International Business Environment †Free Samples for Students

Question: Why is PESTEL analysis used? Answer: Introduction There is a constant change happening every day in our external environment. If a new development takes place in the business world, there is a change in the entire scenario and appropraite chnages have to be made in the business operations to stay at or attain the leading position. Among these changes, there are various factors, known as systematic factors, which are beyond the control of business organisations. These systematic things take place in the environment that surrounds the organisation and in which it operates. Business organisations are greatly influenced by them as several day to day circumstances are determined by them. A constant check should be kept on the external environment and analysis should be done to monitor the changes. A detailed analysis of the environment as a whole or the macro environment is known as the PESTEL analysis. The different components of external environment that affect the operations of the business are known as PESTEL analysis. The word contains an acronym of all the factors that have a direct or indirect impact on all industries, which includes political, economic, social, technological, environmental and legal factors. The PESTEL or PEST analysis is an effective and simple tool that is used while conducting a situation analysis, so that the main macro environment or the external forces that can affect the workings of an organisation can be identified (Czinkota et al. 2009). The main aim of PESTEL analysis is: finding out the present factors in the external environment affecting a business enterprise; identifying the changes that can take place in the external environment in the future; to exploit the available opportunities due to changes or to be prepared for the threats that might affect the business. Thus, this analysis helps in getting an overall idea of the surrounding environment of the firm. Figure 1: External factors affecting a company (Source: Bayraktar et al. 2017, p.38) PESTEL analysis is also conducted by a company to assess a new market for potentiality and success. As a general rule, it is stated that if a market is affected by more negative forces than positive ones, then doing business over there will be difficult. (Glowik, 2017) Due to these difficulties, the profitability of the firm will reduce significantly, and thus a proper decision can be taken by the managers to engage or not engage in any operations in the particular market. There are several variations of PESTEL analysis, and the most basic version of this tool is the PEST analysis. This tool is very dynamic and various new components can be added in it for ease in focusing on more than one critical force that can affect an enterprise (Bullough et al. 2017, p.211). The different variations of PESTEL are: STEP A more positive approach of PEST STEEP PEST along with ethical factors PESTELI - PESTEL along with industry analysis PESTLIED PEST along with legal, international, environmental and demographic factors STEEPLE PEST along with ethical, legal and environmental factors STEEPLED STEEPLE along with demographic factors LoNGPEST PEST along with local, national and global factors This assignment is focused on how this extended framework of PESTEL analysis can help in optimizing the business of an organisation in the international market. Longpest Analysis Though core PESTEL analysis is useful and helps in assessing the external environment sufficiently; sometimes a further analysis is required (Kurtz and Boone, 2008). PESTEL analysis just takes the main industry of a particular country into consideration, whereas the LoNGPEST analyses these factors separately on a local, national and global level. In this analysis, the local area refers to the region or city in which the main branch of the organisation operates. National level refers to the home country out of which the enterprise is based. Global area refers to anything that is outside the sphere of local or national level. Most of the times after attaining success in the local region, a business expands to national level and then in international level (Cantwell, 2017, p. 41). If a business organisation thinks of launching its product or service in some other nation, then the managers will have to conduct a thorough analysis of the factors present in the international market that will influence their operations and shape their selections. The best way of doing thus will be by conducting a LoNGPEST analysis. This helps the organisation in gaining a thorough understanding of the market in which they are about to deal with and the one in which they are already dealing in. Conducting this analysis will help the organisation in understanding the viability of the international market. Since the analysis will take into consideration the local, national as well as global areas, the company can also make comparisons in the techniques that are used by them for the local and national market with the requirement o f the international market. This will help the managers in developing appropriate marketing strategies if they are venturing into the new market (Wild et al. 2014). Additionally, PESTEL analysis will also help in understanding the mechanics of individual markets and the impact of changes in dynamics of one market on the other. When an enterprise is planning to enter a new market, all these factors have to be properly considered as they are extremely important. After analysing these factors, the enterprise must exploit the changes that are going to occur and take good decisions so that they not only survive in the market, but also become successful. Having proper knowledge of LoNGPEST and other factors that affect the business organisation, the managers can take proper precautions for probable difficulties and avoid strategies that will be ineffective and detrimental for the organisation (Knight and Kim, 2009, p. 261). The best example of this is the failure of Tesco in entering the US market. Fresh Easy was opened by the company in US in 2007, when the country was near recession and the consumers were not ready to spend on food. If a proper PES TEL analysis would have been done by the company, then it would have understood that the economic condition of USA was bad. The company had to close almost 200 stores and because of this failure, the British chain had a loss of almost US $1.8 billion. PESTEL factors that a company should consider before going international Political factors When is the next state, local or national election of the country in which it is operating and the county the firm wants to expand to? How can this bring about a change in the regional or government policy? Who are going to be contending for power in the next election? What are their thoughts regarding business policy and other regulations and policies that can have a direct impact on the organisation? How well is the law and property rights developed, and how widespread are organised crime and corruption? The impact of these situations on the business. Any pending changes in taxation or legislation that can affect the business operations? What are the regulations of the country related to foreign trade? What are the existing taxation and other business policies and its impact on business? Is the government of the prospective country a part of trading agreements like North American Free Trade Agreement (NAFTA) and European Union (EU)? Economic factors Is the current economy stable? Is it declining, stagnating or growing? What are the present rates of exchange between important markets, and their impact on the manufacturing and selling process of goods? GDP or gross domestic product of the country, its long term prospects and other economic factors (Lewis and Gates, 2005). What is the level of employment at local level and the rate of change? What are the existing rates of interest and forecasted rate of interest? What is the level of inflation present in the prospective country, and how will it affect the companys growth in the market? Social factors What is the attitude of citizens towards leisure and work? Are there any pending legislations that can influence the corporate social policies like paternity leave and benefits related to domestic partner, and their impact on the business operations (Salminen et al. 2017, p.309)? What are the leading regions in the local area and their influence of the opinions and attitudes of consumers? What are the trends in local lifestyle? What is the level of income and education in the country and its distribution? Current demographics of the country and the changes occurring in them. Technological factors How much funding is provided by industry and local government for research and is this funding being increased? What is the level of focus and interest of industry and government in technology? Is the technology being used in the country advanced? What is the status of issues related to intellectual property in the local environment? Is there any new technology that can be used and would have a radical effect on the industry? Are there any competitors in the market with access to superior technology? Environmental factors Are there any laws for protection of environment? What are the legislations present for energy consumption and waste disposal? How is the business affected by activities of different international activist groups like People for the Ethical Treatment of Animals or PETA and Greenpeace? What are the issues present in local area of the prospective country regarding environment? Are there any environmental or ecological issues pending that will affect the organisation? Legal factors Is there any legal protection for intellectual property? What is the status of laws for product safety, health and safety and employment? What are the regulations of the countrys local government for private property and monopolies? What are the relevant laws for consumers? PESTEL framework in relation to local and global levels All factors have an influence on the working of the company. The first thing that a company should do is identify the factors that will have an effect on the operations of the organisation or will make expansion into international market difficult. (Doh, 2005, p.699) After these external influences have been identified, they should be put into different categories of PESTEL. The level of influence of these factors should then be analysed to understand its impact on local, national and global areas. The categorisation should be justified and judged according to which one is the most important. The most important thing that a manager will have to decide is that whether he has to react to these key influences now, or whether it can be dealt with in the long run (Kennerley and Neely, 2003, p.217). There are several benefits of conducting a LoNGPEST analysis, which includes: It helps the manager of a company in taking appropriate decisions Guides a company at the time of expansion into international markets Long term planning can be done for efficiency in business operations A firm can easily understand the factors that lead to change and its implications on them Opportunities and threats can be anticipated more effectively and with a long time scale so that an appropriate method can be used to deal with it (Halinen and Trnroos, 2005, p.1289). The technological, legal and environmental factors are similar for all the areas. However, the level of impact on the local, national and global areas might differ. Though since the local and national areas are present in the same country, the factors affecting the organisation are the same and the level of impact are different (Grnig and Morschett, 2017, p.89). The political, economic and socio cultural factors differ from place to place, so the same factor will not be affecting a company in all areas. For example, Mattel wanted to bring the renowned fashionista Barbie doll to the children of China, and for that the company had built a 36,000 square foot massive Barbie having six floors, with a bar with the Barbie theme and 875 Barbies lined along the staircase. This was present in the middle of a flamboyant retail district of Shanghai. However, the company did not study the culture of the country fist, which stresses on educational toys and enhancing ones skills. This resulted in a closure of the behemoth store after two years. Figure : Blank grid for conducting a LoNGPEST analysis (Source: Grnig and Morschett, 2017, p.151) Political factors The political environment has a considerable impact on the operations and performance of a business. It also affects the business spending and confidence of a consumer (Cantwell, 2017, p.47). There are various changes happening in the political environment, which could result in a major loss, add risk or be beneficial for the business organisations. The various changes include decrease or increase in tax, changes in the political environment, and changes in regulation. However, different factors affect the operations on local, national and international level differently. At the local level, the companies are affected by the legislations made by the local government, which are include minimum wages, legislation related to working conditions and working time directive (Likoko and Kini, 2017, p.86). The companies have to ensure that they have proper methods for employment and dont pay wages below the set minimum; otherwise this will have a negative impact on the reputation of the company. The criteria for minimum wage are also set by the national government. Tax policy and incentives provided by the government along with the laws for intellectual property, patents and copyright have a significant impact on different companies (Muralidharan and Pathak, 2017, p.291). Other political issues that affect companies on a national level is the level of corruption, stability of the government, and regulation of competition. On the global level, organisations are affected with agreements and alliances of the prospective country. Regulation of international trade also has a significant impact on the organisations (Ekinci, 2017, p.13). The business organisations of UK have lost access to the single market of European Union, which gave them free trade access to all the members of the EU. Sev eral enterprises had to suffer losses because of this, and the cumulative loss for the entire year is expected to be 4.5 billion. Economic factors All the determinants of the economy of a country and its conditions are considered as economic factors. Foreign exchange rates, fiscal and monetary policies, interest rates and inflation rates are some economic factors that affect the operations of a business organisation (Qi et al. 2017, p.167). If the local or national economy is not performing well, then the sales for costly goods will take a hit but that for basic commodities will be large and profitable. However, in such a scenario, there will be a shortage of skilled employees. On the global level, the rate of exchange and taxes for import and export have a major affect on the profits of the company (Helo et al. 2017, p.41). After the decision of Britain to leave the European Union, there has been inflation and the cost of foods and drink industry has risen by almost 20%. This will have a significant impact on the restaurants and food chains, as the customers will decrease. Social factors Every country and in fact all areas have a different and unique mindset, because of which the sale of products and services of a business organisation can be impacted. These factors include domestic structures, social lifestyle, connected demographics, gender and cultural implications (Prakash et al. 2017, p.88). The quality of life of the individuals and their expectation affect companies on a local level, whereas cross-cultural issues on a global level. Walmart had several problems when it started out in Germany. Apart from restricted hours of business, another major issue faced by the company was that the way Walmart greeted its customers had freaked them out because it was an unusual practice in Germany. Technological factors Technology is another thing that has a massive influence on the operations of the business. There is a change in the technology in every minute, and if a company does not keep up with it, then it loses the competitive edge (Eling and Schaper, 2017, p.1083). Changes in technology has given rise to innumerable business organisations like Facebook, Split the bill, Credit Karma and many more. Additionally, many retail companies have opened up their online stores because of the decrease in sales due to advent of online shopping sites. Environmental factors The location of a country influences the trading industry of the country. Apart from the geographical aspect, there are several negative changes happening in the environment (Leonidou et al. 2017, p.31). To cope up with that there are various laws present in a country, and the consumers also expect an organisation to take part in some corporate social responsibilities. The organisations have to be aware about the rules and regulations related to waste management in an area. Undertaking corporate social responsibility has also become important. British Airways has undertaken various CSR activities including creating responsible and sustainable communities and recycling, because of which it has gained several loyal consumers. Legal factors Several changes keep on occurring in the legal environment of a country, which has a direct or indirect impact on the operations of a business. If appropriate laws for patenting or intellectual property are not present in a country, then the business organisation will suffer from a significant loss because its techniques can be copied by its competitors (Peris-Ortiz and Ferreira, 2017, p.8). Apart from this new legislations can be passed for a particular organisation, which has to be followed by them. For example, the market share of Coca Cola in Europe is approximately 40 per cent, because of which the regulators had asked them to provide shelf space in the soft drink coolers to its competitors so that consumers can have a wider choice of selection. Conclusion Thus, it can be concluded that conducting a PESTEL analysis of the external environment in which a business organisation operates is extremely important. It helps companies in foreseeing changes and adapting its operations to it accordingly. It is also necessary for a firm to conduct a PESTEL analysis of the global area, especially when the organisation is thinking of expansion. Conducting a LoNGPEST analysis of the local, national and international areas will help the company in grasping the different dimensions of the market and formulate appropriate strategies. Reference List Czinkota, M.R., Ronkainen, I., Moffett, M.H., Marinova, S. and Marinov, M., 2009.International business. Wiley. 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