PESTLE
1) POLITICAL ENVIRONMENT
The governments activities and conditions of the country that impact the operations of a business.
Key features of a political environment include:
Stability
Relationship with foreign governments
Political Stability
A state of governance characterised by the absence of major conflicts, social unrest, or abrupt changes in leadership.
Features include:
Number of armed conflicts and violent demonstration due to social unrest
Terrorism and security risk ratings
Intensity of internal conflicts due to ethnic, religious or regional disputes
Length of time leadership stays in position of power.
Political instability may lead to country having little chance of developing due to long-term conflicts.
It becomes riskier to invest time/effort into expanding into countries with political instability because rules of foreign ownership can change and assets such as factories belonging to Australian businesses may be shut down, losing its investment.
Relationship with Australian Government
International relationship - the level of interaction and cooperation between different countries governing bodies.
Features include:
Presence/absence of FTAs
Membership in the UN for common goals of peace and security
Similar values regarding the environment, ethics, etc
FTAs gives opportunity for Aus businesses to benefit from global trade and investment such as barriers to trade being reduced/removed. They promote regional economic integrations and build shared approaches to trade and investment between countries.
Countries that have strong economic ties are more likely to take steps to keep peace and harmony between the nations.
2) ECONOMIC ENVIRONMENT
Level of Economic Activity - Economic Cycle
Economic activity - fluctuation in the level of production within a country, measured by Gross Domestic Product.
Expansion - increasing level
Contraction - decreasing level
Top level of management needs to be able to predict the level of economic activity into the future in multiple countries to make strategic decisions regarding the business direction.
Stage in the economic cycle has high or low economic factors, such as inflation, interest rates and availability of labour.
Factors such as GDP, interest rates, levels of employment and consumer spending can help determine the stage if the economic cycle
Management of multinational businesses need to track economic activity in all countries they operate in.
EXPANSION
Business experiences growth in sales and consumer demand.
With higher cash flow businesses are more likely to increase their spending and investment, and should invest in innovation to improve efficiency and product features/range. They will also need to increase capital investment to increase production to keep up with growth in global consumer demand.
May use loans to finance capital investment spending, however if interest rates are rising in the country experiencing expansion they can seek financing from countries that still have lower interest rates.
CONTRACTION
Consumers become worried about their jobs and lose confidence in the economy, so will reduce their spending.
Will experience a decline in sales which may lead to redundancies and reduction in casual hours as they cut their spending.
Will be less impacted if they have invested in a loss minimisation strategy, as they still have high sales in other economies.
Discretionary Spending
Discretionary spending - money spent by consumers on non-essential purchases such as luxury items.
Varies across different countries, influenced by factors such as income levels, economic conditions, inflation, interest rates, consumer confidence.
When expanding globally will need to research levels of discretionary spending in a country, which is closely linked to the level of economic activity. Most developed countries have consumers with a high level of discretionary spending during economic expansion.
Interest Rates
The prices of borrowing money or the return on savings.
The general level of interest rates in an economy is determined by the central bank, which alters them to stimulate (rising - less discretionary spending and reduces business investments) or slow down (lower - more discretionary spending as repayments are reduced, also encourages business investment loans) growth.
Impacts the ability of a business to borrow money to finance operations or capital investment. If country is experiencing high inflation, interest rates increase.
Currency Fluctuations
Rate and degree of change in the value of a country’s currency.
When Aus business deals with customers or businesses in other countries, a conversion of currency occurs.
Appreciation - value rises relative to another currency (AUD appreciating: Reduces costs of imports, increasing profit margins, or business could reduce its prices to increase consumer demand / Aus products more expensive for overseas buyers, leading to decrease in demand).
Depreciation - value falls relative to another country (AUD depreciating: Increases cost of imports, reducing profit margins, or business could increase its prices, reducing demand / Aus product less expensive to overseas buyers, increasing demand).
If currency fluctuations are significant and frequent it can impact the global business due to:
Unpredictable profit margins - translated value of revenue earned in foreign currency shifts constantly, making accurate financial forecasting difficult.
Pricing pressures - must frequently adjust prices to remain competitive, affecting profit margins.
Supply chain cost shocks - if company manufactures in one country but sources raw materials globally, sudden exchange rate spikes can drastically affect the cost of goods sold.
3) SOCIAL / CULTURAL
Before expanding into new markets, market research needs to be conducted and businesses need to understand the different social/cultural aspects of the environments they intend to operate in.
When negotiating or setting up international contracts it is important that you don’t offend the people you are dealing with (investors, business people, customers, etc). Good first impressions establish a long term relationship and enable you to get the best deals possible.
Knowledge of holidays, customs, celebrations, religious beliefs, etc are important as these may affect business operations, such as the availability of labour/staff at certain times, costs associated with employee’s time off, reputations if work is not delivered on time, etc. Also provides the business with opportunities for limited time products based on the celebration.
When expanding globally a standardised packaging and product may not work, as colour or language translation may be offensive, so businesses may need to factor in a change in packaging or product features at extra costs.
Education
Level of education in Aus is high. Levels of education within a country can affect the type of work and income levels the population can achieve.
If operating in a country with low levels of education, may be required to adapt work practices, including verbal instead of written communication, and instruction steps on posters with graphics.
If appropriate level of skill or knowledge is not available, may need to import workers from another country or spend more time and money on providing training.
Customs
The actions / way of behaving that is usual and traditional among the people in a particular group or place, which can be influenced by traditions and/or religion.
Must be mindful of how they use colour and images in marketing to ensure they do not offend local customs, plus may be holidays, events and observances that impact business efficiency.
Need to respect local customs to ensure they do not offend customers and stakeholders, otherwise may not get the best terms and conditions on business contracts and find it more difficult to establish business networks.
Holidays and Celebrations
Knowledge of holidays and celebrations in the country you are expanding into can assist in planning and scheduling, informing if must close, or if open staffing difficulties may occur.
If setting up business and/or outsourcing manufacturing this could affect productivity and labour costs, due to other countries having more holidays and celebrations.
Religious Beliefs
Employees want religious beliefs and practices to be accommodated, so management must take into account everyone’s requests and beliefs into account while making sure there is no preferential treatment.
Failing to recognise different religions and respecting the needs of individual employees is against Australia’s Equal Employment Opportunities legislation and can lead to team conflict, scheduling problems, and costly employee turnover.
If accommodating of a wide variety of beliefs within a diverse workforce they may benefit from innovation through more ideas and solutions due to variety of life experiences and knowledge from across the globe.
Business Etiquette
A set of unwritten rules that apply to social situations, professional workplaces and relationships. Good businesses etiquette means that you act professionally and exercise proper manners when engaging with others in your profession. This will give a good first impression, make you stand out from others, enhancing your chances at success. Ensures that you don’t offend and that you build positive business relationships that count.
Establishing good rapport is significant if you want your business to progress, take on new clients, impress your investors, or close a sale. You can build positive relationships by exercising good etiquette.
Business etiquette encompasses verbal and non-verbal communication, communication styles, taboo topics, dress and appearance, and preferred speaking distances, which all vary by culture. Time sensitivity is another factor, with some cultures valuing punctuality and others seeing punctuality as a sign of eagerness or hastiness.
Dinning manners may also be important if required to attend a business lunch or dinner event.
Communication Protocols
Virtual communication etiquette - compose emails using complete sentences and proper grammar, avoiding jargon, abbreviations, etc as this may be interpreted differently in different languages and cultures.
Ask communication preferences, don’t assume their preference is the same as yours. E.g. phone manners, texting, etc.
Respond to all communication in a timely manner, including emails, phone calls, etc.
4) TECHNOLOGY
Market research regarding the availability of technology and its associated infrastructure is required.
Technological factors are variables that relate to the existence, availability, and development of technology. Includes technological advancements, innovation, and scientific breakthroughs that can influence the operations of a business or industry.
Infrastructure
Infrastructure if technology within a country is affected by government rules and level of expenditure, which is often outside of the business’ control.
Governments in developed countries usually invest in technology infrastructure, while those in developing countries may not.
New technology is constantly becoming available, but is usually expensive when first released so only businesses and governments with large expenditure or capital can afford to continuously upgrade.
Operations
Advancement of technology can make building strong customer loyalty bases through being more in touch with consumers possible regardless of the distance between the customer and business. Social media websites allow businesses to connect directly with customers regardless of their location in real time. Can see what customers needs and wants are through data collected on social media websites to ensure customer satisfaction.
The automation of many unskilled tasks can allow businesses to replace human production lines with entirely machines, reducing costs for manufacturers, distributors and many other different businesses, however initial capital investment required to purchase these automated machines are usually high. Also need to factor in ongoing costs such as maintenance and updating needed to ensure automation is efficient and keeps ahead of its competitors, so business may outsource to other businesses that have already set up and specialise in some of these areas.
Some technology needs specialised knowledge, skills or infrastructure to operate, which is not available in all countries. Production or manufacturing may take place in a country where technology is cheaper and specialised employees may be brought in from other countries to manage the machinery.
Technological factors that can affect businesses include:
Supply chain management systems
Internet connectivity and mobile technology
digital marketing
Sustainability technology
Energy-efficient technologies
5) LEGAL
Different countries operate using different legal systems, and when expanding globally the business must be aware of all the different laws affecting them in the country they are expanding into.
Common law system (Aus) - written laws or constitution does not cover everything, so judges set precedents based on customs and cultural values to guide future legal decisions - new legal standards are set when a court makes a decision, therefore legal standards are continuously changing and can be hard to keep up with.
Civil law system - only legislative written laws are binding, less freedom and more detailed - means that legislation is more precisely written and can’t be broken regardless of the surrounding circumstances, so clear standards are set and do not change regularly.
When operating in any countries it is best to seek legal advice and have a solicitor to assist and consult with on a regular basis.
Competition Regulations
Set rules for business behaviour so that all businesses can compete on their merits - rules and regulations that promote competition and prevent dominant businesses abusing their position.
Product Liability
Holding a manufacturer/retailer responsible for an injury sustained by a customer when using their product.
Each country has different laws regarding product safety standards, however there is a movement towards strict liability.
Traditional/Simple product liability - consumer has to prove that the business they are suing owes them a duty of care, that they breached that duty of care, and that damages were sustained. Businesses can put a warning and instructions on their products to minimise their duty of care and say that the consumer was negligent by not following instructions.
Strict product liability - all sellers of the product who are in the distribution chain are responsible for a product defect that causes injury. The business must prove they did nothing wrong.
Product liability standards are constantly changing, so may need legal assistance.
If a business is being sued in one country it is likely to be sued in each country the product is being sold in, leading to larger pay outs. Must ensure standards are high to prevent this.
Patent Registrations
Registration of IP which gives exclusive rights granted for an invention.
Can apply for IP separately in each different country, or file a single application through IP Australia. The World Intellectual Property Organisation (WIPO) maintains the International Register and publishes the WIPO Gazette of International IP.
By filing one international patent application under the Patent Cooperation Treaty, applicants can get protection for an invention a very large number of countries. The International Patent System facilitates the obtaining of protection for IP and manages the protection easier.
6) ETHICS in ENVIRONMENTAL RESPONSIBILITY
ROLE OF ETHICS - guide business decisions and practices to act as a global citizen.
Business with high ethical standards develop a positive public image and will attract more global customers and have the potential to charge premium prices.
Can implement ethical policies and practices such as fair labour standards, environmentally sustainable production, responsible sourcing and honest marketing. These are guided by the business’ Corporate Social Responsibility Policy.
ROLE OF ETHICS: ENVIRONMENT RESPONSIBILITY - to guide business decisions to act as a global citizen going beyond the legal requirements of environmental sustainability practices.
Businesses still relying on coal power and other non-renewable resources will be required to pay a premium for their energy use, reducing their profitability and contributing to a lower public image as social norms are becoming more aware of their environmental impact.
If using ecological practices can usually charge a premium as they can capture an ethical consumer market. This includes ensuring their raw materials are sourced ethically regardless of where it is sourced throughout the world.
If already acting beyond the legal ethical requirements, businesses are less effected by governments introducing new laws regarding the environment.
Environmental Sustainability Practices
Adopting practices that reduce the company’s impact on the environment while maintaining profitability and ensuring long term viability.
Features to reduce carbon footprint include:
Reducing environmental impact - minimising waste, conserving resources
Promoting resource efficiency
Using renewable energy
Prioritising responsible sourcing
Engaging stakeholders - providing regular reports in the company’s environmental performance
Environmental sustainability practices may cost a lot initially in capital expenditure, in the long term it will lead to:
Cost savings
Enhanced brand reputation
Access to new markets - customers and investors increasingly seeking businesses that prioritise sustainability.
Corporate Social Responsibility
The idea that businesses should operate according to principles and policies that have a positive impact on society and the environment.
The business’ CSR is outlined in a written policy document that sets standards to guide business decisions. It goes beyond legal obligations, and is about balancing financial success with positive societal and environmental outcomes.
The triple bottom line can help businesses pursue corporate social responsibility, and it refers to the idea that a company’s business model should revolve around people, planet and profit. By maximising all three, a company aims to make a positive impact on the world and remove barriers to growth.
Companies may engage in CSR reporting, documenting performance of non-financial metrics and providing transparency on social and environmental impact. This is usually voluntary but some countries require large organisations to disclose social and environmental performance.