BUSINESS STRATEGY

- Strategic Management may be defined as set of decisions and actions resulting in formulation and implementation of strategies to achieve the objectives of an organization.

- The word Strategy was derived from Greek word “Strategia” which means a General or Military Commander.

- Igor Ansoff pioneered the concept of Strategy. Later Henry Mintzberg and Michael E. Porter enriched the concepts of Strategic Management based on empirical studies.

- Ansoff’s strategic success paradigm brought out conditions that optimizes profitability, key elements of which are:1) There is no universal success formula,2) Environmental turbulence determines the strategy options forb

success,3) The strategy choices should be aligned with environmental

changes to optimize results,4) So is the management capabilities with such changes for best

results,5) Internal capability variables i.e. cognitive, psychological, political,

other behavioral aspects all determine organization success.- Ansoff also brought out concepts like Gap Analysis & Synergy still

which is still practiced in many organizations.- Mintzberg added a new dimension by bringing personal side of the

manager. He advocated a more humane approach to strategy formulation and implementation and coined the terminology “crafting strategy”.

- Peter Drucker who is considered to be one of the leading m- Management Gurus’, argued that “management is not passive,

adaptive behavior, it means taking actions to make the desired results come to pass.” Pankaj Ghemawat argued that “Drucker’s

observation that by consciously using formal planning a company could exert some control over market forces became the rational for business strategy. It was Drucker who introduced the concept of MBO i.e. instead of managing through processes to goals and self-control.

- Michael Porter perhaps done major work on strategy through concepts like focus, cost leadership, cost differentiation to survive in competitive environment.

- Vision – What is the future outlook of the organization?- Mission – Company’s approach in doing business reflecting values

and priorities.- Strategic analysis enables the organization to identify possible

attractive investment options which are compatible with its vision and mission.

- Three organizational elements viz. structure, leadership and culture assist organization to institutionalize its strategy and control over it.

- Depending upon organization’s structure strategy choices (scenarios) should be at Corporate, Business and Functional levels.

- Characteristics of Strategic Decisions:1. Strategic management integrates various functions.2. Strategic management should enthuse cross section of

stakeholders.3. It involves multiple time horizons.

- Concerned with both efficiency and effectiveness.

- Industry Analysis- Competition Analysis- Benchmarking your Company against Competitors- SWOT- Operating Environment

- Strategic Positioning- Good Strategies promote alignment among diverse groups within

the Organization.- Various functions such as Marketing, Operation, Finance, R&D etc.

should have integrated approach and Strategy should facilitate such process of integration.

- Goals of various Functions & Departments should be coordinated.- Plan & Review Execution Strategy- Nothing is sacrosanct and so is Strategy- Strategy should assist innovation, new business formation and

economic growth- Today machines are making inroad in almost all areas which now

calls for creativity, dexterity and emotional involvement- Present day Organization should leverage:

Knowledge Operating Infrastructure Entrepreneurship R & D Opportunities Leadership & Management Technology

Strategy IObjectives I Systems & ProcessesGoals (Specific & Measurable) IAction Plan I Management by Objectives (MBO) Execution (???) IMeasuring Progress I Balanced Score Card

Rewarding Performance I

- Strategy execution consists of seizing opportunities that support the strategy while coordinating with other parts of the organization on an ongoing basis.

- Resource allocation process and how flexible is the process under changed circumstances.

- Avoid investment in non-strategic projects.- Often strategic objectives are disconnected or poorly understood.- When companies fail to translate strategy into results, many

managers point to weak performance culture as the root cause.- Agility, Teamwork, Ambition etc. should be rewarded and imbibed

into operating culture for better strategy implementation.

Strategic Management Process

• Environmental Scanning

• Strategy Formulation

• Strategy Implementation

• Evaluation & Control

Environment Variables

- Socio Cultural Forces

- Economic Forces

- Technological Forces

- Geo-Political & Legal Forces

Strategic Decision Making

- Entrepreneurial (Strategies are formed by Owner or Powerful CEO)

- Adaptive (Reactive or Fragmented strategy and incremental benefit)

- Planning (Systemic gathering of information based on which most appropriate solution is selected)

Careful use of Strategic Management can assure better returns for shareholders and would help in sustainability and growth of the organization. But there are practical limitations.

- Holistic vs. Tactical

- Analytical vs. Prescriptive

- Non- Political

An organization’s vision and mission act as guidelines for strategy formulation which involves articulating a vision for the organization, translating the vision into a mission that defines the organization’s purpose, converting the mission into performance objectives and goals and formulating tactics and strategies for implementation.

Organizational Direction

Determined by

Vision – Shareholders/Founder

Mission - Top Management

Objectives - Divisional Heads with Top Management

Plans - Unit Heads/ Divisional Heads within stated objectives

Policies – Framed for smooth and seamless implementation of plans - centrally and unit wise by team of officers

Goals – Set by Divisional Heads in consultation with Unit Managers within overall objectives

Strategies & Tactics – At various organizational levels

Mission Statement

The term ‘mission’ is defined as “the fundamental and enduring purpose of an organization that distinguishes it from its competitors.

The characteristics of a good mission statement are,

It differentiates the company from its competitors, It defines the business (es) that the company wants to be in, It is inspiring, Relevant to its stakeholders, Ensure behavior of the organization while dealing with its

customers, suppliers, employees, government, society, shareholders, etc.

It seeks to clarify the very purpose of the organization – why it exists

Key Elements of a Mission Statement:

- View of the future- Competitive arenas- Source of competitive advantage

Fundamental intention of mission statement is that what role the company intends to attain as a yardstick to measure future success.

Company Goals:

- To be precise and measurable- Should address important issues- Time frame for its implementation- Should be in both financial and non-financial parameters- Cross functional- Stretched goals through trade-offs

Social Responsibility

Economic (must do), Legal (have to do), Ethical (should do), Discretionary (might do).

Organization should strive for ethical business practices in a socially responsible manner so as to create value to the society at large.

A good strategy is generally based on business ethics. Decision making process should be based on ethical practices to benefit all stakeholders and not necessarily for majority shareholders.

Analyzing the Business Environment

External

Political Environment Economic Environment Social Environment Technological Environment

Industry Level Analysis:

Porter’s Five Forces Model driving Industry Competition: The effective strategy formulation needs a clear understanding of competition. Competition is determined not only by existing competitors but also by other market forces such as customers, suppliers, potential entrants,

and existence of substitute products. Goal of any strategy should be to protect the organization from attacks of competitors - existing or potential.

Micheal E. Porter, the revered Professor of Harvard Business School developed a framework known as ‘Five Forces Model’ which illustrates how five forces viz. the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, the rivalry among existing players and the threat of substitute products or services play a vital role in shaping company’s future.

Threat of new entrants:

Economies of scale Product Differentiation Capital requirements Cost advantage independent of size Access to distribution channels Government policy Intensity of rivalry among existing competitors

The bargaining power of buyers:

According to Porter buyers are powerful under following circumstances

When suppliers are many and buyers are few and large When buyers purchase large quantity When large percentage of suppliers business is dependent on few

buyers. Where buyers can influence cost pattern of the suppliers Where buyer can procure supplies from multiple sources Buyer is in a position to source inputs through vertical integration

and influence market pricing

The bargaining power of suppliers:

Product or service is unique or there are few suppliers Multiple buyers are sourcing from a few suppliers When products in the industry are so differentiated that they are

not easily substitutable and it is costly to switch from one supplier to another

Supplier can leverage its controlling position to get into manufacturing through vertical integration thereby disturbing the market dynamics

Buyers are not in an immediate position to counter above threat

The threat of substitute products or services

A close substitute is a potential threat to the company’s product or service

Game theory Assessing another player’s likely behavior

Since 1980, new researchers added new variables to fortify Five Forces model. Two strategists concerned with game theory, Adam Brandenburger and Nalebuff argued that the process of creating value in the market place involve four type of players - customers, suppliers, competitors and complimentors. Complimentors are other firms from whom customers buy complimentary products or services. According to them Complimentors often result into strategic alliances or partnerships.

Value Net Graph of Brandenburger & Nalebuff:

Customers

Competitors Company Complimentors

Suppliers

Learning Curve & Experience Curve

Vulnerability Analysis

BCG Growth – Share Matrix (Relative Competitive Position):

Cash Cows (Low growth but, net suppliers of resources) Stars (Potential of high market growth & high market share) Question Marks ( High market growth but low market share) Dogs (Low market growth & low market share - harvested or

liquidated)

GE Nine Cell Planning Grid based on Business strength & Industry (product – market) attractiveness whether High – Medium – Low which determines decisions on invest/grow, selectivity/earning, harvest/divest.

Arthur D. Little Life Cycle Approach: Takes into consideration the business environment and business strength. The life cycle consists of four stages: start – growth – maturity – aging and business strength measures the competitive position i.e. dominant, strong, favourable, tenable, weak or non-viable. Depending upon such analysis strategies should opt for:

Natural Development strategies are appropriate when SBU is in a mature industry and is competitive.

Selective Development strategies in those areas which are attractive and have competitive advantage.

Prove Viability is transitional strategy which can not be sustained.

Out is a strategy for withdrawal.

SWOT Analysis

In the 1960s, SWOT analysis contributed significantly on competitive thinking on questions of strategy. But SWOT analysis failed to define a company’s distinctive competence. Such distinction is crucial because ‘the strategic decision is concerned with the longterm development of the organization for which understanding of distinctive competence of the organization and level at which it is placed is important. According to Ansoff company’s preparedness in getting into new market or new product is crucial in long term strategy formulation.

Product/mission matrix of Ansoff (source: Pankaj Ghemawat, ‘Competition and Business Strategy in Historical Perspective’.

Present Product New Product

Present Mission Market Penetration Product Development

New Mission Market Development Diversification

Formulating Long Term Strategies:

Concentration Market Development Product Development Horizontal Integration Vertical Integration Diversification

Behavioral aspects affecting strategic choice

Role of past strategy Attitude towards risk Competitive reaction

Degree of Company’s external dependence Values and Preferences

Competitive Strategies:

Cost Leadership Differentiation Focus

Key aspects of Cost Leadership and Differentiation:

Aspect Cost Leadership Differentiation

Strategic Target Broad cross-section of the Broad cross section of market the market

Basis of compe- Lowest cost in the industry Unique product/service titive

Product line Limited selection Wide variety, d differentiating features

Production emph. Lowest possible cost with Innovative and differen asis high quality and essential tiating products f features

Maktng emphasis Low price Premium price and inno-v vative, differentiating features

Risk of Cost Leadership:

Technological change that might erase past investment and outdates past learning.

Risk of imitation by late entrants with low cost and advanced technology.

Lack of attention to the needs & preferences of customers due to too much focus on cost minimization.

Unexpected inflation that reduces company’s ability to offset product differentiation through cost leadership.

Risk of Differentiation:

Increased cost differentials between low cost producers and the differentiating one might result customer to switch to low cost product even at the cost of additional features and image.

Imitation might narrow down the perceived differences.

Risk of Focus:

Increasing cost differential may result in switch of loyal customers.

Disappearance of perceived or actual differences between & services.

Other competitors might enter into the ‘focus’ product market thereby challenging the advantage.

Competitive Strategies in Different Types of Industries:

Fragmented Industries:

Low overall entry barriers Absence of economies of scale or experience curve High transportation costs High inventory costs due to fluctuating sales Advantage of scale in dealing with customers or suppliers is

minimal or economy is not favourable

Low overheads Highly diverse product line Diverse market needs High product differentiation Exit barriers Local regulation

Strategy formulation in a fragmented industry require detailed analysis of industry, competition, market segments, causes for fragmentation, economies, pricing, options for exit or staying ahead strategy or how to counter adverse market dynamics.

Emerging Industries – Characteristics:

Technological uncertainty Strategic uncertainty Plethora of start ups First time buyers Short time horizon Subsidies

Formulating Strategies in an Emerging Industry

Shaping industry structure External factors affecting industry development Changing role of suppliers and channels Shifting mobility barriers

Maturing Industries:Characteritics-

Competitive pressure slowing growth Competition is concentrated on cost and service Over capacity The discovery of new products and services are limited or cost

increases significantly

Profitability of all industry stakeholders goes down

Strategies for Maturing Industries:

Sophisticated cost analysis to rationalize product mix and pricing Process innovation and design for manufacture Asset rationalization/stripping of unproductive assets Look for new markets

Technology Strategy:

Choice of technologies to develop – technology advancement, breakthrough technologies.

Technological leadership or followership

Technological Leadership Technological Followership

Cost Advan- -Evolve lowest cost -Lower cost or value

tage product design. following leaders.

-Be first firm down the -Avoid R&D costs through

learning curve. limitation.

-Create low cost ways of performing value activities.-------------------------------------------------------------------------------------------

Differentiation -Develop a unique product -Adopt a product or

that increases buyer value. delivery system more

closely to buyer needs. -Innovate in other activities by learning from the

To increase buyer’s value. leader’s experience.

A company should decide to be technology leader after considering the following three factors:- Sustainability of technological lead- First mover advantage- First mover disadvantage

Four factors determine the sustainability of technological leadership.

- The source of technological change.- Sustainable cost or differentiation advantage in technology

development.- Relative technical skills.- Rapidity of technology diffusion.

First Mover Advantages – potential advantages are:

- Reputation- Preempting a position- Cost of switching- Selection of channels- Advantage of learning curve- Favourable access to facilities, inputs, or other scarce resources- First mover can create or define technology standards- Patents are the institutional barriers- Early profits leveraging cash low

First Mover Disadvantage:

- Initial costs- Demand uncertainty- Changing buyer needs

- Early investments to a particular technology and can not be modified for later generation technologies

- Technological discontinuities which occur when there are major changes in technology

- Low cost imitation

Formulating a Technology Strategy:

- Identify technologies- Explore outside technologies- Anticipate direction of technological change- Identify important technologies for competitive advantage- Assess strengths and weaknesses- Select a technology strategy- Reinforce business unit strategies at the corporate level and vice

versa.

Gaining and Sustaining Competitive Advantage:

Identifying value activities: In order to sustain competitive advantage it is important to identify value creating activities amongst Primary and Support activities.

Primary activities cover R & D, Production, Marketing & Sales, other Core Services.

Support activities include Materials Management, Finance, HR functions.

When we talk about value creating activities we need to understand the value chain of business and buyer value.

Competitive Scope and Value Chain:

Competitive scope influences the competitive advantage by shaping the structure and economics of the value chain. It has different dimensions such as-

Segment scope Vertical scope Geographic scope Industry scope Coalition and partnership Industry structure and opportunities thereof Intellectual property as competitive advantage

Sustaining a Competitive Advantage:

To sustain a competitive advantage is a challenge for most of the organizations. A competitive advantage has strategic relevance only when it satisfies the following three conditions.

Customers must find differentiated value in company’s products vis-à-vis its competitors so as to influence buying behavior.

The difference must reflect the capability gap between the favored company and its competitors.

The difference in the product and capability gap must be sustainable in the long run.

Principles of Strategy Implementation:

Strategy is implemented through appropriate organizational structure and control system. A well planned organizational structure helps in better coordination and seamless flow of activities. It should also be appreciated that in organizational life change is inevitable due to

changes in business environment. Organizations must seek to build new competencies through changes in strategies, structure and control systems. Some important strategies for bringing about change are:

Reengineering Restructuring Innovation

Managing successful change requires skills and resources, monitoring to evaluate expected results under changed scenario. One has to identify teams which would act as change agents and also to identify sceptics and resisting segments to prevent sabotage and implementation pitfalls. Meticulous planning is required with focus and clarity for successful implementation of strategic change. In this context communication plays a leading role to ensure participation and involvement of employees. It should be ensured that management and control systems complement the new strategy.

Establishing Strategic Controls:

Strategic control provides feedback about various steps of strategic management. It answers questions like:

Are organization’s internal strengths adequate? What are weaknesses coming in the way of strategy

implementation? What additional strengths or weaknesses are observed? Are there new opportunities? Whether existing /new threats will hamper the progress? Are the decisions consistent with the organizational policies? Are resources sufficient to achieve strategic goals and objectives?

Whether vision, mission and objectives are keeping pace with changing environment?

It is imperative that for an efficient strategic control process one has to scan environmental factors, industry factors, review of implementation mile stones, and timely feedback mechanism.

Operational Control System:

Set standard of performance Measure actual performance Identify deviation from standards Initiate corrective action

The key operational control systems are: budgets, schedules and key success factors. Key success factors generally measure employee morale, improved product/service quality, increased earnings per share, growth in market share, timely implementation of new facilities. There should be appropriate reward systems for positive contribution linked with strategy. Similarly crisis management should be looked into to address risks and uncertainties that often arise during the process of implementation.

Operationalizing the Strategy:

Strategy formulation, analysis of alternative strategies and strategic choice precedes implementation. A strategy must have clear, measurable annual objectives understood by all employees. Annual objectives must be linked with long term objectives of the organization. Functional strategy is a short term game plan for a key functional area within a company. Systems and policies have to be aligned with strategic contours to achieve results.

Management tools in Strategy:

Benchmarking Re-engineering Reverse engineering Balanced scorecard

Benchmarking is a process for improving performance by identifying, understanding and adapting best practices and processes followed inside and outside the company and implementing adapted practices.

Re-engineering achieves performance improvement by redesigning operational processes, maximizing the value added content and minimizing all procedural related costs.

Reverse engineering is basically aimed at discovery and learning.

Balanced scorecard is a measure of the key elements of a company’s strategy. R. S. Kaplan and D. P. Norton pioneered the concept of Balanced Scorecard – a set of measures consisting of financial measures, operational measures, customer satisfaction, and the organizational processes and improvement activities. Scorecard brings together many elements of a company’s strategy in a single management report to provide support to customer centric approach, shortening response time, improving quality, emphasizing teamwork, reducing new product launch time, and managing for long term. The scorecard keeps strategy and vision at the center and helps in reducing sub-optimization.

Corporate Restructuring:

Forms of restructuring:

Expansion Sell Offs Corporate Control Change in Ownership Structure

Expansion:

Mergers and Acquisitions (Horizontal – Vertical – Conglomerate Merger)

Tender Offers (Ask shareholders of the target company to submit or tender their shares to have controlling stake)

Joint Venture (Incorporated or Unincorporated)

Sell Offs:

Spin Offs (Creation of a separate legal entity) Split Offs (Some of the existing shareholders receive shares in a

subsidiary in exchange for the stocks of the parent company) Split Ups (Entire company is fragmented into a series of spin offs) Divestitures (Sale of the company or part thereof to a third party) Equity Curve-outs (Selling a part of the equity to a third party)

Corporate Control:

Premium Buy Backs (Repurchase of existing shares at a premium) Standstill Agreements (A voluntary contract in which the new

stock holder agrees not to take over the company in the future) Anti-takeover Amendments (Regulatory arrangement to prevent

mergers or acquisitions) Proxy Contests (An attempt to reduce the controlling power of

existing management or board of directors)

Changes in Ownership Structure:

Exchange Offers (Exchange of debt or preferred stock into common stock and vice versa)

Share Repurchases (Buy back of some portion of outstanding common stock)

Going Private Leveraged Buy-Outs

Organizational Forms:

Vertical Structure: Structure with forward & backward integration.

Horizontal Structure: Multidivisional form (M-Form) organizations are more prevalent now a days for effective allocation of resources, and ease of strategic planning, monitoring and control. It also helps in decentralizes operations with better decision making close to level of activities.

Turnaround Management:

Turnaround is of considerable importance to strategic management. A turnaround involves when a threateningly decline phase is removed with improved performance with a combination of strategies, systems, skills and capabilities.

Joint Ventures and Strategic Alliances:

Joint Ventures: Joint ventures generally take place to reduce investment outlaty and share risk. Major reasons for joint ventures are-

To augment financial and technical ability to enter a particular line of business.

To share technological knowledge and management skills. To diversify the risk involved in the project. To obtain distribution channels or raw materials supply. To gain economics of scale.

To extend business by sharing investments. To take advantage of tax treatment or political incentives.

According to various studies, 70% of joint ventures fail to achieve desired results because of cultural differences, lack of managerial commitment and focus, poor pre planning, refusal by managers to share knowledge or know how, inability to share control etc.

Strategic alliances: Agreement between potential or actual competitors. Strategic alliances enable companies to design new products, minimize costs, enter new markets, block or preempt competitors, and to generate higher revenues.

According to Bleeke and Ernst there are six types of strategic alliances:

Alliance between two strong competing companies, generally short lived, often result in acquisition by one of the partners or merger.

Alliance result into sale by one partner to the other due to inherent differences.

Alliances of complimentary equals – generally remain strong during the course of alliance.

Disguised sale – a short lived alliance between a weak and a strong company, eventually acquired by the stronger company.

Bootstrap alliance – weaker partner uses the alliance to improve its competencies, but eventually acquired by the stronger partner.

Alliances of the weaks – objective is to improve position but often results into failures.

The success of an alliance depends on three factors – partner selection, alliance structure and the manner in which the alliance is managed. The strategic alliance helps in combining skills and assets that neither can develop on their own.

PESTEL FRAMEWORK

A PESTEL analysis is a framework or tool used by marketers to analyse and monitor the macro-environmental (external marketing environment) factors that have an impact on an organisation. The result of which is used to identify threats and weaknesses which is used in a SWOT analysis.

PESTEL stands for:

P – Political

E – Economic

S – Social

T – Technological

E – Environmental

L – Legal

Lets look at each of these macro-environmental factors in turn.

PESTEL Factors

All the external environmental factors (PESTEL factors)

Political Factors

These are all about how and to what degree a government intervenes in the economy. This can include – government policy, political stability or instability in overseas markets, foreign trade

policy, tax policy, labour law, environmental law, trade restrictions and so on.

It is clear from the list above that political factors often have an impact on organisations and how they do business. Organisations need to be able to respond to the current and anticipated future legislation, and adjust their marketing policy accordingly.

Economic Factors

Economic factors have a significant impact on how an organisation does business and also how profitable they are. Factors include – economic growth, interest rates, exchange rates, inflation, disposable income of consumers and businesses and so on.

These factors can be further broken down into macro-economical and micro-economical factors. Macro-economical factors deal with the management of demand in any given economy. Governments use interest rate control, taxation policy and government expenditure as their main mechanisms they use for this.

Micro-economic factors are all about the way people spend their incomes. This has a large impact on B2C organisations in particular.

Social Factors

Also known as socio-cultural factors, are the areas that involve the shared belief and attitudes of the population. These factors include – population growth, age distribution, health consciousness, career attitudes and so on. These factors are of particular interest as they have a direct effect on how marketers understand customers and what drives them.

Technological Factors

We all know how fast the technological landscape changes and how this impacts the way we market our products. Technological factors affect marketing and the management thereof in three distinct ways:

New ways of producing goods and services

New ways of distributing goods and services

New ways of communicating with target markets

Environmental Factors

These factors have only really come to the forefront in the last fifteen years or so. They have become important due to the increasing scarcity of raw materials, polution targets, doing business as an ethical and sustainable company, carbon footprint targets set by governments (this is a good example were one factor could be classes as political and environmental at the same time). These are just some of the issues marketers are facing within this factor. More and more consumers are demanding that the products they buy are sourced ethically, and if possible from a sustainable source.

Legal Factors

Legal factors include - health and safety, equal opportunities, advertising standards, consumer rights and laws, product labelling and product safety. It is clear that companies need to know what is and what is not legal in order to trade successfully. If an organisation

trades globally this becomes a very tricky area to get right as each country has its own set of rules and regulations.

After you have completed a PESTEL analysis you should be able to use this to help you identify the strengths and weaknesses for a SWOT analysis.

PHOTO: FLICKR PEST ANALYSISAn Overview of the PESTEL Framework By Jim Makos | Feb 18, 2015 5SHARESSHARE TWEET SHARE SHARE 0 COMMENTS

A PESTEL analysis is a tool or framework for marketers. You can use it if you are seeking to analyze and screen the external marketing environment of you company. The strategic management tool gauges the macro environmental factors. The results make decision taking much easier.

The different macro-environmental factors can affect business strategies. So, it is vital to follow the PESTEL framework. The aim is to assess how exactly the factors influence business performance.

You can judge 6 types of environmental influences in the PESTEL framework. They are political, economic, social, technological, environmental and legal. You should not see these factors as independent factors. They are all interdependent. For example, technological advances can affect the economy in different markets.

The 6 factors I mentioned above make up the acronym PESTEL. Each letter represents one factor. It is often called PESTLE. You may these factors using other tests too. PEST, STEEP, and STEEPLE are similar analyses. Some other variations are STEPJE, STEP, and LEPEST. Managers can choose any based on the nature of the firm and the factors they wish to study.

I have discussed some characteristics of these environmental factors below. The article will help you find which factors are more important to your company’s strategy. This might serve as a preliminary inspiration. You will have to dig deeper into the details to take accurate decisions.

POLITICAL FACTORS

Politics plays an important role in business. This is because there is a balance between systems of control and free markets. As global economics supersedes domestic economies, companies must consider numerous opportunities and threats before expanding into new regions. It also applies to firms identifying optimal areas for production or sales. Political factors may even help determine the location of corporate headquarters.

Some of the political factors you need to watch are:

Tax policies

Stability of government

Entry mode regulations

Social policies (e.g. social welfare etc.)

Trade regulations (e.g. the EU & NAFTA)

ECONOMIC FACTORS

Economic factors are metrics that measure the health of any economic region. The economic state will change a lot of times during the firm’s lifetime. You have to compare the current levels of inflation, unemployment, economic growth, and international trade. This way, you can carry out your strategic plan better.

Some examples of economic factors you can judge are:

Disposable income of buyers

Credit accessibility

Unemployment rates

Interest rates

Inflation

SOCIAL FACTORS

Social factors assess the mentality of the individuals or consumers in a given market. These are also known as demographic factors. Social indicators like exchange rates, GDP and inflation are critical to management. They can tell when it is a good time to borrow. These factors help find out how an economy might react to certain changes.

The following are some social factors to focus on:

Population demographics: (e.g. aging population)

Distribution of Wealth

Changes in lifestyles and trends

Educational levels

TECHNOLOGICAL FACTORS

This step entails recognizing the potential technologies that are available. Technological advancements can optimize internal efficiency and help a product or service from becoming technologically obsolete. Role of technology in business is increasing each year. This trend will continue because R&D drives new innovations.

Recognizing evolving technologies to optimize internal efficiency is a great asset in management. But, there are few threats. Disruptive innovations such as Netflix affect business for CD-players. The best strategy is to adapt according to the changes. Your strategies should sidestep threats and embrace opportunities.

This is a large challenge for management. Below is a list of common technological factors:

New discoveries and innovations

Rate of technological advances and innovations

Rate of technological obsolescence

New technological platforms (e.g. VHS and DVD)

ENVIRONMENTAL FACTORS

Both consumers and governments penalize firms for having adverse effect on the environment. Governments levy huge fines upon companies for polluting. Companies are also rewarded for having positive impact on the environment. The consumers are willing to switch brands if they find a business is ignoring its environmental duties.

Impact on the environment is a rising concern. Note that the environment benefits the company too. Running water for a hydro-power plant is an example.

Few common environmental factors are:

Waste disposal laws

Environmental protection laws

Energy consumption regulation

Popular attitude towards the environment

LEGAL FACTORS

This step involves learning about the laws and regulations in your region. It is critical for avoiding unnecessary legal costs.

This is the last factor in PESTEL. These factors overview the legal elements. Often, start-ups link these elements to the political framework. Many legal issues can affect a company that does not act responsibly. This step helps to avoid legal pitfalls. You should always remain within the confines of established regulations.

Common legal factors that companies focus on include:

Employment regulations

Competitive regulations

Health and safety regulations

Product regulations

Antitrust laws

Patent infringements

It is common to conduct a PESTEL analysis before serious decisions. Managers might conduct it before any large projects are undertaken. Understanding all the influencing factors is the first step to addressing them.

Remember, there are many factors other than these which can have an effect on business success. The evaluation is a one-to-one process. Each company should do it for themselves and find the key drivers of change. You must identify the factors which have strategic and competitive consequences.

Analyzing the total macro-environment is an extensive task. Even though, it is complex, understanding the framework of basic influences will allow you to maintain an organized and strategic approach. These will isolate each opportunity or threat.

After conducting a PESTEL analysis, company managers can create strategies. The macro environmental factors will shape the strategies. I am sure that the thinking process will be as sensitive as current and future environmental factors.

If you are planning to align strategies for your company, I suggest you should conduct PESTEL analysis first. It is always good to have more information about the surrounding. The tool really helps take better decisions.

Strategy Gaps Critical Success Factors Experience Curve Strategic Capability Resource Strength Core Competencies Competition view of Strategy vs. RBV