An Evaluation of a PESTEL Analysis

An Evaluation of the effect of a PESTEL Analysis on international project(s) for companies operating in an international environment with specific examples of PM case studies in relation to PESTEL.

Introduction

The PESTLE analysis is a planning tool to strategically evaluate the effects of external factors on a project or the external environment of a company. This kind of analysis is a crucial phase within the Project Planning Process. (Haughey, 2014) PESTLE stands for Political, Economic, Socio-cultural, Technological, Legal and Environmental factors. (TeamFME, 2013, p. 6) By the PMI the PESTLE analysis has as well been referred to as a 'prompt list … for use in risk identification'. (PMI, 2009, p. 82)

Figure 1 - Macro environment forces affecting a firm (Jurevicius, 2013)


Project management, according to the PMBOK (PMI, 2013, p. 5), is 'the application of knowledge, skills and techniques to execute projects effectively and efficiently'.
The model of the PESTLE analysis may not only be used for the evaluation of companies, industries or entire nations but even more importantly for individual projects. It is of importance that only external factors are taken into consideration on which the company and the industry have no immediate influence. In this way, the PESTLE analysis forms a summary of the driving forces and the macro environment. It shows which factors were of particular importance in the past, to what extent this could change in the future and what the implications on the project, company or the entire industry may be. For instance the PESTLE analysis can help to identify the differential impact of individual forces for change. As business changes does the economy and the environment which implies the constant risk of a project's scope being influenced by external factors. (Harrin, 2009a)
These forces are highly likely to influence and change the structures of projects, industries or markets. For example, the reduction of regulatory and trade barriers, improving communications technology, increasing competitive pressure on domestic markets and increasing convergence of consumer needs can be driving forces for globalization.

Political Factors

The most important factors of the political environment for businesses are the organization and stability of the political system of a region. That particularly includes stability and reliability of political institutions and their role in the design of economic life, e.g. interventions, subsidies, competition policy, trade policy, etc.
With regards to projects the internal political factors that need to be considered, like in-team conflicts, cohesive projects, and personal interests, can be influenced and managed by the project manager and the stakeholders (Dcosta, 2011) contrary to the external ones which must be followed mandatorily.
Government policy decisions mirror the political defaults but can easily have an important impact on the legal presentation found in laws and rules, for example with regard to employment laws, consumer protection directives, taxation design, trade restrictions or regarding Health & Safety Requirements. (TeamFME, 2013, pp. 12-13)

Economic Factors

The economic environment describes economic developments, as applicable at a global and national level or, for example, in decisions to be made regarding the location for the direct vicinity of the proposed site.
Economic environment factors include not only economic growth, GDP & GNP, interest rates, inflation, exchange rates, taxation and unemployment rates, but as well the costs of raw materials such as energy, petrol and steel. These affect the company in the form of demand, competition, cost pressures, investment climate and investment risk (due to the uncertainty about expected returns). To understand the future development of the economic environment factors requires that factors such as financial policy, economic policy and monetary policy, the structure of capital markets, infrastructure, availability of production factors, etc. must be studied. (TeamFME, 2013, pp. 13-14)
Within projects the economic factors to be considered would shade light on the financial part, the project cost management area. Questions regarding the budget and a contingency may be asked as well as the sponsor's attitude towards budgetary tolerance.

Socio-Cultural Factors

Social factors include characteristics like population composition and demographic change, income distribution, social mobility, lifestyle, work and leisure time management, consumer behaviour, level of education, and even religious beliefs but as well values, attitudes and behaviours of people that might be future employees, customers, suppliers or other stakeholders in relation to the company, that need to be considered. (TeamFME, 2013, p. 15)
All these factors may influence the design of work and production methods as well as demands for products and services or even the company itself. Rising environmental and health awareness and individualization may be important processes in a society to be considered.
Questions may arise like how changes in the age structure would affect the business, are there new social security regulations due or are there new trade union strategies in sight which might affect the business; these are questions which should be answered beforehand.
Project-wise these factors are more internally focused as they would consider for example the structure of a project team, age structure, training needs or the morale of a team.

A Cadbury Schweppes Case Study - Poland a developing market

Cadbury Schweppes started manufacturing chocolate in Poland in 1993. (The Times 100, 1996) Having evaluated the political factors with a positive outcome by doing a PESTLE analysis they chose to enter the polish market. Why did they chose Poland and not any of the other eastern European countries like Hungary, Czech Republic or Slowakia ?
Politically Poland had already developed a stable parliamentary democracy, neither did they face ethnic strife nor border disputes and an Association Agreement with the European Union was already signed. The Polish government recognized that to drop its former communist image and to look forward to the Western market with a proactive commercial setting, major changes in culture and attitude would be required. One way in which this could be addressed, was the promotion of the establishment of companies from Western Europe. The already existing good political ties with Great Britain, where also a significant Polish community of about 150,000 residents existed at that time were just a positive complementation for that.
Economically Cadbury Schweppes chose Poland, as amongst the countries above they had with 38
million (1990) the largest population (WPR, 2014) which meant for Cadbury Schweppes a broad consumer base which as well was already strongly western oriented. At this time, none of the major western confectionery products manufacturer had yet opened a branch in Poland. Also the investment prospects in Poland were excellent there at that time. Although having been under communist regime for 45 years, the private business sector was still very presentable.
From a socio-cultural view Poland as well presented itself as a distinguished target. Statistically the population size was predicted to stay stable. The local labour market was very well trained and offered skilled workers. A decisive reason was finally that in Poland the per capita chocolate consumption in comparison to the rest of Eastern Europe was considerably high.
Figure 2 - Confectionary: Ranking of Per Capita Consumption (The Times 100, 1996)
This continuously and still rapidly changing political positive factors, the positive presentation of the economic landscape and the welcoming socio-cultural picture were key reasons for Cadbury Schweppes' decision to choose the emerging Polish market for their expansion.

Technological Factors

The information and communication technology has revolutionized work processes in businesses and caused huge efficiency gains. E-business has changed the unwinding of transactions but as well opened ways to completely new business models. This means that a company has to master additional technologies that have appeared unimportant in the past.
Important factors to be considered are not only the basic infrastructure level, location-wise the presence of technology clusters, such as Silicon Valley (Haughey, 2014), but as well the Internet and Communication infrastructure. Questions about the spending on research & development in the public and private sectors, the rate of technological change, the strong presence of certain technologies in a region, the Legislation regarding technology or governmental technology incentives need to be answered. (Jurevicius, 2013)
In terms of projects the technological factors to consider refer as well to changes in scope with new developments arising but as well brings up questions like the technological team support or the technological constraints the team needs to work in and what technology is to be deployed as part of the project. (Harrin, 2009b)

A Vodafone Case Study - Using technology to improve economies

In 2007 Vodafone, together with its local telecom affiliate, Safaricom, launched 'M-PESA' in Kenya (Business Case Studies, 2014) which is now 'the world's most successful money transfer service'. (Vodafone, 2014)
Vodafone recognised the infrastructural and communication situation in Kenya very well. The Economy is mostly agricultural, telephone landlines are hardly to find and expensive to install, the banking system is inadequate and only 20% of Kenyans have a bank account. Due to these conditions small businesses find it hard to operate. Vodafone applied for funding from the Financial Deepening Challenge Fund (FDCF), which is a UK fund established to aid international development, and received almost £1 million (ICAEW, 2014) to set up this service. 'A mobile network is quick and easy to install and less expensive to run than landlines.' (Business Case Studies, 2014)
By evaluating the technological factors, mostly the technological telecommunications infrastructure, Vodafone achieved to set up a national money transfer service in Kenya but even extended this idea of 'M-PESA' to 9 other countries, mostly in Africa, by today. Vodafone realised early that this wasn't about developing new technology, it was about a new application of existing technology.
The rapid growth in the telecommunications industry in Africa has not only brought significant benefits to the wider economic development as for example a stimulation of the economic situation at the micro level and a continuous increase in trade particularly on a rural level but furthermore Vodafone benefits of a stable economy which improves the long-term planning on the African continent.

Legal Factors

The legal framework is defined at the local, regional, national and supranational level. This includes the legal standards that affect companies operating in the region incorporating legal rules of corporate governance, taxation, liability of producers and labour legislation as well as investment, environmental protection and patent regulations and legal approval procedures or the enforcement of patent claims. (TeamFME, 2013, pp. 12-13)
Furthermore, European companies must also keep the impact of EU guidelines in mind that can be quite important with regard to global expansions for example regarding products produced abroad under legal aspects but due to EU regulation would be prohibited to be sold in Europe such as the sale of cosmetics tested with the aid of animal experiments which may in some countries not only be allowed but even legally required.
Internally it needs to be considered how information governance and data protection elements that need to be observed, how is any test data used during testing treated. In what regulatory frameworks will the project be operated in and what legislation is to be followed for example regarding health and safety regulations or from a labour law perspective. (Harrin, 2009b)

Environmental Factors

The ecological environment must be seen in close relationship to the social and political-legal environment. While the surrounding conditions very much limit the possibilities of the company, for example in regards of permitted production processes or environmental constraints, there are also numerous opportunities to achieve competitive advantages through eco-friendly products and manufacturing processes.
However, the environmental factors also include the presence of raw materials and economic access to these. Likewise logistical aspects can be relevant in the context of location decisions to be made, such as the connection of a production plant to the world market by its proximity to waterways.
From a project management viewpoint factors that may need to be considered could be the impact on the environment that the project might have and how that would need to be addressed. Is the project considered 'green', will emails be printed or unnecessary paperwork be produced and how is that intended to be managed. (Harrin, 2009b)

The Body Shop – Pursuing Social and Environmental Change

'The Body Shop' (hereafter TBS) is a British retail chain for cosmetic products. It is advertising with the waiver on animal experiments, as well as with other ethical principles. (The Body Shop, 2014) For many years TBS regularly performs campaigns pointing to abuses and to proceed against them. The first of these campaigns was launched in 1986 to save the whales. In 1990 'The Body Shop Foundation' is founded, a charitable organization that supports human rights projects and environmental protection groups. Over the years many campaigns followed.
TBS made Ethics and Social Responsibility their mission. This operating philosophy developed into a major aspect of their operative strength. TBS is mainly engaged in the fields of animal rights and environmental causes and supported with substantial parts of its profits organizations such as 'Amnesty International' and 'People for the Ethical Treatment of Animals' (PETA). In appreciation of one its "5 pillars"
'Support Community Trade', 'Defend Human Rights', 'Against Animal Testing', 'Activate Self-Esteem', and 'Protect Our Planet' (The Body Shop, 2014) no animal testing has been carried out by TBS for more than thirty years. In fact, TBS and their global campaigning against animal testing for cosmetics purposes made them the first international cosmetic brand to be recognised under the human cosmetics standard for its 'Against Animal Testing' which obtained the support of the EU and finally led to the ban of cosmetic products that were tested on animals in Europe. (Lin, 2010, p. 6)
Due to TBS's stance towards animal rights legal aspects impeded TBS for years from establishing itself in the Chinese market. The fact that at least some of their products must be tested on animals contradicts the basic pillars of TBS's philosophy. In consequence of this, TBS announced on 12th March 2014 that they have "removed all its products from duty-free shelves in China after it was revealed the ethical company's products were at risk of testing on animals by the country's authorities" (Davidson, 2014) and retreats completely from the Chinese market until the Chinese government rethinks their opinion about animal testing on beauty products.
From the view of environmental factors TBS achieved significant competitive advantages through eco-friendly products and manufacturing processes. Their campaigns not only raised consumer awareness about grievances but as well evolved to their most important operative strength. In a survey conducted by TBS (The Body Shop, 2009) in 2008 97% said 'that The Body Shop Values are either "important" or "very important" to them as customers'. According to this survey 84% of their buyers 'believe that it is "very important" that we ensure that our products aren't tested on animals.' Finally 34% said 'their purchases of 'The Body Shop's' products were based on the ethical reputation of a company.'

Conclusion

A PESTLE analysis is a very useful tool, a starting point for the analysis of external environments, to be used to look outside the company to evaluate what may or may not happen. It is useful to assure that none of the basic factor are failed to see. It is an agile process which spans through all areas in the Project Planning Process. Using the PESTLE analysis by continuously re-defining the project scope is as important as constantly identifying and analysing the change of risk factors.
As with all tools there are advantages and disadvantages to be considered. Some of the advantages are the simplicity of the analysis and the fact that it stimulates an insight of the wider business environment. The development of external and strategic thinking is stimulated. Some disadvantages of the PESTLE analysis are, that care has to be taken not to over-simplify the analysis as it easily happens to consider too few data, that the tool needs to be used on a regular basis, that it requires different people being involved to have an insight on different perspectives and the risk of collecting too much data as this may end up in 'paralysis by analysis'. (TeamFME, 2013, p. 22)
Figure 3 - Strategic Formulation Process (Rungwitoo, 2012)

However, to win really meaningful findings, it is not enough to look at the PESTLE analysis as a mere listing of factors. Rather, it is just one of the tools to be used in the process of developing a company's strategy.
'A PESTLE analysis should feed into a SWOT analysis as it helps to determine the threats and opportunities represented by macro-environment forces that the organization usually cannot control.' (Oxford Learning Lab, 2012) The outcome of this combined analysis can then be translated into a task list for the Project Planning Process. Other tools to be used, in conjunction with PESTLE, could be Porter's Five Forces, the Boston Matrix and the Ansoff Matrix.

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