The dynamic elements of
environment affect the way in which choice of strategy is made. The survival
and prosperity of a firm depend largely on the interaction of the elements of environment—such as shareholders, customers, suppliers, competitors,
the government and the community. These elements constitute the external
constraints. The flexibility in the choice of strategy is often governed by the
extent and degree of the firm’s dependence on the environment.
Pearce and Robinson (2010)
stated, “A major constraint on strategic choice is the power of environmental
elements. If a firm is highly dependent on one or more environmental factors,
its strategic alternatives and ultimate choice must accommodate this
dependence. The greater a firm’s external dependence, the lower its range and
flexibility in strategic choice.”
Well established, large
companies in different industries are more powerful vis-a-vis their
environments and therefore have greater flexibility in the strategic choice
than their counterparts in the respective fields.
a.
Competition from
other Businesses
The Porters 5 forces Analysis
gives a framework to understand the competition from other businesses:
Suppliers Power, Competitive Rivalry, Entry and Exit barriers.
Dynamism
of Market Sector:
In modern conditions the dynamics of
the external environment (market) is a function of technology development,
innovation, changes in demand, competition, regulatory mechanisms and cyclical
economic development and is a major factor determining the strategic behavior
of the company. In addition, dynamic market conditions determine not only the
structure of the market and the level of competition, but also the development
prospects and profit potential.
The strategic behavior refers to the
business practices applied by a company in the industry to realize its competitive advantages. The strategy of each
company is determined by the market structure, industry specificity and competitive company policies (external
factors), but on the other hand it is based on internal factors (resources and
distinctive competences), independent of the above. Therefore, it is necessary
not only to study the influence of external factors, but also the influence of
internal factors (firm resources) to realize the competitive advantages and
performance.
According to Glueck(1980) the
strategic choice is affected by the relatively volatility of market sector the
firm chooses to operate in. Market forces vehemently influence the choice of
strategy.
For example, a firm which obtains
bulk supply of its raw materials or components in a competitive market will
have greater flexibility in its strategic choice than another firm which has to
depend for its supplies on an oligopolistic market.
b.
Social and
Cultural Factors
PESTEL
analysis also takes into consideration social factors, which are related to the
cultural and demographic trends of society. Social norms and pressures are key
to determining consumer behavior. Factors to be considered are the following:
- Cultural
Aspects & Perceptions
- Health
Consciousness
- Populations
Growth Rates
- Age
Distribution
- Career Attitudes
Social Factors Example: The percentage of the
American population that smokes has decreased since the 1970s, due to changes
in society’s perception of health and wellness.
i.
Industry and Cultural
Backgrounds:
Culture acts as an important force,
modeling the perceptions, dispositions and behaviors of individuals (Triandis,
1989), influencing the willingness of individuals to start a business and,
consequently, their probability of failure or success. According to Geert
Hofstede (1980, 2001), culture is “the collective mind programming”, “a shared
mental software.” Culture is both a source and a manifestation of group
distinction and diversity. From a historical point of view, nations are
political expressions of cultural similarities. National governments shape the
work culture through specific legislation and provide a basis for how to
operate multinational firms, both within the country and abroad.
For Igor Ansoff (1968) strategy is “a
decision that runs relations between the enterprise and the environment”, and
Henry Mintzberg (Vagu, Stegăroiu et al., 2014) offers for the enterprise
strategy the following five meanings: plan, ploy, pattern, position and
perspective. Schneider, Barsoux and Stahl (2014) refer to the relationship
between culture and strategy, appreciating that their definition of culture – a
solution to problems of external adaptation and internal integration – can be
used equally well in defining the concept of strategy. A strong culture must be
adaptive and strategically appropriate to support the company's orientation
towards development and performance (Huţu, 1999). Companies build value systems
that express the essence of their philosophy of success, and provide a common
direction to sustain performance. Establishing the value system in close
correlation with efficiency and effectiveness has special implications for how
to set mission, goals and strategies, structure formation, and plan
implementation
For Igor Ansoff (1968) strategy is “a
decision that runs relations between the enterprise and the environment”, and
Henry Mintzberg (Vagu, Stegăroiu et al., 2014) offers for the enterprise
strategy the following five meanings: plan, ploy, pattern, position and
perspective. Schneider, Barsoux and Stahl (2014) refer to the relationship
between culture and strategy, appreciating that their definition of culture – a
solution to problems of external adaptation and internal integration – can be
used equally well in defining the concept of strategy. A strong culture must be
adaptive and strategically appropriate to support the company's orientation
towards development and performance (Huţu, 1999). Companies build value systems
that express the essence of their philosophy of success, and provide a common
direction to sustain performance. Establishing the value system in close
correlation with efficiency and effectiveness has special implications for how
to set mission, goals and strategies, structure formation, and plan
implementation
The perception of cultural distance
influences strategic choice. Business partners from another country will
develop more trust in their home country if there are many similarities between
the two business cultures, such as between US and British culture. Cultural
dimension short-term orientation vs. long-term orientation seems to influence
the strategic choices at different levels of analysis. According to Geert
Hofstede's approach, “long-term orientation stands for the fostering of virtues
oriented toward future rewards – in particular, perseverance and thrift. Its
opposite pole, short-term orientation, stands for the fostering of virtues
related to the past and present – in particular, respect for tradition,
preservation of “face” and fulfilling social obligations” (Hofstede, Hofstede
and Minkov, 2012). China, Southeast Asian countries called dragons or tigers,
alongside Japan occupy the leading positions in the dimension of
"long-term orientation". Americans can focus on their strategic
short-term profit choices, while the Japanese prefer to build the future
through investment, research and development, giving priority to increasing
market share (Deresky, 2014). Risk orientation has been identified as an
explanation for choosing between different ways of entering a company in a
foreign market (“equity mode” vs. “non-equity mode”) (Pan and Tse, 2000).
“Equity modes” (joint ventures, green fields) imply a high level of control
from the headquarters of the company, giving it a considerable investment
attachment. “Non-equity modes” imply a lower level of control because the
volume and scope of investment are lower. Risk orientation is closely linked to
Hofstede's “avoidance of uncertainty” dimension. Companies from countries with
high uncertainty avoidance (those in Africa or Latin America) tend to prefer
“non-equity modes” to reduce their exposure to risk, while organizations from
countries with low uncertainty avoidance will be more inclined to adopt “equity
mode”. Pan and Tse (2000) also found that companies in countries with high
power distance tend to adopt “equity entry mode” when they want to expand
abroad.
a. Industry and cultural backgrounds affect strategic choice.
For example, executives with
strong ties within an industry tend to choose strategies commonly used in that
industry. Other executives who have come to the firm from another industry and
have strong ties outside the industry tend to choose different strategies from
what is being currently used in their industry.
b. Country of origin often affects preferences.
For example, Japanese managers
prefer a cost-leadership strategy more than do United States managers. Research
reveals that executives from Korea, the U.S., Japan, and German tend to make
different strategic choices in similar situations because they use different
decision criteria and weights.
c.
Intra-Organisational
Factors:
Organisational factors also
affect the strategic choice. These include organisational mission, strategic
intent, goals, organisation’s business definition, resources, policies, etc.
Besides these factors, organisational strengths, weaknesses, and capability to
implement strategic alternatives also affect the strategic choice.
Cyert and March (1963) have
observed another power factor that influence strategic choice. They explained
that “in large organisations, subunits and individuals have reason to support
some alternatives opposed by others. Mutual interest often draws certain groups
together in a coalition to enhance their position on major strategic issues.
These coalitions, particularly the more powerful ones, exert considerable
influence in the strategic choice process.” More on coalition phenomenon is
separately discussed later in this chapter.
d.
Laws, Regulations and
Governmental Policies:
i.
Legal
Factors
There is often uncertainty regarding the
difference between political and legal factors in the context of a PESTEL
analysis. Legal factors pertain to any legal forces that define what a business
can or cannot do. Political factors involve the relationship between business
and the government. Political and legal factors can intersect when governmental
bodies introduce legislature and policies that affect how businesses operate.
Legal
factors include the following:
- Industry
Regulation
- Licenses
& Permits
- Labor
Laws
- Intellectual Property
Legal
Factors Example: A restaurant is forced to shut down after not meeting food
safety standards set out in state law.
ii.
Governmental Policies
This includes the regulations,
directives, guidelines and regulations of business environment. The government
plays a crucial role in setting down the priorities and projects of the
business. A change in government policies may affect the future prospects of a
business.
Almost every industry depends
on the governmental policies to a great extent. Government reports also have a
major impact on the strategic plans of the organisations. Thus governmental
policies act as the most important factor that a strategist should take into
account while making strategic choices.
Monopolistic And Restrictive Trade Practices Act,1969 amendment in 1984 was brought on the recommendations of the
Sachar Committee. The amendment ensured that Section 36A was added to the Act
to protect the consumers against unfair trade practices so that effective
action can be taken against them. Claims against fake and misleading
advertisements, wrong representation of goods, false guarantees came under this
Act. On September 27,1991, the
Government amended the MRTP Act, 1969 through a Presidential Ordinance which
substantially changed the entire character of the original Act. The Ordinance
removed all pre-entry restrictions on the setting up of new undertakings and
expansion of the existing ones.
Pricing of petroleum products from
Govt Dept to Petroleum companies is a policy change. Liberalisation of Interest
rates, FX rates etc are some other policy changes that have happened to modern
Indian economy.
ii.
Political
factors
When
looking at political factors, you are looking at how government policy and
actions intervene in the economy and other factors that can affect a
business. These include the following:
One
of the reasons that elections tend to be a period of uncertainty for a country
is that different political parties have diverging views and strategies for
policy on the items above.
The Goods and Services Tax (GST), which has replaced the
Central and State indirect taxes in India such as VAT, Excise duty and
Service tax, was implemented from 1st July 2017
e.
Technological
Factors
Technological
factors are linked to innovation in the industry, as well as innovation in the
overall economy. Not being up to date with the latest trends of a particular
industry can be extremely harmful to operations. Technological factors include
the following:
- R&D Activity
- Automation
- Technological
Incentives
- The Rate of change in technology
Technological Factors Example: A company decides to
digitize their physical data files to allow for quicker access to company
information. Bank Tellers Counter become slim after introduction of ATMs and
digital payment services in India.
Patents, copyrights etc.. are also evaluated in this section.
f.
Environmental
Factors
PEST/PESTEL framework is used to
understand the wider economic scenario in which the firm operates.
i.
Economic
Factors
Economic
Factors take into account the various aspects of the economy, and how the
outlook on each area could impact your business. These economic indicators are
usually measured and reported by Central Banks and other
Government Agencies. They include the following:
Often
these are the focus of external environment analysis. The economic outlook is
of extreme importance for a business, but the importance of the other PESTEL
factors should not be overlooked.
Economic Factor Example: A company decides
to refinance its debt after an
interest rate decrease is announced.
ii.
Environmental factors
Environmental
concerns the ecological impacts on
business. As weather extremes become more common, businesses need to plan how
to adapt to these changes. Key environmental factors include the following:
·
Weather
Conditions
·
Temperature
·
Climate
Change
·
Pollution
·
Natural
disasters (tsunami, tornadoes, etc.)
Additionally,
there is increasing importance for businesses to be environmentally friendly
with their operations, as evidenced by the rise of Corporate Sustainability
Responsibility (CSR) initiatives. Examples of CSR initiatives include carbon
footprint reduction efforts and transitions into renewable material and energy
sources.
Environmental
Factors Example: An agricultural company has to adjust its harvest forecasts due to
unexpectedly dry seasonal conditions that will prevent crop growth.
Those who read this, also read:
1. Factors Affecting Portfolio Strategy
2. Factors affecting Portfolio Strategy- Internal Factors
3. Factors Affecting Portfolio Strategy- Common Factors
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