Lecture_04 July 2020 THE PESTLE FRAMEWORK The business can have some control over the inputs it buys and how it combines those inputs to produce its outputs. However, there are several external factors over which it has very little control but which it has to respond and react to. In order to help understand and analyse these external factors, a framework is used which summarizes a number of broad, sometimes highly related and interacting areas, which business has to work within. This framework is referred to as the PESTLE framework with the acronym standing for: • Political • Economic • Social • Technological • Legal • Environment Political Politics refers to power – who has power, who makes decisions and how it affects individuals and business. Power can be wielded by local governments, national governments and supranational governments (where decision making or laws are made by groups or states outside national boundaries) such as the European Union (EU). In some countries power lies in the hands of a relatively small number of people, possibly linked to a royal family, tribal or religious group. In others the military may be an important element in the way in which political authority is framed. Changes to laws, directions in policy or regulations can all affect businesses in different ways. Laws on employment, employee rights and responsibilities, health and safety, taxation, planning, trade, advertising and business governance amongst many other things, all affect business and invariably raise the cost of doing business by either involving the business in additional time, form filling or procedures. In some cases laws or regulations may be passed with the aim of helping a business by giving grants or special dispensation to operate. In this case there may also be a cost in terms of certain conditions to which the business has to adhere to get the benefit. For example, there may be a relaxation of planning regulations which mean a business can establish new premises more quickly. Economic Businesses have to operate within an economic environment. This relates to the extent of economic activity in different ‘economies’ which could include a very local economy, a regional economy, a national or supranational or global economy. There are also bodies which have supernational powers – the authority to act across different nations – such as the International Monetary Fund (IMF). The south of Italy, for example, suffers from a lower level of economic activity than the north and as such standards of living in the south are lower and opportunities for employment and growth are lower in return. Microeconomic environment In times of weak economic growth retail businesses such as supermarkets may also find that whilst there may be changes to the type of products people buy, the volume of trade does not decline that much, meaning they are relatively insulated from declines in economic activity. Retail businesses which sell high end products such as electronic goods or fashion items may find that they are very badly hit by economic slowdown and sales may fall dramatically. Other businesses such as secondhand shops, pawn shops or low price discount stores may actually find their business increases in times of economic slowdown. Macroeconomic environment Refers to the national or global economy within which the business operates. The things which can affect businesses from macroeconomic changes include variations in exchange rates, interest rates (which may be linked), policies on taxation, planning, competition and so on. Changes in these macroeconomic factors can affect the level of economic activity in the economy as a whole and as a result impact on businesses. Social Businesses are affected by various trends, fashions, moods and changes in society. Many European and Middle East economies, for example, are experiencing an ageing population with an increasing proportion of the population over the age of 65. This creates both opportunities and threats to businesses. Technological It is tempting to think of technology as some electronic gadget but the definition of technology is much wider. Technology is the use of knowledge in some way which enables individuals or businesses to have greater control over their environment. Businesses constantly think of ways in which they can employ knowledge in this way because it can help to reduce costs, improve technical and productive efficiency and in many cases social and allocative efficiency. Technology can also help give a firm competitive advantage where the advantage has the key characteristics of being distinctive and defensible. Legal Laws and regulation can be national or supranational. The legal framework covers all aspects of society and businesses have to abide by these laws. A strong legal system which is respected is fundamental to the principle of good governance, which in turn helps provide confidence in the way in which a business operates and so promotes Trade. For example, customers want to know that if they buy a litre of fuel from a petrol station they do actually get a litre of fuel dispensed from the pump; investors need to know that the information on which they base decisions is as accurate and truthful as possible, if a business comes up with a new idea, process or invention that they can protect the investment in time, money and intellectual capital that they have made. Environment The impact on ecosystems and land use. There are plenty of studies to suggest that carbon emissions, largely produced by human activity, have been a direct cause of a gradual rise in average global temperatures which in turn could lead to greater volatility in global weather patterns and also bring about a thawing of polar ice caps, rising sea levels and subsequent effects on those living in low-lying areas of the world.
