends to be low and skilled human

capital becomes a scarce and more

expensive resource

in economic downturns unemployment rises

as more people search for employment

skilled human capital is more abundant

and wages usually fall

number three interest rates

another key macroeconomic variable for

managers to track is real interest rates

which refers to the amount that

creditors are paid for use of their

money and the amount the debtors pay for

that use adjusted for inflation

low real interest rates have a direct

bearing on consumer demand

when credit is cheap because interest

rates are low consumers buy homes

automobiles computers and vacations on

credit

in turn all of this demand fuels

economic growth during periods of low

real interest rates firms can easily

borrow money to finance growth

borrowing at lower real rates reduces

the cost of capital and enhances the

firm's competitiveness however these

effects reverse when real interest rates

are rising

consumer demand slows

credit is harder to come by and firms

find it more difficult to borrow money

to support operations possibly deferring

investments

number four

price stability

as we know the lack of change in price

levels of goods and services is rare

therefore companies will often have to

deal with changing price levels which is

a direct function of the amount of money

in any economy

when there is too much money in an

economy we tend to see rising prices

indeed a popular economic definition of

inflation is too much money chasing too

few goods and services

inflation tends to go with lower

economic growth countries such as

argentina brazil mexico and poland

experience periods of extremely high

inflation rates in recent decades

in contrast with inflation deflation

describes a decrease in the overall

price level a sudden and pronounced drop

in demand generally causes deflation

which in turn forces sellers to lower

prices to motivate buyers

deflation is also a serious threat to

economic growth because it distorts

expectations about the future

for example once price levels start

falling companies will not invest in new

production capacity or innovation

because they expect a further decline in

prices

in recent decades the japanese economy

has been plagued with persistent

deflation

number five currency exchange rates

the currency exchange rate determines

how many dollars one must pay for a unit

of foreign currency it is a critical

variable for any company that buys or

sells products and services across

national borders for example if the us

dollar appreciates against the chinese

yuan then firms need more yuans to buy

one dollar

this in turn makes u.s exports such as

boeing aircraft intel chips or

caterpillar tractors more expensive for

chinese buyers and reduces demand for

u.s exports overall

this process reverses when the dollar

depreciates against euan

in this scenario the u.s exports become

more competitive in china

however chinese-made products such as

toys clothes and electronics become more

expensive for u.s consumers

in summary economic factors affecting

businesses are ever-present and rarely

static

managers need to fully appreciate the

power of these factors in both domestic

and global markets to assess their

effects on firm performance

third

socio-cultural factors

socio-cultural factors capture a

society's cultures norms and values

because socio-cultural factors not only

are constantly in flux but also differ

across groups managers need to closely

monitor such trends and consider the

implications for firm strategy in recent

years for example a growing number of

u.s consumers have become more health

conscious about what they eat

this trend led to a boom for businesses

such as chipotle subway and whole foods

at the same time traditional fast food

companies mcdonald's and burger king

along with grocery chains such as

albertsons and kroger have all had to

scramble to provide healthier choices in

their product offerings

demographic trends are important social

cultural factors

these trends capture population

characteristics related to age gender

family size ethnicity sexual orientation

religion and socioeconomic class

for example the 2020 u.s census revealed

that 62.1 million americans are hispanic

which count for 18.7 percent of the

total population

in addition hispanics on average are

younger and their incomes are climbing

quickly

to respond to this trend many companies

such as mcdonald's at t and toyota are

pouring dollars into the spanish

language networks to promote their

products and services another global

demographic trend is that by 2050 india

is expected to be the most populous

nation in the world

china the us indonesia and pakistan are

expected to be the next four most

populous countries in 2050

besides cus all those countries

currently are still emerging economies

their huge market size will provide

numerous opportunities for companies

fourth technological factors

technological factors capture the

application of knowledge to create new

processes and products

major innovations in process technology

include lean manufacturing

six sigma quality

and biotechnology

the nanotechnology revolution which is

just beginning promises significant

upheaval for a vast array of industries

ranging from tiny medical devices to new

age materials for earthquake-resistant

buildings product innovations include

the smartphone computer tablets and

high-performing electric vehicles

service innovations include social media

and online search engines that respond

to voice commands if one thing seems

certain technological progress is

relentless and seems to be picking up

speed

unsurprisingly changes in the

technological environment bring both

opportunities and threats for companies

given the importance of a firm's

innovation strategy to competitive

advantage we will discuss the effective

technological factors in greater detail

in a separate video

fifth environmental factors

environmental factors involve broad

environmental issues such as the natural

environment global warming and

sustainable economic growth

organizations and the natural

environment coexist in an interdependent

relationship

managing these relationships in a

responsible and sustainable way directly

influences the continued existence of

human societies and the organizations we

create

managers can no longer separate the

natural and the business worlds they are

inextricably linked

negative examples come readily to mind

as many business organizations have

contributed to the pollution of air

water and land as well as depletion of

the world's natural resources

bp's infamous oil spill in the gulf of

mexico destroyed fauna and flora among

the u.s shoreline from texas to florida

this disaster led to a decrease in fish

and wildlife populations triggered a

decline in the fishery and tourism

industries and threaten the livelihood

of thousands of people

it also cost bp

some 50 billion dollars and one half of

its market

the relationship between organizations

and the natural environment need not be

adversarial

actually environmental factors can

provide many business opportunities

for example 260 million tons of plastic

waste is generated across the globe

every year but only 16 gets recycled

the plastics industry has the

opportunity to move away from a take

make and dispose business model and

adopt a circular model which aims to

eliminate waste across sectors while

creating economic societal and

environmental benefits

one promising circular process is

pyrolysis which uses heat and the

absence of oxygen to reconvert plastic

waste back into liquid feedstock the

benefits are economic as much as

environmental with the recycling based

profit pool estimated at 55 billion

dollars by the next decade

sixth

legal factors legal factors include the

official outcomes of political processes

as manifested in laws mandates

regulations and court decisions all of

which can have a direct bearing on a

firm's profit potential

in fact regulatory changes tend to

affect entire industries at once

many industries in the united states

have been deregulated over the last few

decades including airlines telecom

energy and trucking among others

it is worth noting that legal factors

often coexist with or result from

political will

governments especially can directly

affect firm performance by exerting both

political pressure and legal sanctions

including court rulings and industry

regulations

consider how several european countries

and the european union apply political

and legal pressure on u.s tech companies

european targets not only include apple

amazon facebook google and microsoft the

five largest u.s tech companies but also

many startups

europe's policy makers seek to retain

control over important industries

ranging from transportation to the

internet to ensure that profits earned

in europe by silicon valley firms are

taxed locally

taken together political and legal

environments can have a direct bearing

on a firm's performance

now

let's do a quick review of today's topic

a pestle analysis is a framework or tool

used to analyze and monitor the macro

environmental factors that may have a

profound impact on an organization's

performance

this tool is especially useful when

starting a new business or entering a

foreign market pestle is an acronym that

stands for political economic social

technological environmental and legal

factors

for managers it is a good idea to run a

pestle analysis at least every six

months and identify changes to the

external environment on a regular basis

by monitoring and responding to these

changes managers can keep their

strategies fluid and current

so

what do you think about the

pestilenalysis

can you apply the pestle analysis to a

company or business you are interested

in

please leave your thoughts in a comment

below

thanks for watching and i will see you

next time