Ibs BS Mba S4

BUSINESS STRATEGY
IBS (MBA) Bangalore
SESSION -4
Course Coordinator
Dr. L.R.S.Mani
Slide 2.2
Layers of the Business Environment

THE FIRM’S EXTERNAL ENVIRONMENT
4-3
The PESTEL Framework
The PESTEL framework categorises environmental factors into
six key types:
Political Economic
Social Technological
Ecological Legal
PESTEL helps to provide a list of potentially important issues

influencing strategy. It is important to assess the impact of each
factor.
POLITICAL FACTORS
Political factors include:

 The role of the state e.g. as an owner, customer or
supplier of businesses.
 Government policies.
 Taxation changes.
 Foreign trade regulations.
 Political risk in foreign markets.
 Changes in trade blocks (e.g. BREXIT).
 Exposure to civil society organisations
(e.g. lobbyists, campaign groups, social media).
POLITICAL FACTORS
Political risk analysis is the analysis of threats and
opportunities arising from potential political change.
There are two key dimensions to political risk analysis:
 The macro–micro dimension – assessment of the
macro risk is that which attaches to whole countries

(e.g. middle east countries assessed as high risk.) Micro
risk is that which attaches to the specific organization.
 The internal–external dimension – internal factors
relate to issues within a country (e.g. government

change); external factors arise outside a country but
have an impact within it (e.g. OPEC oil prices).
ECONOMIC FACTORS
Economic factors include:

 Business cycles.
 Interest rates.
 Personal disposable income.
 Exchange rates.
 Unemployment rates.
 Differential growth rates around the world.
ECONOMIC FACTORS
Some industries are particularly vulnerable to

economic cycles:
 Discretionary spend industries (e.g. housing,

cars).
 High fixed cost industries (e.g. airlines, hotels).
SOCIAL FACTORS
Social factors include:

 Changing cultures and demographics (e.g. ageing
population in Western societies).
 Income distribution.
 Lifestyle changes.
 Consumerism.
 Changes in culture and fashion.
 Social networks within an organisational field
(e.g. with regulators, campaign groups, trade unions).
TECHNOLOGICAL FACTORS
Technological factors include:

New discoveries and technology developments.
Examples include developments on the internet,
nano-technology or the rise of new composite
materials.
Ecological Factors
Ecological factors: This refers to ‘green’ or

environmental issues, such as pollution, waste and
climate change.
Examples are environmental protection regulations,
energy problems, global warming, waste disposal and
recycling.
ECOLOGICAL FACTORS
Three sorts of ecological challenges that organizations
may need to meet:
 Direct pollution obligations– minimizing the production
of pollutants; cleaning up and disposing of waste.
 Product stewardship – managing ecological issues
throughout the organisation’s entire value chain and the
whole life cycle of the firm’s products.
 Sustainable development – whether the product or
service can be produced indefinitely into the future.
LEGAL FACTORS
Legal factors include:

 Labour, environmental and consumer
regulations.
 Taxation and reporting requirements.
 Rules on ownership.
 Competition regulations.
 Regulation of corporate governance.
LEGAL FACTORS
PESTEL analysis should consider not only formal

laws and regulations but also more informal norms:
Informal rules are patterns of expected (‘normal’)
behaviour that are hard to ignore (e.g. proper
respect for the ecological environment).
LEGAL FACTORS
Varieties of capitalism. Formal and informal rules vary
sufficiently between countries to define very different
institutional environments:
 Liberal market economies – formal & informal rules
favour competition between companies (US, UK).
 Coordinated market economies – encourage more
coordination between companies, supported by industry
associations or similar frameworks (Germany, Japan).
 Developmental market economies – strong roles for
the state, which own or influence companies that are
important for economic development (China, India).
KEY DRIVERS FOR CHANGE
Key drivers for change:

 Key drivers for change are environmental factors that
are likely to have a high impact on industries and
sectors, and impact on the success or failure of
strategies within them.
 Typically key drivers vary by industry or market.
 For example, retailers are concerned with social
changes and customer behaviour which have driven a
move to ‘out-of-town’ shopping. Personal disposable
income also drives demand for retailers.
LATEST VERSION - STEEPLED
 Social
 Technological
 Economic
 Ecological
 Political
 Legal
 Ethical
 Demographic
INTERNATIONAL ENVIRONMENT
 Monitoring the international environment
involves assessing each non-domestic market on the
same factors that are used in a domestic assessment.
 While the importance of factors will differ, the same
set of considerations can be used for each country.
 Economic, political, legal, and social factors are used
to assess international environments.
 One complication to this process is that the interplay
among international markets must be considered.
4-18
DEMOGRAPHIC DIVIDEND
India has more than 50% of its
population below the age of 25
and more than 65% below the
age of 35.
In 2020, the average age of an
Indian was slightly less than 30
years.
19
USING THE PESTEL FRAMEWORK
 Apply selectively – identify specific factors which

impact on the industry, market and organisation in
question.
 Identify factors which are important currently but also
consider which will become more important in the
next few years.
 Use data to support the points and analyse trends using
up-to-date information.
 Identify opportunities and threats – the main point of
the exercise.
SCENARIOS
Scenarios are plausible views of how the environment of

an organisation might develop in the future based on key
drivers of change about which there is a high level of
uncertainty.
 Build on PESTEL analysis and drivers for change.
 Offer more than a single view. An organisation will

typically develop a few alternative scenarios (2–4) to
explore and evaluate future strategic options.
 Scenario analysis is used in industries with long
planning horizons, for example, the oil industry or
airlines industry.
CARRYING OUT SCENARIO ANALYSIS
 Identify the most relevant scope of the study –

the relevant product/market and time span.
 Identify key drivers of change – PESTEL
factors which will have the most impact in the
future but which have uncertain outcomes and
are mutually independent.
 For each key driver select opposing outcomes
where each leads to very different
consequences.
CARRYING OUT SCENARIO ANALYSIS
 Develop scenario ‘stories’: That is, coherent and

plausible descriptions of the environment that result
from opposing outcomes.
 Identify the impact of each scenario on the
organisation and evaluate future strategies in the
light of the anticipated scenarios.
 Monitor progress: Identify indicators that might
give an early warning of the way the environment
is changing and monitor such indicators.

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BUSINESS STRATEGY

IBS (MBA) Bangalore

Layers of the Business Environment

PESTEL helps to provide a list of potentially important issues

Political factors include:

macro risk is that which attaches to whole countries

relate to issues within a country (e.g. government

Economic factors include:

Some industries are particularly vulnerable to

 Discretionary spend industries (e.g. housing,

Social factors include:

Technological factors include:

Ecological factors: This refers to ‘green’ or

Legal factors include:

PESTEL analysis should consider not only formal

Key drivers for change:

 Apply selectively – identify specific factors which

Scenarios are plausible views of how the environment of

 Offer more than a single view. An organisation will

 Identify the most relevant scope of the study –

 Develop scenario ‘stories’: That is, coherent and

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