The External business Environment (PESTEL)

• As mentioned in our introduction to this topic
• Businesses do not operate in isolation
• There are external factors which also exert their influence on its operations
• These external factors together constitute the external business environment
• The external environment is sometimes known as PESTEL
• This is because their acronym spell this word
• PESTEL stands for the various components that make up a business’s external environment
• Namely the following aspects of the external environment:
  • Political factors
  • Economic factors
  • Social factors
  • Technological factors
  • Environmental factors
  • Legal factors
• It is important to point out now that this environment is not constant
• It is dynamic
• It is in constant flux as various elements of these factors are constantly changing ways that might affect a business’s operations
• The onus lies on the affected business to keep abreast of these changes and make sure that its rectifying any problems presented by these changes as well as take advantage of opportunities that these changes bring
• Failure to keep abreast can see a business being forced into liquidation, facing criminal/civil charges, garnering unwanted political scrutiny, being overtaken by technology, facing backlash on social media etc

Political factors

• Refers to governmental activities and political conditions that may affect your business
• These factors are mainly determined by the ideology/philosophy of the government in charge
• Generally, there are capitalist governments, conservatives, pro-labour, communists and socialists
• Each party/government when in power would be inclined to pass laws that are influenced by their philosophy
• These laws would determine things like:
  • tax policy,
  • labour law,
  • environmental law,
  • trade restrictions,
  • tariffs,
  • licence fees etc
• All these things will have a profound effect on the way businesses operate or if they operate at all
• Political stability is also important as it determines the economic health of a country and makes sure that businesses do not suffer from disruptions
• An unstable political environment would cause businesses to go in hibernating mode and put expansion plans on hold
• For example in Zimbabwe due to land reform and indigenisation
• Another example is Brexit in Britain which created uncertainty
• It is important to note that there are many types of governments including the local and national government
• All these impact on the operations of a business

Economic factors

• These factors can be:
• Macroeconomic factors that affect the economy as a whole for example interest rates, inflation, employment rates, taxes etc
• These would, for example, affect what a business pays for its inputs, what it can charge its customers, its operating costs, whether it can plan ahead (hyperinflation, for example, impedes the planning process), the cost of capital (borrowing)
• Microeconomic factors that affect the business specifically for example market size, demand for the specific product the business is selling etc

Social factors

• Refers to sociological factors that can impact on the business
• include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety
• For example, gay relationships are accepted in other societies such as in western countries while they are banned in other countries such as in African countries
• Anti-gay business practices would attract a backlash in these western countries
• Conversely, business activities promoting gay relationships in Muslim and African countries would attract a backlash
• It is important that a business be sensitive to these attitudes and societal norms and act appropriately
• Sometimes this requires a lot of diplomatic juggling as a lot of Multi-National Companies have successfully done for decades

Technological factors

• These are innovations that can either enhance your business or harm it as a whole
• Technological changes can create barriers to entry, for example, it would not be easy to form a plane making business right now because the current major players Boeing and Airbus have accumulated so much knowledge and technology it would require lots of capital in research and development just to catch up with them
• technological shifts can affect costs, quality, and lead to innovation
• A business needs to keep abreast with technological changes that might affect otherwise it might go under
• An example is the internet
• Due to an increase in households with high-speed internet businesses like Amazon have managed to crush local book stores and retailers putting them out of business
• These retailers and bookstores failed to anticipate the importance of the internet in their business models

Environmental factors

• These refer to the actual physical environmental factors
• This is taken to include weather, climate, and climate change, which may especially affect industries such as tourism, farming, and insurance
• Global warming is now accepted as a fact
• It has a complex impact on various businesses
• It is important that a business be mindful of these factors and how they are constantly changing
• Examples of businesses that are directly affected include carmakers who have to keep an eye on carbon emissions made by the vehicles they produce
• This might mean investments in clean technologies even if the law does not require them

Legal factors

• A business should make sure that it is operating on the right side of the law
• The legal environment refers to the applicable laws, by-laws and regulations
• In most countries, there are three types of laws: common law, case law as made by the courts and legislation made by the government
• Laws include discrimination law, consumer law, antitrust law, employment law, and health and safety law
• These factors can affect how a company operates, its costs, and the demand for its products
• Regulations include things like the accounting framework under which a business operates
• It is important that businesses keep an eye on those changing regulations that might affect how it operatesTo access more topics go to the Advanced Level Business Studies page

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