Factors that affect the economic environment of a company

Analyzing the factors that affect a company or its economic environment is what they call PESTLE Analysis in strategic business management.

The PESTLE or PESTEL analysis is an acronym in English for the terms Political, Economic, Social, Technological, Legal and Environmental (Environmental in English) which are the series of macro or external factors that affect the development of a business.

The analysis of factors that affect a company was initially conceived as PEST Analysis, its origins date back to 1967 and 1968 from the hands of Francis Aguilar and Arnold Brown respectively. Methodologies used in organizational management to evaluate the environment of a company, campaign, project or strategic plan.

It is also called macro-environment analysis or macro-environmental factor analysis of a company. As a business diagnostic tool, it is used alongside methodologies such as SWOT analysis and Porter’s five forces analysis.

The economic environment of a company can be affected not only by external factors or the macro-environment, but it can also be compromised by internal factors.

An internal factor affecting the business environment is the cost of direct and indirect labor, materials, processes, and procedures.

The internal factors may be improved through action plans or operational plans (POA).

On the other hand, external factors also affect the economic and operational performance of an organization, with the company having less control over them.

According to the PEST methodology , the main macro-environment factors or external factors that influence the management of a company are: political, economic, social and technological, let’s look at each of them.

The political factor

The political environment inevitably affects the economic performance of companies.

Lawmakers at the local, state and federal levels on the one hand can offer incentives or tax or tariff exemptions to companies. On the other hand, they can impose rules that restrict or limit their commercial transactions.

In the latter case, for example, if a political body establishes that a company must include a certain chemical in its production processes, the cost structure is immediately affected.

Changes in foreign trade policies may affect the cost structure of imported raw materials, importers or exporters of finished products.

Companies, to maintain their balance, must transfer these cost impacts to the prices of their products so that it is the customers who end up paying higher prices.

The customer must decide whether or not he wants to buy that product. If the product has a totally elastic demand, sales will fall and the company will be affected, an imminent decision in these cases is to reduce costs such as labor and thereby dismiss employees.

The economic factor

The economic Macro-environment around a company is a factor that can affect its microeconomics.

A decrease in interest rates can be an incentive to finance assets and increase installed capacity.

During a recession, consumers spend less on optional items, such as cars and appliances.

As a result, the business environment suffers. On the other hand, if the macroeconomic environment is prosperous, consumers are more likely to spend money, not only on necessities, but also on larger and even superfluous items.

The social factor

The social factors that affect the economic environment of a company are the cultural influences of the time, trends at the level of consumption, fashions and customs.

For example, a fashion designer who creates skinny or striped pants will not succeed in an environment where baggy, solid-colored designs are desired.

Consumer tendencies are easily transferable between certain cultures, for example technological advances from Asia or the United States, they are easily placed in Western Europe and Latin America.

The same is not true in social settings that tend to be more orthodox or conservative, such as the Middle East and Eastern Europe, where styles that appear to be fashionable are not easily supported.

The technological factor

Innovation and technology affect business environments.

As technology advances, a company is forced to keep up, otherwise it will lose competitiveness, market power and become obsolete.

In other words, companies that are not technologically up-to-date risk increased production costs and higher prices.

If the company’s cost to produce a product or service exceeds that of its competitors, it may soon go out of business.

When computers were invented, they were the size of a room. They were used by large companies in the 1970s to calculate payrolls and support certain production activities.

Back then, users were forced to use punch cards and handle difficult-to-understand programming codes even for the most skilled.

Today, computers that are much more powerful, user-friendly and intuitive and fit in the palm of one hand, so that a CEO has all the comforts to connect with his company wherever he is.

Not to mention the wonders that the internet and social networks have brought to business.