Implications of Changes

PESTLE analysis describes a framework of macro-environmental factors used in the environmental scanning component of strategic management. It is a part of the external analysis when conducting a strategic analysis or doing market research, and gives an overview of the different macro-environmental factors that the company has to take into consideration. It is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. The growing importance of environmental or ecological factors in the first decade of the 21st century have given rise to green business and encouraged widespread use of an updated version of the PESTLE framework.

The basic PESTLE analysis includes six factors:

Political: factors are basically to what degree the government intervenes in the economy. Specifically, political factors include areas such as tax policy, labor law, environmental law, trade restrictions, tariffs, and political stability. Political factors may also include goods and services which the government wants to provide or be provided (merit goods) and those that the government does not want to be provided (demerit goods or merit bads). Furthermore, governments have great influence on the health, education, and infrastructure of a nation.

Economic: factors include economic growth, interest rates, exchange rates and the inflation rate. These factors have major impacts on how businesses operate and make decisions. For example, interest rates affect a firm’s cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy.

Social: factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a company’s products and how that company operates. For example, an aging population may imply a smaller and less-willing workforce (thus increasing the cost of labor). Furthermore, companies may change various management strategies to adapt to these social trends (such as recruiting older workers).

Technological: factors include technological aspects such as R&D activity, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation.

Legal: factors include discrimination law, consumer law, antitrust law, employment law, and health and safety law. These factors can affect how a company operates, its costs, and the demand for its products.

Environmental: factors include ecological and environmental aspects such as weather, climate, and climate change, which may especially affect industries such as tourism, farming, and insurance. Furthermore, growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer, both creating new markets and diminishing or destroying existing ones.

Other factors for the various offshoots include:

Demographic factors include gender, age, ethnicity, knowledge of languages, disabilities, mobility, home ownership, employment status, religious belief or practice, culture and tradition, living standards and income level.

Regulatory: factors include acts of parliament and associated regulations, international and national standards, local government by-laws, and mechanisms to monitor and ensure compliance with these.

It is not possible to discuss the details of the above changes owing to space limitations. However, we can analyze their implications from strategic management point of view. Post liberalization, most of the Indian companies have started feeling the heat of new competitive environment. Even two most prominent industrial groups of the country- Tata and Birla-have evoked similar views on these threats. However, at the same time, these changes have provided opportunities to Indian companies.

Therefore, let us see what opportunities and threats have been provided by these changes.

Opportunities: Economic liberalization has thrown a number of opportunities to Indian companies. In general, these opportunities are in the following forms:

• Entry into business has become easier than what it used to be in pre-liberalized era which was marked by industrial licensing and several types of clearances from various government agencies. On the situation prevailing earlier, T. Thomas, former Chairman of Hindustan Lever, has commented that “trying to set up a new industrial unit in India is like running an obstacle race with one difference. In setting industrial unit obstacles incre91se both in number and complexity without prior warning ‘We have estimated that it takes about seven years from the conceptual stage to the production stage for any significant investment to take place in India. Out of this at least fifty per cent of the time is spent to satisfy government regulations. This situation has changed completely. Today, companies can implement projects in much lesser time because of lack of government regulations. For example, Reliance Group has taken less than four years in implementing its petroleum refinery, biggest in Asia, and paying dividend.
• Liberalisation has eased the process of business restructuring either by way of divesting some businesses by an organization or acquiring other businesses. Business restructuring has become a common phenomenon in Indian business scene because of lesser entry and exit barriers. Non- core and weaker businesses have been passing to those organisations which have substantial strengths in these businesses. For example, much of the growth in Hindustan Lever has generated because of mergers and takeovers. Most of these ‘have taken place post-liberalisation.
• Liberalisation has opened the path to private-sector organizations for the participation in management of public- sector companies through acquisition of majority or controlling shareholding as the government has adopted the policy of disinvestments and divestment. This phenomenon provides lot of strategic advantages to acquiring companies. For example, Sterlite Industries which is in the business of cables has substantial cost advantages over its competitors by acquiring. Controlling interest in Bharat Aluminum Company (BALCO) as it supplies critical raw materials to cable industry.
• Liberalization has paved the way for acquiring businesses abroad, which adds to competitive advantages to the acquiring companies. Such takeovers have become common in information technology sector, which add value to the acquiring companies by way of addition of IT professionals and business portfolio. In non-IT sector, takeover of Tetley by Tata Tea has provided it a plate form to become global player in tea bags.
• Post-liberalization rising of funds has become much easier because of fewer restrictions on this process. With free pricing, companies can charge price of their shares based on intrinsic worth rather than the price to be flexed by the government agency (earlier, it was Controller of Capital Issues). Besides, Indian companies can raise funds overseas by way of Global Depository Receipts (GDRs), American Depository Receipts (ADRs) or long-term loans. Many Indian companies have raised funds through GDRs and ADRs. Similarly, many companies have raised funds through long-term loans at much cheaper cost. For example, Reliance Industries has raised funds through bonds with a maturity period of 99 years, a phenomenon unheard or even unconcealed, in Indian context.

Threats

Every action has a mixture of both positive and negative aspects. This is true with liberalization too. Though it is not possible to evaluate whether liberalization as a policy is good or bad because it has ideological contention and many persons have taken this exercise at the academic level, it is sufficient to say, here, that liberalization has thrown many challenges. Though these challenges may affect all Indian companies but those companies would be badly affected which do not come up with reality. Given below is the list of challenges that liberalization has posed in the form of threats to Indian companies:

• Liberalization has posed a kind of competition with which Indian companies have not confronted in the past. The competition has emerged in three forms. First, because of relicensing of industries, many new companies have entered the business fields which were considered to be safe. Second, many foreign companies have entered Indian business scene and they have tilted the competition in their favor. Third, because of lesser restrictions on import, the Indian market is flooded with lot of imported goods. All these three factors taken together have changed the earlier seller market into the buyer market ‘in which many companies find it extremely difficult to compete which has eroded their profitability and, in- many cases, their basic survival.
• Entry of many new players in business field has posed acute pressure on productive resources, both human and non- human. Since resources are scarce by nature, this scarcity has raised the cost of procuring these resources. Just to take an example of human resources; most of these place their PGP students in management on the very first day of campus recruitment programmes and most of these students are grabbed by subsidiaries of MNCs. The cost of acquiring these students is increasing on an average of 20-25 per cent. Similar is the case with other critical resources.
• Foreign Institutional Investors (FIls), sometimes, interfere with the management process of companies in which these FIls have substantial shareholdings through stock market operations. Many times, they insist on the adoption of foreign management practices which may not be applicable in Indian context in the same way.
• With the increased limit of FIls holding up to 49 per cent, there may be threat of takeover of companies because promoters will not have controlling stake in shareholding. Though such a case has not happened, the possible threat exists.