A Study on Models Applied in Strategic Management

Abstract

This is a comparative paper based on strategic management models. The research begins with an explanation of the reason as to why PESTEL model is given more weight over other approaches towards SWOT analysis. The paper takes in to account PESTEL model, which is among the various managerial approaches towards SWOT analysis. The advantages of the model over other approaches are also analyzed in the paper. The PESTEL approach to environmental analysis is also discussed in the paper. Various factors that affect any business operation are categorically analyzed and discussed in details. A clearer link between the PESTEL and SWOT analysis is also part of the discussion. The advantages of majoring in external environment analysis over internal environment are discussed as the major elements that give the PESTEL model more weight over others.

Introduction

According to Gillespie (2007, pp.26), the success of any business is determined by its environments. The business environment ranges from internal to external factors. In order to effectively run a business without been compromised by its environments, there is a need for a strategic management system. Various models have been employed by various firms in order to establish the strengths, weaknesses, opportunities, and threats of the business (SWOT analysis). The SWOT analysis helps in predetermining the environments that counteract the business and hence helps in strategic management. In this paper, PESTEL model is considered. The PESTEL, also referred to as the PEST model is most preferred for use alongside the SWOT analysis in strategic management. This is because the model takes in keen consideration the macro environment also referred to as the external environments. The internal environment is easily controllable by any business manager. However, a greater failure in most cases erupts from the external environment, which ranges from Political, Economic, Social, Technological, Environmental and the legal factors revolving around the business. A keen interest is in the PESTEL model which attempts to handle the greater segment of the factors influencing the business organizations (Gillespie 2007, pp.45).

PESTEL Model

The term PESTEL is an abbreviation of the key elements that compose the PESTEL model. The term PESTEL stands for political, economic, social-cultural, technological, environmental and legal factors. All these constitute of the macro environment that affects the operation of any business organization. Jurevicius (2013, pp.25-39) discusses PESTEL model as strategic approach that takes in to account a combination of all these factors in order to establish the strengths, weaknesses, opportunities, and threats that are encountering or likely to affect the business in the near future. The macro environment is unpredictable, with most of its factors uncontrollable by any business manager. Taking, for instance, the business management can control the workers and its resources, which form the internal environment of the business. However, the business management cannot take in control the political situation or the technological trend within its nation, though these may affect the business. This explains why PESTEL model is of great importance since the macro environment cannot be controlled from within the business. The overall advantage of this model is that the management will employ measures that will counteract such political, environmental or technological factors among others (Jurevicius 2013, pp.25-39).

Any business organization operates in an environment surrounded by competitors and the political, economic, social-cultural, technological, environmental and legal factors. All these form the business forces, which the firm has to counteract. This calls for strategic management that requires keen analysis, especially on the environmental factors. Strategic management shapes the business to suit the industry and gain a competitive advantage over its competitors. This draws us to the application of the PESTEL model of analysis.

The elements of the PESTEL model also determine Porter's five forces found within the business environment. These forces include the threat of entry, threat to substitution, bargaining power of the buyers, bargaining power of the suppliers and the rivalry among the business competitors. Taking, for example, the threat to entry and threat to substitution, these may be caused by the technological factors, political situation, and the legal factors. The purchasing power and bargaining power of the buyers and suppliers respectively may be influenced by economic factors, which may equally bring about the threat of substitution. Legal factors, which are among the components of the PESTEL model, may influence the rivalry among the competitors. In general, the business forces rotate around the external factors elaborated in the PESTEL model (Peng, G. C. A., & Nunes. (2007, pp.34).

PESTEL model stands out as the most effective tool for business analysis (Kaplan, R. S., & Norton 2008, pp. 20). The PESTEL model takes in to account the political factors that may in one way impact on the business. This is based on what degree the governance impacts on the business field. Among the political factors that impact on a business is the political stability or instability, government policy, labor laws, taxation, foreign trade among other government impacted policies. Taking, for example, political stability, this is an external factor that streamlines the flow of business activities and hence attracts foreign investors. The expansion of business activities beyond national boundaries has been the modern trend in the business field. This attracts more customers and creates larger markets for the business products or services. However, all these will depend on the political situation and national governance. As much as the government has a role to play in nurturing business to prosperity, there is a need for strategic management and analysis of political factors that in a way may favor or undermine the business operations. The employment of the PESTEL model in any organization will give priority to analysis on political factors that may affect the business (Peng, G. C. A., & Nunes 2007, pp.54).

Rothaermel (2015, pp.35) explains how the use of PESTEL model in business analysis, will keep track of the political trend. In cases of political instability, it is the role of the business to foresee and take precautions. Employing PESTEL model will also enable the business to secure new opportunities outside the nation where international markets are opened by the government. Although the business cannot control the political trend, a keen study on the political and governance situation will help the firms to discover new opportunities within the market, upcoming threats, and the necessary precautions. Through this, the organizations will be able to respond to the current and expected legislation by the business, thus adjusting accordingly to a bind to the policies in their favor (Yüksel 2012, pp. 23).

Another element of the PESTEL model is the Economic factor of the business. The economy of the business operations area is a key element that should be considered by the business. The economic situation determines the business income. PESTEL analysis model takes into consideration some economic aspects such as interest rates, economic growth, and exchange rates. Unlike other approaches, the Model employs a keen study on the flow of capital. Although it may not have any control on the aspects of economic growth, taxation rates, customers income and taxation policies, it is important for the business to analyses such because they determine the business income. Such economic factors like taxation and customer’s income will directly determine the purchasing power of the customers. Lesser income will reciprocate to little purchasing power hence culminating in low business income. Taxation rates and economic growth direct determine the business income and capital. For example, low economic growth and high taxation will add up to little business income and hence there is a need for the business to come up with a strategy that will help its survival in such situations (Valentin 2001, pp. 54-69)

Economic factors influence the costs of products, prices and the business investments. The PESTEL Model gives an analysis of the economic situation surrounding the business. This may range from the current to the future situation. Upon the analysis of the economic factors, the business employs strategies to curb the situation and enhance its survival. For example, the probability of economic decline and low customer income that may lead to low sales may prompt the business to venture into other markets elsewhere. The business may also consider adjusting its prices to suit the customer’s purchasing power, hence or otherwise gaining a competitive advantage. Capital is a key component in a business and the aspect of sales and profits is the steering wheel towards business prosperity. The PESTEL model is hereby important in managing the economic status of any business to ensure prolonged survival a competitive advantage over its rivalries.

Social factors are among the macro environment elements that affect every business. The PESTEL model analyses these as beliefs social-cultural practices and attitudes found in the society within which the business is conducted. In order for the business to understand its customers and suppliers, PESTEL analysis is employed. This helps to understand the age distribution within the population, a factor that determines the kind of commodities the population is likely to purchase. Population growth and health consciousness are among the social factors that a business can take advantage of in order to gain a competitive advantage over its competitors. Considering the aspect of beliefs and altitudes, the business is likely to understand the preferred commodities that the customers in that region can purchase. This is by considering the fact that some of the cultural beliefs and practices trickle down to constitute the lifestyle of the society, what they eat and their general way of life. This analysis should be employed prior to the product introduction in order to determine the prosperity of the particular market segment.

Modernization has brought about technology. All sectors of the economy, including business, have employed the aspect of technology. This ranges from production, packaging, distribution, and promotion of business products and services. Technology has also been employed in product acquisition. Technology itself has stood out as a product in the business world. PESTEL analysis drives a business towards establishing the landscape of technology. The model has helped the business to be innovative in terms of new ways of production, marketing and distribution of their products. Unlike other analysis, the model takes in to account the dynamic nature of technology, and how laxity in employing technology in your business may act as a weakness and a threat to substitution by your competitors in trading in similar products. Failure to employ the modern technology as caused by poor business analysis as led to diminishing market shares and extinction of some business firms from the sector upon been outcompeted by their counterparts who have keenly employed the PESTEL model.

Hill, T., & Westbrook (1997 pp.45) claims that environmental factors also constitute the external elements of a business environment. Resources have become scarce over years due to environmental elements such as population, climatic changes, and natural calamities. Such has come as a threat to the business environment. PESTEL model of analysis employs the study of the environmental factors and enhances sustainable business operation. Same environmental factors have stood out as threats to particular business activities but strengths to others. This solely depends on the strategies deployed to counteract the factor and preparedness towards the unforeseen contingencies associated with the environment.

Every business, be either local or international is governed by regulations, either from the government or the economic sector. These regulations govern the business to operate in a healthy environment, monitoring the quality and quantity standards, advertisement and consumer rights. PESTEL analysis enables a business to abide by health and safety operations through the equal hiring of its employees, considering the employee rights, advertising and effective labeling of their products. Although these regulations vary from a nation to the other, any business has no obligation to this provision. The business should operate within the legal frames agreed upon by the governing authorities. PESTEL model of analysis gives a business the advantage to understand these legal provisions and follow them to avoid conflict with the law.

Conclusion

PESTEL analysis hereby stands out as the most effective business analysis tool for strategic management. This analysis tool exploits all the elements of the external business environment, laying a platform for business prosperity. PESTEL as an analysis tool helps the business to understand its relationship with the macro environment. This tool helps the business to understand its operational zone and the forces that it’s likely to counteract. PESTEL model of business analysis is also the most effective tool towards the SWOT analysis within the external environment. Upon understanding the external environment, the business is likely to understand its strengths and weaknesses. A keen study of the environment through the PESTEL analysis also gives the business an opportunity to see new opportunities. For instance, the aspect of technology, which is an environmental factor, can be employed to bring about new production methods, new products, product modifications and equally new markets for the business.

PESTEL model exploits the entire business environment, revealing to the business how dynamic and complex the business environment is. PESTEL analysis is selective and handles each and every environmental factor independently. This helps the business to come up with specific solutions for the situations that may arise. Unlike other ways of analyzing the business environment, PESTEL is specific and hence gives applicable solutions to the situations. A business understands best its strengths through PESTEL model. The business also uses the PESTEL model to understand the competitive nature of its environments and hence helps in the success of business operations.