Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears PESTEL Analysis

Posted by Zander Henry on Aug-22-2018

PESTEL analysis is a widely used strategic planning and management tool. It is an acronym for political, economic, social, technological, environmental and legal factors that shape the macro business environment. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. operates in a complex and dynamic environment characterized by regulatory changes, growing environmental activism, collective social trends, technological changes and evolving legal system.

2 Application of PESTEL to Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.

The application of PESTEL analysis can help Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. identify the major external environmental forces that shape the strategy and competitive landscape and support its strategic decision making process. As Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. looks to expand and leverage its competencies and core capabilities, conducting the PESTEL analysis is imperative for developing effective strategies and achieving long-term growth objectives.

2.1 Political factors

2.1.1 Importance of political factors in the PESTEL framework

Within PESTEL analysis, political factors exert a strong influence on the long-term sustainability and profitability of Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. The presence at international stage increases the company’s sensitivity to changes in political environments of different countries. In a political context, the key to success in a dynamic international business environment is to diversify the systematic risks. The political environment of a country comprises multifaceted factors. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. needs to consider the following political factors during the strategic planning process:

2.1.2 Political factors that influence Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.

2.1.2.1 Political stability

High political stability provides a stable and friendly business environment with predictable market growth trends. However, when there is political chaos, it deters the investors and harms the stakeholders' trust in economic and consequent organizational performance. Currently, Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. is present in different countries, each having own political tensions. Growing tensions and instabilities in the global political environment can affect the Gold industry growth and limit the growth opportunities available to Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.

2.1.2.2 Changing policies

Frequent changes in government policies harm business performance by increasing environmental uncertainty. It is important for Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. to study the current trends in the country's political scenario as changes in government may alter the government's priorities towards the development of different industries.

2.1.2.3 Protests/pressure groups and governance system

Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. should carefully analyze the protests by pressure groups, social/environment activists and worker unions as such protests play an important role in the policy making process. Close collaboration with such groups may enhance the Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.’s ability to collaborate with community and achieve long-term corporate goals. Moreover, a well-developed governance system with a democratic political environment makes the business environment more comfortable for international business organizations like Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.

2.1.2.4 Bureaucracy and corruption

Bureaucracy and corruption negatively influence the business environment. Operating in countries with high corruption level and weak law enforcement makes the business environment increasingly unpredictable for Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. due to jeopardized public trust on business organizations and overall political and economic structure. The corruption can influence various business operations, ranging from licensing, contracting, fraudulent deals to frequent lawsuits. If Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. decides to enter in markets with the corrupt economic, political system, it will threaten the organization's sustainable development by destabilizing the society, harming justice system and endangering the rule of law.

2.1.2.5 Taxation, trade restrictions and intellectual property protection

Entering in countries with high taxation level will directly influence the profitability of Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. High taxation affects international trade and prevents exports. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. can enter in low taxation markets and benefit from high profits that can be invested in research and development activities. The organization may also study the industry specific taxation policies to understand the host government's priorities and interest in developing industries. Similarly, high trade restrictions can make the business environment more complex by affecting the exports and harming relationships with foreign trade partners. Moreover, if the government of the country under consideration is not serious about protecting the intellectual property rights of business organizations, it will deter the entrepreneurs from investing in organizations due to high risk of ideas being stolen. Hence, Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. should study how intellectual property rights are protected in the host country and make the business strategies accordingly.

2.2 Economic factors

2.2.1 Importance of economic factors in the PESTEL framework

It is important for Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. to understand economic factors such as foreign exchange/interest rate, labor market conditions, inflation and saving rates etc. as they determine the overall economic environment of the country. A detailed understanding of the economic environment can help Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. estimate the growth trajectory of industry and organization. Following economic factors need to be considered by Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. to make informed decisions:

2.2.2 Economic factors that influence Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.

2.2.2.1 Economic/business cycle stage

The economic development of a country directly influences organizational performance. Growing economies offer wide-ranging growth opportunities to the Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. Similarly, it is important to understand the industry lifecycle stage. Entering in mature industries can be more challenging due to market saturation than industries at the growth stage. Moreover, the business performance of Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. is also influenced by the extent to which the host country government has spent on core infrastructure development. A well-developed infrastructure facilitates the business environment and increases the growth potential of the gold industry in the respective country.

2.2.2.2 Inflation/employment/interest/exchange rates

The GDP growth rate will determine the Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.’s ability to pursue its long-term growth strategies. High GDP also signals the consumers’ ability to spend more on offered products. High unemployment signals the availability of surplus labor at comparatively lower wages. Operating in such a market can lower the production cost of Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. The organization should also carefully consider the interest rate and its influence on borrowing ability and attitude towards investment. The high interest rate will encourage the attitude towards investment and increase growth opportunities for Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. Finally, the exchange rate fluctuation can also influence the profitability and international trade. The high fluctuation on local currency can be a cause of serious concern for Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.

2.2.2.3 Labor market conditions

The demand and supply of labor determine the wage rates and supply of skilled workforce. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. must study and predict the labor market conditions to understand how it can attract talented workers and leverage their skills to improve business performance. When labor markets are flexible, Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. can take advantage of higher labor productivity. Whereas, operating in rigid labor markets may cause labor wage and other issues raised by powerful labor unions. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. should also carefully analyze the availability of skilled human capital as a shortage of skilled labor can affect business efficiency and make talent attraction and retention more challenging.

2.2.2.4 Financial markets efficiency

The global expansion strategies of the Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. are influenced by the financial market efficiency as operating in highly efficient financial markets leads towards improved liquidity position and strengthened ability to enter new markets. The health and efficiency of financial markets will determine Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.’s ability to raise the capital at fair prices.

2.2.2.5 Economic structure

The business practices of the Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. are influenced by the prevailing economic structure. The economic and regulatory environment in a monopolistic or oligopolistic structure will be different from the monopolistic competition and perfect competition.

2.3 Social factors

2.3.1 Importance of social factors in the PESTEL framework

Organizational culture derives strong influence from the societal norms, values and trends. Understanding the demographic trends, power structures, consumers’ spending patterns and shared beliefs can help Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. design effective marketing messages and fulfil corporate objectives through informed PESTEL analysis. The marketing department of Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. can use the information retrieved from social, environmental analysis to target the consumer groups and increase the appeal of offered products to potential buyers. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. must consider the following social factors to conduct macro-environmental analysis:

2.3.2 Social factors that influence Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.

2.3.2.1 Demographic trends

Changes in demographic patterns like aging population, migration trends and socio-economic variables have paramount importance for international business organizations like Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. Studying the demographic characteristics can help Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. in choosing the right market segment/segments with high growth potential. The business and marketing strategies are also influenced by migration. It is important for Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. to understand the people’s general attitude towards migration as it can influence firms’ ability to bring international managers to host country.

2.3.2.2 Equality and power distance

The power distance within any society shows the acceptance of hierarchy and income inequality. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. must adjust its business management practices while entering in markets with high or low power distance. The growing inequality in many countries is altering the power structure, which has serious implications for international business organizations like Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.

2.3.2.3 Gender Roles

Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. need to study the traditionally assigned gender roles to align its marketing and communication practices accordingly. Marketing and human resource strategies in a traditional, patriarchal society with clearly distinguished gender roles will be different from societies with low gender stereotypes.

2.3.2.4 Societal norms and class distribution

Culture is considered an important variable by international marketing managers. Each society has distinctive norms and values that play an important role in shaping consumer behavior. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. should develop local teams and develop local partnerships for understanding the societal attitudes and norms to tailor marketing strategies according to unique cultural context. The observation of social class stratification is also important for Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. Offering luxury products at premium prices to a market where the high-end market is considerably small in number will require Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. to adopt the niche marketing strategies. Similarly, market segmentation based on social class may be ineffective where social class stratification is low.

2.3.2.5 Online shopping

The advent of social media and e-commerce has encouraged online shopping behavior among customers. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. needs to understand the online shopping behavior by considering the generational differences as younger consumers are more inclined to shop online than older customers. The growing use of mobile phones and social networking sites must be considered when developing marketing and communication strategies.

2.3.2.6 Spending patterns and behavior

The consumers’ spending patterns are influenced by their purchasing power of money. Studying and forecasting the consumers’ purchasing power based on relevant economic indicators is important to analyze the customers’ interests and spending patterns. In some societies, consuming the offered product is considered a status symbol, while, some people use the same products for functional aspects. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. should invest time on understanding the consumption motivations and social trends that define the consumption behavior. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. should also attempt to understand the degree of consumer ethnocentrism and consider the country of origin effect to determine local consumers’ evaluation of foreign products. Lastly, Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. should study the consumers’ leisure interests and should focus more on enhancing the customer experience if customers prefer experiential products over traditional product offerings.

2.4 Technological factors

2.4.1 Importance of technological factors in the PESTEL framework

‘Technology' is the fourth factor of PESTEL analysis. The rapid technological advancement and technological diffusion across the globe have increased the importance of understanding technological factors during the strategic decision making process. A detailed analysis of the technological environment can help Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. capture the technological trends to achieve certain business advantages, such as- increasing profitability, boosting innovation process and enhancing the operational efficiency. Following technological factors can influence the business performance of Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.:

2.4.2 Technological factors that influence Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.

2.4.2.1 Social media marketing

The development of information and communication technologies has led towards the adoption of innovative marketing techniques to enhance collaboration with customers. Use of social media has become common in a modern business environment. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. can leverage the opportunities offered by social media marketing to improve business performance. Technological trends can be used to start the creative social media campaigns for developing online brand communities.

2.4.2.2 Technological innovations and development level

Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. should carefully consider the on-going technological innovations to stay ahead of the competition. A close eye should be kept on analyzing the 5G and determining its potential to deliver positive business outcomes through enhanced user experience, increased speed and expanded access. Technological innovations like this can bring major transformations in the industry and reset the success rules for market players. Moreover, considering the development and maturity level of technology in the respective market is also important. Entering in markets where technological advancement has not reached the maturity means Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. can increase the market share by focusing on emerging technological innovations.

2.4.2.3 Research and development on technology and impact on cost structure/value chain

Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. needs to consider the investments made by competitors on a micro and macro level to understand how new technologies influence the firm’s value chain and prevailing cost structure. Research and development activities are highly important in an environment characterized by creative disruption. In such an environment, Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. should invest in disruptive technologies to maximize the profits and re-invest the profits for future disruptive technologies.

2.4.2.4 Shortened product life cycles

The adoption of new technologies has shortened the lifecycle of new product development. Today, new products are developed quickly, and supply chain partners have also gained more power. It pressurizes the Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. to develop new products quickly, increase product range diversity, integrate flexibility into the value chain and develop healthy business relationships with value chain partners.

2.5 Environmental factors

2.5.1 Importance of environmental factors in the PESTEL framework

The growing environmental consciousness and changing climatic conditions have made ‘environmental analysis’ an important part of the PESTEL analysis. The environmental standards, laws and regulations vary across different markets. The international presence of Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. require the organization to consider these differences to avoid undesired circumstances carefully. Detailed environmental analysis is imperative before deciding to enter a new market or start a new product line. Some examples of environmental factors that Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. need to consider are given below.

2.5.2 Environmental factors that influence Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.

2.5.2.1 Recycling and waste management

The growing environmental pollution coupled with technological advancement has compelled business organizations to adopt innovative recycling and waste management practices. In some countries, recycling has almost become a business norm. Moreover, adopting efficient waste management practices in organizational units that are located in or near urban areas is highly crucial for Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. Many countries have placed strict norms to protect their urban areas through effective waste management.

2.5.2.2 Renewable technologies

Some countries offer subsidies for encouraging investment in renewable technologies. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. can benefit from it and invest in renewable technologies to ensure long-term sustainability. This investment will also increase stakeholder satisfaction and expand the customer base due to enhanced brand image.

2.5.2.3 Weather and climatic conditions

Changes in weather and climatic conditions can influence business efficiency. For instance, extreme weather conditions can increase the cost of operations and compel the Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. to make the value chain more flexible. Such changes can also influence the consumers' spending patterns, causing the organization to revise its product and marketing strategies.

2.5.2.4 Attitude towards eco-friendly products

There is a growing trend towards the use of green/eco-friendly products. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. can take it as an opportunity and adopt green business practices to win the trust of stakeholders. Regulatory bodies’ emphasis on ensuring compliance with environmental norms is altering the product innovation priorities. It requires Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. to prioritize and focus on marketing the eco-friendly nature of their products over customary value propositions.

2.5.2.5 Environmental regulations to avoid resource depletion

Excessive resource depletion by Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. can draw the negative response from media, environment protection groups, customers and the general public. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. must study the specific environmental regulations of the country under consideration to understand which resources (like water, electricity etc.) are considered rare or which species are endangered whose excessive consumption can cause trouble for the organization.

2.6 Legal factors

2.6.1 Importance of legal factors in the PESTEL framework

“Legal” is the sixth factor of PESTEL analysis. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. cannot enter a new market without studying in detail the legal environment and regulatory structure of the new consumer market. A careful evaluation of legal aspects is required to avoid getting into some serious trouble. Ignorance in this regard can cause undesired circumstances for Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears., such as- hurting competitive advantage as a result of intellectual property rights violation and harmed organizational image due to violation of consumer/employee/environment protection standards. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. should consider the following legal factors when exploring a new market.

2.6.2 Legal factors that influence Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.

2.6.2.1 Employee protection laws (discrimination and health and safety)

Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. must follow the employee/labor health and safety laws as some countries have strict regulations to ensure labor safety. Providing a secure work environment for the workforce is the ethical and moral obligation of Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. Similarly, anti-discrimination laws (like equal employment opportunity) also need to be carefully studied when developing human resource practices as discriminatory suits against employer harm the organizational image and affect organizations’ ability to attract and retain the talent.

2.6.2.2 Consumer protection laws

The data protection has become an important issue due to consumers’ privacy and security concerns. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. need to study data protection regulations to protect the customer data. Moreover, there are laws to set the maximum price, ensure a certain quality standard and protect consumers from fraudulent marketing claims. Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. must consider these factors to ensure compliance with consumer protection laws.

2.6.2.3 Intellectual property laws

Intellectual property regulations are designed to protect the companies' patents and valuable ideas. Inability to protect intellectual property rights can result in losing competitive advantage, which may weaken the positioning of Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears. against other market players.

3 Concluding statement

To conclude, the PESTEL model is an important business tool that involves a detailed analysis of macro-environmental factors that shape the business environment. Ranging from political factors to environmental factors, each factor comprises various variables that influence the strategic decision making process of business organizations like Critical Questions When Launching Innovation Is the Team Right Is It Time to Shift Gears.