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3.2 Evaluating the General Environment

L E A R N I N G O B J E C T I V E S

1. Explain how PESTEL analysis is useful to organizations.

2. Be able to offer an example of each of the elements of the general environment.

The Elements of the General Environment: PESTEL Analysis

An organization’s environment includes factors that it can readily affect as well as factors that largely

lay beyond its influence. The latter set of factors are said to exist within the general environment.

Because the general environment often has a substantial influence on an organization’s level of success,

executives must track trends and events as they evolve and try to anticipate the implications of these

trends and events.

PESTEL analysis is one important tool that executives can rely on to organize factors within the

general environment and to identify how these factors influence industries and the firms within them.

PESTEL is an anagram, meaning it is a word that created by using parts of other words. In particular,

PESTEL reflects the names of the six segments of the general environment: (1) political, (2) economic,

(3) social, (4) technological, (5) environmental, and (6) legal. Wise executives carefully examine each of

these six segments to identify major opportunities and threats and then adjust their firms’ strategies

accordingly (Figure 3.1 "PESTEL").

P Is for “Political”

The political segment centers on the role of governments in shaping business. This segment includes

elements such as tax policies, changes in trade restrictions and tariffs, and the stability of governments

(Figure 3.2 "Political Factors"). Immigration policy is an aspect of the political segment of the general

environment that offers important implications for many different organizations. What approach to

take to illegal immigration into the United States from Mexico has been a hotly debated dilemma. Some

hospital executives have noted that illegal immigrants put a strain on the health care system because

immigrants seldom can pay for medical services and hospitals cannot by law turn them away from

emergency rooms.

Proposals to provide support to businesses are often featured within political campaigns.

Reproduced with permission from [citation redacted per publisher request].

Meanwhile, farmers argue that a tightening of immigration policy would be harmful because farmers

rely heavily on cheap labor provided by illegal immigrants. In particular, if farmers were forced to

employ only legal workers, this would substantially increase the cost of vegetables. Restaurant chains

such as Subway would then pay higher prices for lettuce, tomatoes, and other perishables. Subway

would then have to decide whether to absorb these costs or pass them along to customers by charging

more for subs. Overall, any changes in immigration policy will have implications for hospitals, farmers,

restaurants, and many other organizations.

E Is for “Economic”

The economic segment centers on the economic conditions within which organizations operate. It

includes elements such as interest rates, inflation rates, gross domestic product, unemployment rates,

levels of disposable income, and the general growth or decline of the economy (Figure 3.3 "Economic

Factors"). The economic crisis of the late 2000s has had a tremendous negative effect on a vast array of

organizations. Rising unemployment discouraged consumers from purchasing expensive, nonessential

goods such as automobiles and television sets. Bank failures during the economic crisis led to a

dramatic tightening of credit markets. This dealt a huge blow to home builders, for example, who saw

demand for new houses plummet because mortgages were extremely difficult to obtain.

Some businesses, however, actually prospered during the crisis. Retailers that offer deep discounts,

such as Dollar General and Walmart, enjoyed an increase in their customer base as consumers sought

to find ways to economize. Similarly, restaurants such as Subway that charge relatively low prices

gained customers, while high-end restaurants such as Ruth’s Chris Steak House worked hard to retain

their clientele.

Decisions about interest rates made by the Federal Reserve create opportunities for some organizations and

threats for others.

Reproduced with permission from [citation redacted per publisher request].

S Is for “Social”

A generation ago, ketchup was an essential element of every American pantry and salsa was a relatively

unknown product. Today, however, food manufacturers sell more salsa than ketchup in the United

States. This change reflects the social segment of the general environment. Social factors include

trends in demographics such as population size, age, and ethnic mix, as well as cultural trends such as

attitudes toward obesity and consumer activism (Figure 3.4 "Social Factors"). The exploding popularity

of salsa reflects the increasing number of Latinos in the United States over time, as well as the growing

acceptance of Latino food by other ethnic groups.

Sometimes changes in the social segment arise from unexpected sources. Before World War II, the

American workforce was overwhelmingly male. When millions of men were sent to Europe and Asia to

fight in the war, however, organizations had no choice but to rely heavily on female employees. At the

time, the attitudes of many executives toward women were appalling. Consider, for example, some of

the advice provided to male supervisors of female workers in the July 1943 issue of Transportation

Magazine:1943 guide to hiring women. 2007, September–October. Savvy & Sage, p. 16.

Older women who have never contacted the public have a hard time adapting themselves and are

inclined to be cantankerous and fussy. It’s always well to impress upon older women the

importance of friendliness and courtesy.

General experience indicates that “husky” girls—those who are just a little on the heavy side—are

more even tempered and efficient than their underweight sisters.

Give every girl an adequate number of rest periods during the day. You have to make some

allowances for feminine psychology. A girl has more confidence and is more efficient if she can keep

her hair tidied, apply fresh lipstick and wash her hands several times a day.

The tremendous contributions of female workers during the war contradicted these awful stereotypes.

The main role of women who assembled airplanes, ships, and other war materials was to support the

military, of course, but their efforts also changed a lot of male executives’ minds about what females

could accomplish within organizations if provided with opportunities. Inequities in the workplace still

exist today, but modern attitudes among men toward women in the workplace are much more

enlightened than they were in 1943.

Women’s immense contributions to the war effort during World War II helped create positive social changes

in the ensuing decades.

Image courtesy of J. Howard Miller, http://en.wikipedia.org/wiki/File:We_Can_Do_It!.jpg.

Beyond being a positive social change, the widespread acceptance of women into the workforce has

created important opportunities for certain organizations. Retailers such as Talbot’s and Dillard’s sell

business attire to women. Subway and other restaurants benefit when the scarceness of time lead dual

income families to purchase take-out meals rather than cook at home.

A surprising demographic trend is that both China and India have more than twice as many English-

speaking college graduates each year than does the United States.

Reproduced with permission from [citation redacted per publisher request].

T Is for “Technological”

The technological segment centers on improvements in products and services that are provided by

science. Relevant factors include, for example, changes in the rate of new product development,

increases in automation, and advancements in service industry delivery (Figure 3.5 "Technological

Factors"). One key feature of the modern era is the ever-increasing pace of technological innovation. In

1965, Intel cofounder Gordon E. Moore offered an idea that has come to be known as Moore’s law.

Moore’s law suggests that the performance of microcircuit technology roughly doubles every two years.

This law has been very accurate in the decades since it was offered.

One implication of Moore’s law is that over time electronic devices can become smaller but also more

powerful. This creates important opportunities and threats in a variety of settings. Consider, for

example, photography. Just a decade ago, digital cameras were relatively large and they produced

mediocre images. With each passing year, however, digital cameras have become smaller, lighter, and

better. Today, digital cameras are, in essence, minicomputers, and electronics firms such as Panasonic

have been able to establish strong positions in the market. Meanwhile, film photography icon Kodak

has been forced to abandon products that had been successful for decades. In 2005, the firm

announced that it would stop producing black-and-white photographic paper. Four years later,

Kodachrome color film was phased out.

Successful technologies are also being embraced at a much faster rate than in earlier generations. The

Internet reached fifty million users in only four years. In contrast, television reached the same number

of users in thirteen years while it took radio thirty-eight years. This trend creates great opportunities for

organizations that depend on emerging technologies. Writers of applications for Apple’s iPad and other

tablet devices, for example, are able to target a fast-growing population of users. At the same time,

organizations that depend on technologies that are being displaced must be aware that consumers

could abandon them at a very rapid pace. As more and more Internet users rely on Wi-Fi service, for

example, demand for cable modems may plummet.

Moore’s law explains how today’s iPhone can be one hundred times faster, one hundred times lighter, and ten

times less expensive than a “portable” computer built in the 1980s.

Image courtesy of Evolution,

http://en.wikipedia.org/wiki/File:Osborne_Executive_with_iPhone_in_2009.jpg.

Although the influence of the technological segment on technology-based companies such as Panasonic

and Apple is readily apparent, technological trends and events help to shape low-tech businesses too. In

2009, Subway started a service called Subway Now. This service allows customers to place their orders

in advance using text messages and avoid standing in line at the store. By offering customers this

service, Subway is also responding to a trend in the general environment’s social segment: the need to

save time in today’s fast-paced society.

E Is for “Environmental”

The environmental segment involves the physical conditions within which organizations operate. It

includes factors such as natural disasters, pollution levels, and weather patterns (Figure 3.6

"Environmental Factors"). The threat of pollution, for example, has forced municipalities to treat water

supplies with chemicals. These chemicals increase the safety of the water but detract from its taste. This

has created opportunities for businesses that provide better-tasting water. Rather than consume cheap

but bad-tasting tap water, many consumers purchase bottled water. Indeed, according to the Beverage

Marketing Corporation, the amount of bottled water consumed by the average American increased

from 1.6 gallons in 1976 to 28.3 gallons in 2006.Plastic recycling facts. earth911.com. Retrieved from

http://earth911.com/recycling/plastic/plastic-bottle-recycling-facts At present, roughly one-third of

Americans drink bottled water regularly.

As is the case for many companies, bottled water producers not only have benefited from the general

environment but also have been threatened by it. Some estimates are that 80 percent of plastic bottles

end up in landfills. This has led some socially conscious consumers to become hostile to bottled water.

Meanwhile, water filtration systems offered by Brita and other companies are a cheaper way to obtain

clean and tasty water. Such systems also hold considerable appeal for individuals who feel the need to

cut personal expenses due to economic conditions. In sum, bottled water producers have been provided

opportunities by the environmental segment of the general environment (specifically, the spread of

poor-tasting water to combat pollution) but are faced with threats from the social segment (the social

conscience of some consumers) and the economic segment (the financial concerns of other consumers).

A key trend within the environmental segment is an increasing emphasis on conserving fossil fuels.

Reproduced with permission from [citation redacted per publisher request].

L Is for “Legal”

The legal segment centers on how the courts influence business activity. Examples of important legal

factors include employment laws, health and safety regulations, discrimination laws, and antitrust laws

(Figure 3.7 "Legal Factors").

Intellectual property rights are a particularly daunting aspect of the legal segment for many

organizations. When a studio such as Pixar produces a movie, a software firm such as Adobe revises a

program, or a video game company such as Activision devises a new game, these firms are creating

intellectual property. Such firms attempt to make profits by selling copies of their movies, programs,

and games to individuals. Piracy of intellectual property—a process wherein illegal copies are made and

sold by others—poses a serious threat to such profits. Law enforcement agencies and courts in many

countries, including the United States, provide organizations with the necessary legal mechanisms to

protect their intellectual property from piracy.

In other countries, such as China, piracy of intellectual property is quite common. Three other general

environment segments play a role in making piracy a major concern. First, in terms of the social

segment, China is the most populous country in the world. Second, in terms of the economic segment,

China’s affluence is growing rapidly. Third, in terms of the technological segment, rapid advances in

computers and communication have made piracy easier over time. Taken together, these various

general environment trends lead piracy to be a major source of angst for firms that rely on intellectual

property to deliver profits.

A key legal trend in recent years is forcing executives to have greater accountability for corporate misdeeds

via laws such as the 2002 Sarbanes-Oxley Act.

Reproduced with permission from [citation redacted per publisher request].

K E Y TA K E AWAY

To transform an avocado into guacamole, a chef may choose to use a mortar and pestle. A

mortar is a mashing device that is shaped liked a baseball bat, while a pestle is a sturdy

bowl within which the mashing takes place. Similarly, PESTEL reflects the general

environment factors—political, economic, social, technological, environmental, and legal—

that can crush an organization. In many cases, executives can prevent such outcomes by

performing a PESTEL analysis to diagnose where in the general environment important

opportunities and threats arise.

E X E R C I S E S

1. What does each letter of PESTEL mean?

2. Using a recent news article, identify a trend that has a positive and negative implication for

a particular industry.

3. Can you identify a general environment trend that has positive implications for nursing

homes but negative implications for diaper makers?

4. Are all six elements of PESTEL important to every organization? Why or why not?

5. What is a key trend for each letter of PESTEL and one industry or firm that would be

affected by that trend?