Strategic

Impact of Economic Factors in PESTEL Analysis

A typical economic factor that should be considered in strategic decision-making is the economic structure of a country. Countries typically progress from reliance on primary industries (e.g. agriculture, minerals, forestry) through manufacturing to tertiary services (e.g. financial and commercial sectors).

Lesser developed countries

Reliant on a small number of products (e.g. crops or minerals) as the main export earner. Infrastructure is poor.

Implications:

Wealth and foreign exchange rate depend on yield of product and world price of product.

Political actions aimed at securing control over incomes from product either domestically (e.g. insurgent liberation forces) or externally (e.g. develop cartels, invasion etc).

Newly industrializing countries

Rapid industrialization and manufacturing base grows

Implications:

Infrastructure struggles to keep pace (e.g. power shortages, lack of housing, lack of roads, ports etc). Large shifts in population towards areas of industry and away from villages.

Advanced industrial country There is a wide industrial base and a well developed service sector. These affect overall wealth, financial stability and patterns of demand.

The long-term trend of industrialized economies is one of positive growth. The different phases of the cycle have the following characteristics:

 Recovery phase


Increased business confidence and investment causes growth to increase. Unemployment declines and consumer confidence/spending rises.


 Boom phase


Growth exceeds the long-term trend. Demand is too great, leading to rising prices of goods, balance of trade deficits (as exports fall, imports rise), labor shortages and wage/factory price increases.


 Recession phase


Demand falls, leading to increased unemployment and falling investment and business/consumer confidence. Recession is often first seen in building and capital goods sectors.

 Depression phase

Weak consumer and business spending/confidence. Unemployment in excess of normal levels with falling (or even negative) inflation and wage cuts. In setting strategy an organization needs to consider where the economy is currently and where it is
heading.

Long-term exchange rates’ behaviour affect the relative competitiveness of imported and domestically produced products and exports. A falling domestic exchange rate makes firm’s exports more competitive and imported inputs more expensive. This may be determined by the value of key exports such as oil, minerals, crops, manufactured goods etc.

Interest rates (long-term and short-term) affect cost of finance and also levels of demand in the economy.

The economic infrastructure, for example access to payments systems, consumer and trade credit, access to venture and other capital, the quality of the stock exchanges.

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