PESTEL model is useful for leaders and managers to analyze the microeconomics of business environment they are working in or attempting to enter in the future. Strategist use PESTEL model to find the macro-environmental factors that can or will affect their strategy implementations and the organizational performance. PESTEL model include six environmental influencers, which are Political, Economic, Social, Technological, Environmental, and Legal. These influencers may look independent but they are related to each other in different ways. Change in the political situation may change the economical and the environmental regulations. The environmental standards may be relaxed which make the organizational investments unjustified, on the contrast, the environmental regulations may become more stringent which may need more investment in an approved project.
Political factors: governmental instability make the intended market undesirable because new government may revoke contracts or change social policies (Evans & Richardson, 2007). The unexpected changes may consume the intended profit margin. Tax policies and trade regulations, like NAFTA, are equally important political factors.
Economic factors include unemployment rate, buyers disposable income, and credit accessibility (Carpenter & Sanders, 2009). These three factors affect the individuals buying power. Strategist need to look at these factors along with interest rate and inflation before offering their products and services in the intended market.
Social Factors are lifestyles, educational levels, wealth distribution, and population demographics (Evans & Richardson, 2007). A product or service may be successful in a country or part of the country because of the lifestyle of that area but could be unsuccessful in another. Trendy cafes may be successful with the young population but gourmet coffee shops are more desirable for the older population.
Technological factors like innovations and discoveries can affect the pace of technological obsolescence (Carpenter & Sanders, 2009). The introduction of iPod in the market signaled the obsolescence of the Sony Walkman. The same situation can be noticed with the DVD use over VHS tapes and now the online rent services made the DVD lose market share fast. Digital and audio books affected the printed books heavily. Boarders, the bookshop chain, just announce its troubled operations and its intention to close more stores.
Environmental factors are increasing and becoming more stringent every year. Waste disposal, energy conservation, and protections laws are the most important factors but not all. Environmental laws keep on increasing the limits after the noticed global environmental changes. Managers and business leaders need to plan for more changes in the protection laws because of the constant demand from the environmental groups and the international environmental organizations.
Legal factors are changing constantly depending on the market needs, or government political views (Carpenter & Sanders, 2009; Evans & Richardson, 2007). Change in the employment regulations like minimum wage, discrimination laws, and health and safety regulations can affect the operational cost.
Managers and business leaders should expect the risk of the changes in the above factors. Well planned and risk managed strategy can decrease the cost and maybe signal good opportunities in the future.
Carpenter, M. A., & Sanders, W. G. (2009). Strategic management. Upper Saddle River, NJ: Pearson Prentice Hall.
Evans, C., & Richardson, M. (2007). Assessing the environment. Manager: British Journal of Administrative Management(60), i-iii.