Political and economic aspects of environment
The PEST analysis describes a framework of macro-environmental factors (Political, Economic, Socio-cultural and Technological) used in the environmental scanning component of strategic management.
Over the next couple of steps we will look into each factor more closely, starting with the political environment.
It goes without saying that the political environment can have a major influence on both individual businesses and the wider corporate community. For example, it can either facilitate business transactions by removing trading barriers or generate increased levels of uncertainty, due to greater political instability.
Companies, therefore, should take adequate measures to allow them to deal with any potential domestic or international political changes. A perfect example of the political climate having a major influence on business can be seen in the fallout that has followed the UK’s vote to leave the EU in 2016. As a result of the vote, there are growing concerns that Brexit could lead to a reduction in investment and a drop in the UK’s employment rate, which would eventually harm the competitiveness of British businesses.
There are many political factors that can influence business. They include, but are not limited to:
- Political regime and stability
- Freedom of press, rule of law, bureaucracy, corruption
- Existing legislation around employment, environment and property protection
- Security control
A business should always strive to keep abreast of any changes, opportunities and threats shaping and influencing its political environment. For example, an unstable political environment and rising political tension in a certain region may damage the appeal of local markets, or new legislation may change the relationship between a firm and its employees and could even change the overall structure of the industry (e.g. the Antitrust Law: Federal Trade Commission 2019).
Economic factors are connected with supply, demand and money and relate to financial variables of the economy, which include:
- Exchange rate
- Gross Domestic Product (GDP)
- Disposable income
- Interest rate
For example, exchange rates would influence companies that deal with international business (e.g. export, import and foreign investment). Changing exchange rates will definitely affect how much a company has to pay to its international supplier/customer, which would ultimately affect profit margins.
GDP growth and disposable income can be used to gauge the overall state of the economy and overall consumption power, which can also influence a business’s profit scope.
In the comments area discuss the effects of political and economic factors on companies you have worked for or have experience of.
Federal Trade Commission. (2019). Guide to Antitrust Laws. https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws
© Coventry University. CC BY-NC 4.0