THE EXTERNAL ENVIRONMENT - PESTELDR DOUGLAS NISBET

PGDBA 101 Strategic Leadership and Management Skills

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Learning ObjectivesTo be able to understand and analyse the External Environment of Business using PESTEL Analysis:P = Political E = EconomicS = Socio-culturalT = TechnologicalE = Ecological (Natural Environment)L = Legal

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P = PoliticalPolitics:

– “...is concerned with those processes which help to determine how conflicts are contained, modified, postponed or settled, and as such can be seen as a universal social activity” (Worthington and Britton 2009 p.60).

Government:• A process of exercising power to make decisions;

• The institutions through which this power is exercised.

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Government as ProcessFigure 1. Government and its environment

Source: Worthington and Britton 2009 p.74.

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Government in Democratic States

Source: Worthington and Britton 2009 p.74.

Uganda Electoral Commission :Http://www.ec.or.ug

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Three Branches of Government

The process of governing involves three major activities:

• Making decisions The Legislature

• Putting them into effect The Executive

• Adjudicating over them in the event of dispute or non-compliance The Judiciary

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Subnational Government:The Local Government System

Figure 3. The local government system

Source: Worthington and Britton 2009 p. 84. For information on Local Government in Uganda consult the Republic of Uganda Ministry of Local Government: Http://www.molg.co.ug

Examples of Supranational Government

EUROPEAN UNION• Currently 27 member states;• European Parliament - currently 785 MEPs;• The council of the European Union – the

Council of Ministers (27);• The European Council – the Heads of State,

Foreign Ministers, and the President of the Commission;

• The European Commission - 27 Commissioners and 23,000 civil Servants;

• Currency Euro (only 7 members)• European Central Bank• European Union Passport Format (but with

individual states nationality)• Common Agricultural Policy• The European Court of Justice - 27 judges.

EAST AFRICAN COMMUNITY• Currently 6 member states• East African Legislation Assembly

(equivalent of Parliament)• Council of Ministers• Summit – Heads of Member States

• Customs Union – not fully implemented• Inter-Universities Council for East Africa• East African Development Ban• East African Passport – only valid with

members

• Lake Victoria Fishers Association• East African Court of Justice

EU/ EA Comparisons

• EU• 10,180,000 sq km• Population: 500 million• GDP: $ 17.6 trillion• GDP per capita: $34,000

• EA• 1,817,945 sq km • Population: 125 million• GDP: $ 104 million• GDP per capita: $1,000

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The Political Environment and Business

Political, social and economic checks and balances act as constraints on the government actions through:

• Separation of power between three branches of government;• Pressure groups’ activities;• Business organisations, and their representing organisations as

key pressure groups; • Economic decisions by businesses.

E = EconomicTwo main branches:• Microeconomics - studies the small parts of the

economy, e.g. housing market, firms.• Macroeconomics - studies the economy as a

whole, e.g. national income and output, inflation, unemployment, growth.

World Bank Statistics;http://data.worldbank.org

What, How and For Whom

The key choice in economics relate how society decides• What to produce• How to produce• For Whom to produce.

• There are differing ways of anwsering these questions at one extreme we could let the market decide. The the other end of the spectrum we could let the government decide.

For Whom to produce• Spending is related to consumption. Thus those

with the highest incomes are able to the consume the most should they choose. In an ideal world the most productive/useful would receive the highest income

• Certain groups dominate spending in the UK.

• Spending is dependant on income in the long run. Income in turn depends on those who own the most; income earning assets or those who have highly valued skills.

• The government can direct production to certain groups by directing its spending at key target groups.

GROSS NATIONAL INCOME COMPARISONS:

$39,038 (UK); $8,070 (South Africa): $487 (Uganda)

(SOURCE: World Bank, 2011)

Ugandan Economy

• UGANDA (2011)• Population: 34,509,205 • GDP: $16,809,623,488• GDP Growth: 6.6%• Inflation: 4.8%

Economic Systems• The various ways of answering the economic problem vary with differing

countries.USA TaiwanUKUgandaNorth Korea Cuba

• The countries on the left are communist or command economies. Where, who, what and for whom is governed by the state.

• On the right is a free market of capitalist economy.

• Most economies are mixed. i.e. some state involvement

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S = Socio-cultural

• Demography• Social issues• Cultural aspects

Social influences on business:

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Changing Context of Business – Demography

Demography, as the study of population:– The size of population;

– The ageing population;

– The birth rate;

– The death rate;

– Net migration

– Changes in the population’s size and/or structure.

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Changing Context of Business – Social Context

• Social classes• Social mobility• Lifestyle.

The social context of business:

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Changing Context of Business – Cultural Context

• Culture• Cultural differences• Cultural diversity.

The cultural context of business:

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Changing Context of Business – Market SegmentationTable 1. Methods of segmenting consumer markets

Source: Worthington and Britton 2009 p.152

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T = Technological

Resources:– People - “labour”

– Technology – “capital”

– Natural resources – “land”.

Renewable resources: labour, water, fishing stocks, wool, air, and solar power, although the time it takes for some of these to renew differs;

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Non-renewable resources: most minerals, oil, iron ore, coal, and agricultural land, although some non-renewable resources may become renewable with technological advances.

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Resources – People

• Quantity and quality of the workforce• Participation rate• Working week• Wages• Trade Unions

People as resources – “labour”:

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Resources – People

• Geographical Immobility• Occupational Immobility• Educated workforce• Occupational structure.

People as resources:

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Resources – Technology

Technology - ‘the total knowledge and skills available to any human society for industry, art, science, etc.’ (Wilkes and Krebs 2001 p. 1583).

Technology as resources – “capital”:1. Information technology

2. Technology and investment:– Capital: working, fixed, social capital;

– Stock.

3. Infrastructure

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Resources – Technology

• Product innovation• Process innovation• Research and Development (R&D)• Technological unemployment

Technological change:

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Resources – Natural Resources

• A fixed / non-fixed factor of production• Uneven distribution of natural resources• Protection of the environment• Environmental control• Energy• Negademand.

Natural resources – “land”:

E = Ecological (Natural Environment)• Corporate Social Responsibility (CSR): business organisations have responsibilities beyond

mere profit making, and encompass voluntary activities and actions that affect people, their communities and the natural environment.

• Friedman’s (1970) view is that businesses’ obligation is to make profit for their shareholders.

• Freeman’s (1984) view is that company’s responsibilities are to their internal and external stakeholders.

• Strategic advantages on the demand and supply side (McWilliams et.al. 2006);

• Competitive advantage by investing in CSR (Porter and Cramer 2002);

• Resource-based view (RBV), highlighting organisational resource capability that can lead to sustained competitive advantage (Hart 1995).

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Environmental management: an issue of corporate responsibility

Environmental management – as reconciliation between businesses’ need for economic growth with the demand for greater environmental protection and reduced levels of ecological degradation.

Sustainable development lies in finding an appropriate balance between economic development and environmental protection (e.g. oil production but generating energy from other renewable resources such as wind, waves, or solar)

Top-down approaches from the government or corporate level, can only be part of the overall solution, depending on the actions to accept responsibility for firms’ and individuals’ own behaviour and its consequences.

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Business Responses to CSR• A reactive and/or defensive approach, with minimal and compliance-driven

actions;

Or

• A socially responsible approach as a result of the possible advantages it might bring to the organisation;

Or

• Instigating firms’ own environmental policies and/or regulations, and therefore improving their company’s image while reducing external checks upon corporate practices and processes.

• Organisations may not pursue a proactive role in the development of environmentally responsible policies, where initial short-run costs are prohibitive when the payback is to be over the long term.

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Encouraging Environmental Concerns within BusinessMethods for encouraging environmental concerns within business:

• Government intervention – through a regulatory system as a means of control.

• Market mechanisms - through the increased ethical and environmental awareness of businesses’ stakeholders, such as customers, suppliers, employees and investors.

• External pressure – through the activities of various organisations, from local communities’ meetings with businesses, to the global actions orchestrated by e.g. Friends of the Earth or Greenpeace.

• Self-regulation – where industries and businesses would impose self-regulation as an attempt to offset on-coming regulation.

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Environmental Policies and Benefits to BusinessDirect and indirect benefits of environmental policies for businesses:• Efficiency of factor inputs – as a sign of more efficient use of materials and energy, that

will ultimately reduce costs.

• Improved market image – carefully built and maintained company image can be easily damaged by some careless action (e.g. BP’s oil spill in the Gulf of Mexico).

• New market niches – the consumers are prepared to pay extra for a product that is less harmful to the environment; or other market opportunities such as products, services, and technologies for pollution reduction, energy saving and waste control, and environmentally friendly products.

• Proactive legislative compliance – there is a growing economical and social pressure for organisations, which are proactive in developing greater corporate responsibility, and which are committed to the concept of sustainable development.

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Implications of the Ethical and Ecological Environments to Business

• Businesses have to take into account their stakeholders’ views, particularly regarding the natural environment.

• Businesses’ actions differ, from reactive to proactive ethical and environmental approaches, which go beyond compliances with regulatory demands.

• The key ‘drivers’ of corporate environmental responsiveness include governmental intervention, market forces, external pressures, and self-regulation by organisations.

• Firms, which implement environmental policies, can benefit from improved resource efficiency, enhanced market image, new market opportunities, and increased competitive advantage.

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L = Legal

Classification of law:

• Public law - concerns the state and individual;

• Private law – governs relationships between individuals;

• Criminal law – relates to legal wrongdoings;

• Tort – covers specific civil wrongdoings;

• Trust – imposes a duty of dealing with various types of property.

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Business Organisations and the Law

Table 1. Business organisations and the law

Source: Worthington and Britton 2009 p. 194.

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Contract Law: the essentialsContracts - agreements (oral or written) between two or more persons, which are legally enforceable, provided they comprise a number of essential elements:

– Offer;

– Acceptance;

– Consideration;

– Intention to create legal relations; and

– Capacity.

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Law and the Consumer• In some cases, under the effect of various factors, the

consumer’s sovereignty can be impinged.

• Hence consumer law provides inherent protection in the marketplace from powerful, and in some cases, unscrupulous, suppliers.

• Law and the consumer:Consumer Law is at a developing stage in Uganda and is yet incomplete. The main relevant Acts are:

Weights and Measures Act

Sale of Goods Act

SEE Uganda Law Reform Report on Consumer Law (2004)