macro factors affecting business planning

2023, a testing year: Will the macro-scenario range widen or narrow?

Volatility from macroeconomic and geopolitical factors has dominated the business environment lately and tested management teams in ways that may once have seemed unimaginable. However, at the outset of 2023, energy prices are off their peaks, inflation is no longer accelerating, and economic growth appears to be holding up. These positive signs make it tempting to expect a narrower range of potential macro outcomes and, as in any new year, seek a fresh start. We see 2023 as a test of whether such a fresh start is now possible.

About the authors

This article is a collaborative effort by Michael Birshan , Arvind Govindarajan , Ezra Greenberg , Homayoun Hatami , Sebastian Kohls, Ida Kristensen , María del Mar Martínez Márquez , Asutosh Padhi , Sven Smit , and Andy West , representing views from McKinsey’s Strategy & Corporate Finance and Risk & Resilience Practices.

With geopolitical tensions high, key supply–demand imbalances unresolved, and interest rates on an upward march, business leaders may be contemplating whether comparisons to the 1970s are appropriate or if the path forward will resemble more familiar business cycles. The big-picture question for leaders is: Will their companies ever return to a prepandemic-like world of 2 × 2 uncertainties, or has there been a permanent reset to a 3 × 3 world, where uncertainties are multiplied (Exhibit 1)?

To help leaders answer this question, McKinsey has developed a wide range of macroeconomic scenarios for 2023  and beyond. The scenarios consider favorable and not-so-favorable long-term outcomes and delineate the shorter-term choices that will largely determine which path the global economy could ultimately take. Leaders must decide which actions they should take regardless of how the environment plays out and what calibrated risks they should pursue in a bid to move their companies boldly forward. Some might conclude that their business model and strategic moves would remain largely the same across the macro outcomes they consider plausible, while others may see different opportunities and risks.

To put the scenarios into context, we begin with our views on the top issues of 2022: inflation and labor market dislocations. We believe it is important to lay out the facts on these topics, which have thus far avoided consensus, so leaders can create lasting solutions. 1 This analysis complements our published perspectives on global energy markets. See for example the role that US natural gas could play in solving the global energy crisis: Michael Dalena, Dumitru Dediu, Luciano Di Fiori, and Brandon Stackhouse, “ How North American natural gas could alleviate the global energy crisis ,” McKinsey, November 16, 2022; how Germany might develop a safe, sustainable power supply by 2025: “ Electricity price reduction to competitive level feasible by 2025 ,” McKinsey, December 5, 2022; and our longer-term perspective on the energy transition: Global Energy Perspective 2022 , McKinsey, April 26, 2022. We then share McKinsey’s new macroeconomic scenarios, focusing on the United States and the eurozone. 2 We will consider the implications for European countries outside the eurozone, Asia, Africa, and the Americas in early 2023.

We find that the best leaders and companies navigating these volatile times  are both prudent about managing the downside and aggressive in pursuing the upside. We hope such leaders can use these scenarios to make practical decisions to reach their goals.

Understanding 2022’s economic headlines: Inflation and labor markets

Looking back one year, the world was facing numerous tests. In January 2022, the COVID-19 Omicron variant was spreading fast. Logistics teams continued to struggle with fractured supply chains amid record demand. 3 US consumer spending on goods was up 15 percent above the 2010–19 trend in March 2021. McKinsey analysis of US Bureau of Economic Analysis (BEA) data and the BEA’s National Income and Product Accounts. Commodity prices were up 30 percent, global container shipping rates nearly tenfold, and inland freight haul rates soared. 4 McKinsey analysis of data from the Baltic Exchange and Cass Information Systems, Goldman Sachs Commodity Index, and Haver Analytics. Labor market imbalances, most acute in the United States and the United Kingdom, boosted wages up to two times the pre-COVID-19 pace. Inflation was reaching what appeared at the time to be generational highs. 5 McKinsey analysis of US Bureau of Labor Statistics and UK Office of National Statistics data.

Even so, there was hope that the worst pandemic repercussions were over. Then, in February, hope turned again to anxiety when Russia invaded Ukraine. Many businesses joined the chorus of condemnation , 6 “Ukraine: UN General Assembly demands Russia reverse course on ‘attempted illegal annexation’” United Nations, October 12, 2022. and the ensuing war ignited the worst humanitarian crisis  in Europe since World War II, a global food and energy crisis, 7 “Joint statement by the heads of the Food and Agriculture Organization, International Monetary Fund, World Bank Group, World Food Programme, and World Trade Organization on the global food security crisis,” World Bank, July 15, 2022; World Energy Outlook 2022 , IEA, October 2022. and an acceleration of the negative disruptions already under way .

How did the world end up with the highest inflation in a generation?

From March 2020 to November 2022, consumer prices rose nearly 16 percent in the United States, 15 percent in the eurozone and the United Kingdom, 16 percent in India, and 21 percent in Brazil. 8 McKinsey analysis of data from the Brazil Institute of Geography and Statistics, Eurostat, Haver Analytics, India Ministry of Statistics and Programme Implementation, UK Office of National Statistics, and US Bureau of Labor Statistics. These increases are two to three times greater than what would have been expected based on pre-COVID-19 outcomes. Even in Japan, which has been fighting deflationary pressures for decades, prices in November 2022 were up 3.8 percent during the previous 12 months, the highest monthly inflation rate recorded in more than 40 years. 9 Inflation in Japan reached 4 percent in January 1991, according to McKinsey analysis of Bank of Japan data.

From March 2020 to November 2022, consumer prices rose nearly 16 percent in the United States and 15 percent in the eurozone and the United Kingdom.

What about ‘money printing’?

‘Too much money chasing too few goods’ is an often-used refrain to explain the origins of inflation. Milton Friedman, this view’s most prominent historical advocate, famously wrote in 1963 that “inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” 1 Milton Friedman, Inflation: Causes and consequences , Asia Publishing House, 1963. Formulaically, the quantity theory of money is expressed as MV = PY, where M is the money supply, V is velocity, P is overall prices in the economy, and Y is output. The implication is that central banks can directly control the rate of inflation by regulating the growth of the money supply.

The US money supply 2 As measured by M2, the sum of currency in circulation as well as checking accounts, savings accounts, and money market mutual funds. increased nearly 40 percent from February 2020 to December 2022, inspiring quantity-theory adherents to give Federal Reserve chairman Jerome Powell a proverbial yellow card for causing the current bout of inflation. However, whether Powell actually deserves blame depends on the “velocity of money.” Just as we look at a company’s inventory-to-sales ratio, the velocity of money tells us how many times the money supply needs to turn over relative to total spending in the economy (price times volume). If velocity is stable, then the growth of the money supply has a direct link to prices and inflation.

When Paul Volcker took the reins at the Fed in August 1979 with a mandate to quash inflation, he tested the quantity theory by having the Fed directly control the growth rate of the money supply. It didn’t take long for the Fed to realize that this control didn’t have the desired impact. It turned out that, in practice, money’s velocity isn’t stable and the money supply can’t be used as a reliable instrument for monetary policy. 3 The velocity of the money stock as reported by the US Federal Reserve board has indeed been highly volatile: after declining about 10 percent between January 1981 and January 1983, it rose by almost 20 percent to its highest level in the 1990s and has come down by almost 50 percent since then. Volcker quickly pivoted to focusing on raising interest rates, which reached nearly 20 percent before the fight against inflation was over.

Facing similar circumstances, Gerald Bouey, governor of the Bank of Canada, quipped in 1982, “we didn’t abandon monetary aggregates, they abandoned us.” 4 Frederic S. Mishkin, International experiences with different monetary policy regimes , National Bureau of Economic Research working paper, February 1999. A decade later, Fed chairman Alan Greenspan said, in his July 1993 testimony before the US Congress, that “the historical relationships between money and income, and between money and the price level, have largely broken down, depriving the aggregates of much of their usefulness as guides to policy.” 5 Semiannual Monetary Policy Report to Congress: Testimony before the Subcommittee on Economic Growth and Credit Formation of the Committee on Banking, Finance and Urban Affairs, US House of Representatives, July 20, 1993.

The Fed’s postpandemic policy did contribute to inflation, but in a more indirect way. During the 2008 financial crisis, central banks learned that once they have lowered to zero the short-term interest rate that they control, asset purchase programs (also known as “quantitative easing” or QE) that buy up long-duration securities can push longer-term interest rates lower and generally loosen financial conditions. The impact of this extra stimulus can be illustrated with a “proxy rate” 6 Calculated by the Federal Reserve Bank of San Francisco. that translates QE into equivalent movements of short-term rates (Exhibit A).

The QE programs pursued by the Fed and European Central Bank during and after the financial crisis didn’t spark inflation, which remained below historical averages. Similarly, the programs the Bank of Japan pursued, starting in the late 1990s, couldn’t reverse the deflation that Japan experienced for most of the 2000s. During these episodes, there was a great deal of excess capacity in the United States, eurozone, and Japanese economies, and the extra stimulus provided by QE didn’t measurably impact inflation.

The Fed again turned to QE in March 2020 when the pandemic struck, as it successfully raced to ensure global financial markets didn’t freeze in the panic. Critics say the Fed stuck with the QE program for too long and that this additional stimulus contributed to cyclical demand and wage pressures, which added to inflation. Our estimate is that cyclical pressures accounted for about one-third of the total increase in inflation through September 2022, with this share increasing as commodity and supply shocks faded. We don’t know how much of these cyclical pressures were caused by QE, stimulus programs, or accumulated savings. The proxy rate shows that the reversal of the QE program has amplified the tightening of financial conditions as the Fed has aggressively raised rates.

While historical experience demonstrates that QE doesn’t directly lead to inflation in the prices of goods and services, it can indirectly spur demand by loosening financial conditions. It’s also widely held that episodes of QE have buoyed asset prices as market players search for yield by buying higher-risk assets. 7 For a review of the effects of asset purchase programs, see Ben Bernanke’s presidential address to the American Economic Association: “The new tools of monetary policy,” American Economic Review , Volume 110, Issue 4, January 4, 2020. QE has become a standard tool for central banks around the world. To understand the path of policy in 2023, business leaders should recognize these tools for what they are.

Many competing views have been offered about the current inflation’s origins and the reasons for its persistence, but we see the facts as much simpler than the debate suggests (see sidebar “What about ‘money printing’?”). Recent work by economists at the Brookings Institution and the Federal Reserve Bank of San Francisco provide a useful analytical framework to explain the origins of US consumer price inflation, which we adapt here. 10 Laurence Ball, Daniel Leigh, and Prachi Mishra, “Understanding US inflation during the COVID era,” Brookings Institution, September 7, 2022; Regis Barnichon, Luiz E. Oliveira, and Adam H. Shapiro, “Is the American Rescue Plan taking us back to the ’60s?,” FRSFB Economic Letter, Federal Reserve Bank of San Francisco, October 18, 2021. In addition to approximately 2 percent normal annual inflation, the following three factors should be considered:

• The direct impact of commodity shocks and supply chain dislocations: disruptions in oil, gas, and basic food markets, and supply–demand mismatches (for example, when semiconductor shortages caused used car prices to spike).
• The pass-through of businesses’ higher material costs: commodity shocks and supply chain dislocations slowed production and raised business material costs.
• The pass-through of higher wage costs: the shock to labor markets led to a doubling of wage growth as businesses competed for scarce workers to meet surging demand.

Inflation over the past three years demonstrates the above factors in action. In 2020, the economic collapse, unprecedented stimulus programs, and surprise V-shaped rebound left US inflation at about 2 percent. Then, in 2021, inflation initially picked up steam as pent-up demand from pandemic lockdowns bumped up against commodity market and supply chain dislocations, and businesses began raising prices. Energy prices were still elevated when concerns about a Russian invasion of Ukraine drove them even higher at the end of 2021, ultimately bringing US inflation close to 9 percent. In 2022, these factors were compounded by and eventually overtaken by demand-driven wage pressures, which became the dominant driver of inflation (Exhibit 2)—and inflation expectations rose.

If US inflation had increased each year along with 2.2 percent prepandemic annual expectations, 11 McKinsey analysis of data from Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters. then by the end of September 2022, the level of prices would have been 6.2 percent higher. Only it wasn’t. The total increase in the price level since January 2020 was 14.9 percent. Two-thirds of those extra 8.7 percentage points can be credited, either directly or indirectly, to commodity and supply chain shocks (Exhibit 3). The remaining third was largely the result of an increase and shift in the composition of demand that outstripped companies’ capacity to produce and the wage and price increases that followed. This demand was supported by stimulus programs, accumulated savings, and accommodative monetary policy.

The eurozone story starts in the same way, with inflation rising because of pandemic-era commodity and supply chain shocks. Unlike in the United States, policy makers and businesses leaders in the eurozone were able to keep workers attached to their jobs through existing furlough programs and job subsidy channels that reduced labor market disruptions and wage inflation. 12 Thomas Klitgaard, “How have the euro area and U.S. labor market recoveries differed?,” Liberty Street Economics, Federal Reserve Bank of New York, March 30, 2022. However, the impact of the Ukraine invasion on eurozone inflation was far greater than in the United States, dramatically raising energy prices across the continent. Consequently, eurozone inflation has been almost exclusively caused by the continued direct impacts of energy supply shocks combined with the aftermath of supply chain disruptions, and the pass-through of these costs by businesses.

What happened to the US labor market?

In March and April 2020, pandemic-related shutdowns caused US private-sector companies to shutter their doors en masse, eliminating more than 21 million jobs. 13 McKinsey analysis of US Bureau of Labor Statistics data. Adjusted for the size of the economy, this level of job loss was only surpassed during the Great Depression. 14 John W. Kendrick, Productivity Trends in the United States , Princeton, NJ: Princeton University Press, 1961; US Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970, Bicentennial Edition, Washington, DC, 1975; McKinsey analysis.

US workers and businesses are still dealing with the consequences nearly three years later. One of the most visible outcomes—from the point of view of employers—has been the difficulty of hiring. In the first ten months of 2022, the unemployment rate averaged 3.7 percent and total private-sector job openings averaged 10.1 million per month. Compare those figures with several points in 2019 and early 2020, when unemployment rates were similar but total private-sector job openings averaged 6.4 million per month.

It’s the jobs riddle of the postpandemic era: At 3.7 million additional job openings per month, why are vacancies 60 percent higher than just before the pandemic?

Many analysts focus on the fact that fewer people joined the labor force than expected, 15 To be counted as part of the labor force by the US Bureau of Labor Statistics, a person has to either be working or have been actively looking for work in the four weeks prior to the survey reference week in each month. If a person is actively looking for work but doesn’t have a job, they are officially counted as unemployed. The change in population refers to the civilian, noninstitutional population. a deficit we estimate to be about 1.6 million. Lower participation has indeed contributed to labor market tightness but doesn’t explain why there are 3.7 million additional monthly job openings. A deeper analysis of age brackets, job types, and employee behavior reveals three additional causes (Exhibit 4).

First, the US population is aging quickly, so part of the decline in labor participation is due to entirely normal retirement behavior. The 16- to 64-year-old group increased by 1.5 million people between January and November; however, in the same period, 3.5 million baby boomers reached age 65. In any typical year, 80 percent of those turning 65 retire and about 26 percent of those aged 16 to 64 don’t join the labor force. 16 Assumes that labor force participation remains the same as February 2020; McKinsey analysis of US Bureau of Labor Statistics data. Normal behavior patterns would thus explain why, within these age cohorts, 2.8 million people retired and 400,000 others did not work.

Second, there is evidence of a lasting jobs–skills mismatch 17 Dilip Bhattacharjee, Felipe Bustamante, Andrew Curley, and Fernando Perez, “ Navigating the labor mismatch in US logistics and supply chains ,” McKinsey, December 10, 2021. in the wake of the “layoff” of 2020. Workers did not simply re-up with their same jobs when the pandemic subsided. Instead, shifts in demand across industries and geographies occurred and workers moved, lost or gained skills, or took new and different jobs. We estimate that in 2022, it took an average of 40 percent longer for an employer to fill a vacancy than it did in 2019. 18 McKinsey analysis of US Bureau of Labor Statistics data. By November 2022, the differential recovery of employment across industries had changed the mix of jobs, as workers found employment in growing sectors (Exhibit 5). The persistence of excess vacancies demonstrates that the mismatch of skills and geographies continues.

The third reason for scarce labor is due to more workers reevaluating what they want  from a job—and from life. Employees are leaving traditional employment for temporary, gig, or part-time roles, or are starting their own businesses. Some are quitting because of life demands—they need to care for children or elders. Health problems for many persist. Some workers are ready for a break and feel confident they will find another job when they want one.

There is evidence of a lasting jobs–skills mismatch in the wake of the “layoff” of 2020. Workers did not simply re-up with their same jobs when the pandemic subsided.

None of these three factors will be easily or quickly resolved. But they are knowable and business leaders can change their approach to the talent equation .

Scenarios for what could happen next

When the pandemic struck, the primary sources of uncertainty for individuals, businesses, and governments were the impact of the virus’s spread and the effectiveness of responses . Other concerns just had to wait. When Russia invaded Ukraine, uncertainty regarding the duration and scale of the disruption, sanctions, and policy responses  was the focus.

The ‘cusp’ and McKinsey’s economic scenario framework

A McKinsey Global Institute (MGI) article 1 On the cusp of a new era? , McKinsey Global Institute, October 20, 2022. published in October discusses five dimensions that capture the history of epochal shifts across three different eras: the postwar boom (1944–71), the era of contention (1971–89), and the era of markets (1989–2019). The article asks whether the evolution of these dimensions has put the global economy on the cusp of a new era . Questions include the following:

• World order: Is there is a tendency toward multipolarity, which may lead to regionally and ideologically aligned groups? What does multipolarity imply for trade systems and global economic growth?
• Technology platforms: The key drivers of the most recent era’s digitization and connectivity may be approaching saturation, which could reduce productivity. Will already potent transversal technologies, particularly artificial intelligence and bioengineering, contribute to another surge of progress?
• Demographics: How will countries, institutions, and individuals adapt to demographic changes? Will people age “gracefully” and be able to maintain economic growth, even as populations’ proportions of retirees rise?
• Resource and energy systems: Underinvestment combined with geopolitical disruption have recently created real vulnerability. How will the world navigate an affordable, resilient, and feasible path to climate stability and energy security?
• Capitalization: Economic growth rates appear to be normalizing while asset valuations have risen considerably. What will the next productivity engine be to drive growth? Will the rise of the global balance sheet  be reversed?

To design McKinsey’s macroeconomic scenarios, we focused on two dimensions to structure a set of scenarios that capture the macro factors most relevant to business leaders. The first dimension captures largely predetermined states, broadly framing the different operating environments businesses are likely to face. The second dimension accounts for the most important choices that individuals, businesses, and governments face. How these exogenous factors and choices come together and interact will determine the outcomes (through 2030) depicted in the scenarios.

Applying the MGI report’s five dimensions to this framework, demographics have both an exogenous component and are part of the outcome: everyone who will impact the economy through 2030 has already been born, but people will also choose how to build their lives and participate in the workforce depending on the opportunities presented. For any single country, world order can be considered largely beyond their control. Even though each country’s decisions affect the evolution of the world order , it’s the interaction of all decisions that creates the global operating environment.

The evolution of technology platforms and resource and energy systems depend upon the choices that individuals, businesses, not-for-profits such as nongovernmental organizations (NGOs) and universities, and governments make to invest in the future. Capitalization is the outcome of a complex interaction of all these forces.

The first dimension of our scenario framework, the state of long-term structural balance and international cooperation , captures demographics and different states of the world order, which include broad international regulatory frameworks. The second dimension, the short-term level of fiscal support and state of monetary policy , will have a strong influence on the choices made by individuals, businesses, and not-for-profit organizations (including NGOs and universities) to invest in technology platforms and resource and energy systems. Both dimensions will impact capitalization.

Today, a complex and varied set of forces is potentially introducing a new era , with multiple sources of risk, opportunity, and potential transformation. Leaders must weigh how the world order, technology, demographics, energy and resources, and capital will evolve and affect their businesses (see sidebar “The ‘cusp’ and McKinsey’s economic scenario framework”). With these forces in mind, there are two primary dimensions that define McKinsey’s new scenario framework, as Exhibit 1 shows.

• The first dimension is the state of long-term structural balance and international cooperation . This dimension captures how well the supply of materials and manufactured goods, and the people, data, and capital they require, can satisfy global demand at affordable prices. It is strongly influenced by local regulations that determine supply responses as well as by the institutions and frameworks that govern diplomatic relations and international exchange. A key example of an issue within this dimension is how effectively the world can establish the regulations and relationships required to deliver an affordable energy transition.
• The second dimension is the short-term level of fiscal support and state of monetary policy . This dimension captures how well government spending and market-based incentives are targeted. It also captures how central banks affect the availability of credit and overall financial conditions. It is strongly influenced by national political dynamics. A key example of an issue within this dimension is how effectively current moves by central banks can rein in inflationary pressures.

The first dimension is the state of long-term structural balance and international cooperation. The second dimension is the short-term level of fiscal support and state of monetary policy.

How these two dimensions vary and interact shape choices made by individuals, businesses, and not-for-profits (including nongovernmental organizations [NGOs] and universities) to spend, invest, and pursue innovative solutions. The interplay between dimensions will largely determine the range of macroeconomic outcomes in McKinsey’s new global scenarios, including how fast productivity, wages, and profits might grow; how labor force participation could rise or fall; how much consumers may spend and businesses invest; what heights inflation may reach; and how affordable the energy transition could be.

The following two scenarios, labeled A1 and C2, depict the range of outcomes that CEOs and their executive teams will most likely need to consider entering 2023. A third scenario, C3, portrays a sobering downside reminiscent of the economic experience of the 1970s (see sidebar “The C3 scenario: Deep recession, long-term growth limitations, and significant regime change in inflation management”). A recent tally of economic forecasts shows a wide range of GDP growth estimates for 2023, from a low of –1.4 percent to a high of 1.2 percent in the United States, and –0.8 to 0.8 percent in the eurozone. 19 McKinsey analysis of Bloomberg data as of December 20, 2022; 63 institutions for the United States and 30 institutions for the eurozone reported forecasts for 2023. The McKinsey scenarios illustrate this range and include additional downside risks that should be considered.

The A1 scenario: ‘Soft landing,’ accelerating into prosperity with target inflation

In the A1 scenario, individuals, businesses, and governments renew their commitments to accelerating global cooperation. Societies commit to absorbing the costs of ensuring resilience, reliable access to critical sectors, the vitality of local economies and communities, and promoting regulations that expand affordable supply. The conflict in Ukraine and other international tensions escalate no further and perhaps even begin to wind down.

Economic policy makers in the eurozone and the United States create incentives to boost public- and private-sector investments that help resolve near-term energy supply–demand imbalances. Coordinated actions by central banks steer 2023 without a recession. Inflation begins returning to central bankers’ 2 percent targets (Exhibit 6) and real GDP growth accelerates to approximately 3 percent as growth returns.

The commitment to global cooperation and effective economic-policy choices together create long-term incentives for investment and innovation and deliver strong productivity growth and supply expansion. This helps counter the demographic headwinds of aging societies and enables an affordable energy transition. Post-2025, a sense of shared prosperity emerges as the US economy delivers more than 3 percent annual real GDP growth, the eurozone maintains growth well above 2 percent, and the income from this growth benefits stakeholders across society (Exhibits 7 and 8).

The C2 scenario: Deep recession followed by anemic growth with entrenched higher inflation

The c3 scenario: deep recession, long-term growth limitations, and significant regime change in inflation management.

In the C3 scenario, commitments to global cooperation are in jeopardy. Divergent interests stymie the development of institutions and diplomatic frameworks that enable the global flow of goods, ideas, and capital. This severely limits access to critical sectors and hinders the expansion of global supply. The conflict in Ukraine and other international tensions continue and may escalate further, with negative implications for global markets.

In the face of continued supply shocks, policy makers in the eurozone and the United States find themselves unable to act effectively. As political tensions and conflicts within countries increase, fiscal policy is ineffective at promoting the investment needed to resolve near-term energy supply–demand imbalances. Central banks raise interest rates further in an attempt to bring inflation under control. As political pressure in the face of economic challenges mounts, central bank independence is compromised, and central banks abandon their low-inflation targets. This “regime change” allows inflation to settle at a higher level of around 7 percent per year (Exhibit B).

The fracturing global order and lack of investment lead to continued supply shortcomings. The transition to permanently higher inflation proves costly, as many existing stabilization policies (such as tax structures and social transfers) are not designed to cope. As inflation outstrips wage growth, real wages and household incomes decline, deepening the downturn. This not only leads to a severe recession, but limits growth post-2025. The US economy delivers no more than 1 percent annual real GDP growth and the eurozone’s GDP stagnates.

In the C2 scenario, individuals, businesses, and governments determine that the costs of global cooperation outweigh the benefits. Interregional flows stagnate amid disagreement over new rules to address the effect of outsourcing on local economies, the vulnerabilities of concentrated dependence on raw materials, and the system’s lack of resilience. The conflict in Ukraine continues to reinforce these vulnerabilities.

Amid this more difficult international environment, central banks in the eurozone and the United States move more aggressively against inflation, tipping these economies into recession in 2023. Despite the purposeful slowdown, inflation comes down only gradually, forcing central banks to abandon their 2 percent targets to avoid a prolonged downturn. Inflation persists at 3.5 percent or higher while growth in the short term recovers to about 2 percent in the United States and the eurozone (Exhibit 9).

The combination of stagnating global economic cooperation and more restrictive economic-policy choices create poor long-term incentives and slow the rates of investment and innovation. This weakens productivity growth and makes it harder to produce the technology required for an affordable energy transition. In this scenario, investment in energy technology and renewables is insufficient to scale new technologies, creating more reliance on fossil fuels, so global oil prices reach $130 a barrel (Exhibit 10). Slow growth after 2025 makes it harder to deliver on the promise of inclusivity. The US economy experiences only about 1.7 percent annual real GDP growth, while growth in the eurozone is stuck below 1 percent.

Scenario-informed perspectives help build strategic insight, commitment, execution, and resilience

Embracing uncertainty, embedding resilience, and enabling growth.

Uncertainty poses risks. Understanding and managing those risks unlocks opportunities to thrive—to explore new markets, capture share from less agile competitors, make strategic acquisitions, and build trust amongst stakeholders.

Thriving in uncertainty doesn’t happen by accident; it takes resilience. Resilient organizations can prepare for storms in the following three ways:

• Respond: Organizations should manage critical vulnerabilities and disruptions by addressing immediate risks and resilience gaps (such as financial, operational, organizational, technological, reputational, and related to the business model).
• Foresee: Organizations should build the capability to anticipate risks and identify their implications and opportunities. The ability to “look around the corner” is central to building strength (including capital buffers and organizational flexibility) prior to a disruption and to using that strength (by executing M&A and capital expenditures, for example) before a disruption ends to outcompete less resilient firms.
• Adapt: Based on foreseen opportunities and risks, organizations should embed flexibility within long-term strategies designed for sustainable growth. To be ready for whatever may arise, they will need to institutionalize resilience and crisis preparedness.

Management teams can thrive rather than merely survive in this volatile environment by building both resilience and boldness in their organizations (see sidebar “Embracing uncertainty, embedding resilience, and enabling growth”). Leaders who are both prudent and bold hone their organizational performance edges in three ways: in being sharper on insights, deepening their commitment, and accelerating their execution.

Business leaders can use scenarios to sharpen insights by analyzing longer-term success factors before zeroing in on the near term. McKinsey’s new scenarios show a wide range of potential GDP growth rates for 2025–30, and leaders need to understand whether alternative growth outcomes require a fundamental change in where and how they choose to compete. Consider two real-world examples, the first of which highlights a company for which strategy hinges on macroeconomic outcomes, and the second which demonstrates the opposite.

• A container shipping terminal operator is emerging from the pandemic surge in container volumes, which produced never-before-seen operational challenges along with record profits. This record volume won’t continue, but there is a fundamental question about whether the terminal operator will see a permanent increase in volume momentum relative to the slowdown experienced since the financial crisis. How volumes are expected to play out will be critical to determining strategy for 2023 and beyond.
• A polyethylene manufacturer faces the prospects of an accelerating energy transition, carbon taxes becoming a reality, and increasing consumer demand for green products. How strong that demand will be is certainly a question, but the real strategic challenge is that the fundamental technologies to compete in this new world are still on the R&D bench. The critical question is whether the executive team and their stakeholders have real conviction that green plastics are the future.

Individual industry growth matters and will be influenced by overall GDP, but the moves a company chooses to make and how it responds to trends make the biggest difference to performance. 20 Chris Bradley, Martin Hirt, and Sven Smit, Strategy Beyond the Hockey Stick: People, Probabilities, and Big Moves to Beat the Odds , Hoboken, NJ: John Wiley & Sons, 2018. These scenarios can help provide the foresight that can improve the odds of success. Working with these scenarios can also help executive teams build shared conviction about their operating and competitive environment and, consequently, act more decisively when it’s time to commit, be bold, and accelerate execution; or hold back, remain agile, and preserve optionality.

We believe that the effort to build commitment and resilience around scenarios and scale execution should be planned in a separate effort that reports directly to the CEO and by design avoids disrupting current operations. This plan-ahead team  must also evaluate what new infrastructure and people may be needed to execute against multiple scenarios in existing business processes recognizing that key capabilities (for example, financial planning and analysis) may require additional resourcing. With the right prioritization, leadership commitment, and shifts in organizational incentives in place, the new plan-ahead initiatives can be executed with confidence and speed.

Many business leaders see 2023 as a continuation of the most challenging environment  management teams have ever faced—and for good reason. The scenarios we have shared can help give you the insight into the range of operating environments you could face, the opportunities and risks of the commitments you make, and where you need the discipline and strength to accelerate execution and build resilience. They can help you set your top priorities  and prosper in a 3 × 3 world where uncertainties are multiplied.

Michael Birshan is a senior partner in McKinsey’s London office; Arvind Govindarajan is a partner in the Boston office, where Andy West is a senior partner; Ezra Greenberg is a partner in the Stamford, Connecticut, office; Homayoun Hatami is managing partner of global client capabilities and a senior partner in the Paris office; Sebastian Kohls is an associate partner in the New York office, where Ida Kristensen is a senior partner;  María del Mar Martínez Márquez is a senior partner in the Madrid office; Asutosh Padhi is McKinsey’s managing partner for North America and a senior partner in the Chicago office; and Sven Smit is chair of insights and ecosystems, chair of McKinsey Global Institute, and a senior partner in the Amsterdam office.

The authors wish to thank Tera Allas, Joe Basar, John Kelleher, Krzysztof Kwiatkowski, Isabela Nassif, Derek Schatz, and Zachary Silverman, and Neil Walker of Oxford Economics, for their contributions to this article.

This article was edited by Katy McLaughlin, a senior editor in the Southern California office.

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In the contemporary world, organizations lay great emphasis on the business environment. In fact, the business environment is a key determinant of strategic planning, change management, and goal setting that companies undertake to stay ahead in an enormously competitive business ecosystem. Having said that, the environmental analysis holds great significance in terms of business planning. The business environment and marketing environment are both essential for businesses to thrive and advance towards greater scalability.

Table of Contents

What is macro environment, macro environment in business.

• Macro environment factors

Macro environment in marketing

Further, it is important for you to know that both the business environment and marketing environment are broadly categorized into two classifications. To explain, micro and macro environment are the two major bifurcations of business environment and marketing environment.

In this blog, we shed light on what the macro environment is with respect to business planning and marketing. The blog elaborates on the macro environment definition, macro environment factors, and its applicability for businesses. So, let us get started without further ado.

A macro environment can be understood as the mix of external factors that affect decision-making, strategic planning, and operational strategies at organizational levels. To discuss further, the macro environment with respect to a country or specific geographical area including political, economic, social, technological, legal, and environmental factors that can have a direct or indirect influence on industries. In simpler terms, the macro environment takes into account the broader picture with respect to the state of the external environment.

Here, it is imperative to note that a macro environment is always external to the organization and looks at the set of overall external factors that affect the entire industry. For instance, when the top management at Apple will be conducting a macro environment analysis, it will look into external factors with respect to a country or location that affects the entire consumer electronics industry.

To further explain, when organizations undertake strategic planning in terms of expansion to new markets or other business objectives , the external environment has a massive role to play. Let’s say a company has to expand into a new market in one of the emerging markets. For the company to be able to formulate an effective expansion strategy, the overall political, economic, and social environments and their influence on that industry will be a major consideration. Similarly, the legal framework in the country and the environmental norms that affect the industry in the country will also be a major consideration.

While the micro environment in business delves into factors like competitors, the influence of customers or suppliers, trade unions, market intermediaries, and so on, the macro environment looks at the overall environment prevailing in the industry with respect to a specific market or country. This is where the major difference between micro and macro environment lies. Also, when it comes to the macro environment, companies or governments cannot really completely control the macro environment.

Further, in the context of macro environment analysis, businesses apply various strategic planning models to assess macro environment factors. For instance, PESTLE analysis is a widely applied strategic planning model that organizations implement to examine the business environment external to the company. What are the macro environment factors that we are talking about? How do these factors influence business decisions and strategic planning at organizational levels? Let’s find out in the subsequent section.

Macro environment factors you need to know

The macro environment factors in business influencing strategic planning and change management at the organizational level are broadly categorized into the following segments.

1. Demographic factors

An analysis of demographics takes into account the divisions of populations in terms of age, gender, race, income, profession, and other factors with respect to population. An analysis of demographic factors has a vital role to play in strategic planning.

When it comes to product diversification or entering a new market, the population demographics with respect to that market will be significant in decision making. To explain, when it comes to segmentation of the target audience for a product or service, the demographic division will be an essential dimension of segmentation.

In the ultimate sense, for business success, organizations need to identify the demographic breakdown of their niche target audience and deliver on their expectations for worthwhile customer experiences.

Let us try to understand the significance of demographic factors through an example. Let’s say a premium smartphone brand plans to expand to a developing nation like. Now being a premium smartphone brand, the company will only want to cater to the premium segment customers. This is where the demographic context of income levels will have a huge role to play. The target audience of this brand will be the upper financial segments that can spend on premium phones. If there are not many people in the country that have above-average income levels, the idea of expansion may not seem beneficial.

Similarly, for most businesses, millennials and Gen Z folks make the most important markets. So, a country where millennials and Gen Z make up the most considerable part of the population will be an ideal market for brands. Makes great sense, right?

This is how demographic factors prove substantial for businesses. This explains why businesses pay great heed to the demographic segments of their niche market.

2. Ecological factors

Ecological factors correspond to the natural factors pertaining to a country or a geographical region. In simpler terms, ecological factors define the convenience of access to key natural resources that are vital for supply chain operations and production.

If companies have easy access to natural resources that are required in a recurring manner for key operations like production, assembly, or distribution, it will certainly add greater value to business success. On the contrary, if a geographical area is such that the supply of natural resources is scarce, not only will it add to the operational cost but also increase the risk of unprecedented delays in operations.

For instance, the food and beverages industries are a lot dependent on water resources. As per the Water Footprint Network , beverage companies use more than 600 liters of water in the production of a 2-liter bottle of soda. Hence, it is important for beverage companies to set up their plants and production units in areas that have an abundance of water resources.

3. Political factors

Political factors play a very crucial role in strategic planning at the organizational level. The political scenario of a country is a major determinant for companies to continue their operations, expand to the country, or make future strategies for business growth in the country.

As a business owner, would you like to expand to a country that has an unstable government or harsh taxation policies? For your company’s expansion, you would rather want to enter a market where the political environment is stable and there are attractive tax rebates for industries.

With respect to the political environment of a country, the following considerations are vital.

Does the government offer subsidies?

Are the taxation policies favorable or not?

What is the state of FDI norms in the country?

What are social welfare policies or CSR policies?

Is the legal framework a hindrance for industries?

To cite an example, most international brands are now entering the Indian market given the favorable and thriving political environment in the country. In some sectors, the Indian government even allows a hundred percent FDI making the country highly attractive to companies. Besides, the country has strong diplomatic relations with the strongest economies of the world and has signed various free trade agreements. All these factors make India one of the most sought-after countries for global trade and commerce.

4. Economic factors

Cost, profits and net present value are the most important considerable metrics for each and every type of business. If you are a business owner, you will ultimately measure the success of your business in terms of numbers that correlate to profitability, sales, revenue, and so on. Hence, in terms of macro environment analysis, taking economic factors into account is highly vital.

Economic factors with respect to a market include determinants like inflation rate , GDP growth projections, exchange rates, industry growth rate, price index, and interest rate. Also, the per capita GDP income in the country and the unemployment rate are key factors to analyze.

To explain the context, if there is economic stability in a country and growth projections are promising for industries, enterprises will get the confidence to invest. On the contrary, if an economy is not doing well as in the case of Sri Lanka, companies will rather want to withdraw.

Hence, the economic prosperity of a country and the key economic trends form an important part of the business macro environment. If the macro environment with respect to industry growth projections and GDP projections is favorable, companies will embrace the idea of expansion without a second thought.

5. Socio-cultural factors

Another important dimension of the business macro environment is the set of socio-cultural factors that define the cultural and social trends in a market. These social and cultural trends have a direct correlation with consumer preferences and shopping patterns in a country. Needless to say, to stay ahead of the competition, it is vital for contemporary businesses to formulate strategies that have consumer preferences at the epicenter.

Probing further, customer needs and wants are often influenced by their cultural norms and social habits. For instance, beef consumption is banned in India given the religious and cultural significance of cows in the country. On the contrary, beef consumption is one of the most common needs of American consumers because their culture does not hold them back from consuming beef. So, when an American meat brand looks to enter the Indian market, it will have to alter its product portfolio for the Indian market.

Moreover, social factor examples can also include e-commerce trends in a country. In some countries, there is a greater preference for online shopping while in others, people have a greater preference for shopping offline. Subject to this trend, businesses need to keep flexibility in their distribution channels.

All in all, for greater success, companies need to keep up with the latest social and cultural trends that have a direct impact on consumers’ buying preferences and patterns. Given the dynamic nature of social trends, companies need to plan for effective change management. An understanding of Hofstede’s cultural dimensions can be of great help for organizations.

6. Technological factors

Last on the list of macro environment factors is the assessment of a country’s level of technological advancement. As we know, every industry today is going through a technological revolution, and the overall business environment is embracing disruptive technologies.

Companies are more interested in exploring markets wherein there is impressive technological advancement and emerging technologies have attained maturity. Basically, the technological infrastructure should be supportive of processes like business automation , remote working, advanced testing, digital communication, and so on.

If we talk about countries like the US, China, Japan, Germany, or Russia, these countries have acquired next-level technological capabilities and their technological infrastructures can offer crucial competitive advantages to any industry. On the other hand, countries like Bangladesh, and Indonesia are yet in the process of developing technological capabilities that can give a major boost to industries Global innovation rankings have a huge impact on companies’ approaches to strategic planning.

Nations with exemplary innovation capabilities make the ideal choices for multinational companies looking for business expansion.

Now that we have understood the macro environment in business with attention to detail, the next section explains the concept of the macro environment in marketing.

The macro environment in marketing is inclusive of the external factors or influences that have a direct or indirect impact on the marketing strategies of a business. It is a well-known fact that marketing is among the functional areas of business operation. Effective marketing could well be the underlying difference between a highly successful business and a business struggling to get desired results in terms of market penetration .

In the contemporary world, marketing has new dynamics altogether. With most businesses going online, marketing has become quite synonymous with digital marketing through social media and search engine marketing. Statistically speaking, the global market size for digital marketing in 2021 was USD 56.5 billion as per Grand View Research . By 2030, this market is projected to grow at an impressive compound annual growth rate of 19 percent.

Moreover, interestingly, as per Statista, the global spending on digital marketing is more than 600 US dollars in 2022. Clearly, businesses are spending on digital marketing with all their heart. However, the formulation of marketing strategies and the success of marketing approaches is largely dependent on the macro environment.

Further, speaking of the factors linked to the macro environment in marketing, the macro environment factors that affect marketing strategies or the marketing mix of a company are explained below along with their impact.

Demographic segments and divisions in a country can have a huge impact on an organization’s marketing strategies . Subject to variations in different population groups and their preferences, companies need to show greater flexibility in their marketing tactics and pricing strategies.

For instance, if in a country, the millennial and Gen Z population is much higher than baby boomers and Gen X shoppers, companies can run sponsored ads on social media as millennials and Gen Z are quite active on social media platforms like Instagram, Facebook, Snapchat and so on. In fact, a large proportion of millennials search for new businesses and brands online.

2. Political factors

As in the case of business planning, the political environment of a country also has a great influence on the marketing strategies of a company. Companies have to frame their marketing and pricing strategies as per the prevailing political environment.

For instance, if there are anti-monopoly laws in place, companies cannot exploit pricing strategies by creating monopolies. Also, we can understand the influence of political factors on marketing strategies through another example. In Norway, there is a complete ban on advertising alcohol brands on TV or even on billboards. Hence, the liquor brands in the country have to be considerate of this ban and have to find ways for indirect brand promotions.

3. Economic factors

We saw above how economic determinants and metrics hold immense significance in the analysis of the macro environment in business. Similarly, the assessment of economic factors is also crucial for strategic planning with respect to marketing mix and marketing strategies.

To explain, if the per capita income in a country is high, businesses can go for a premium pricing strategy for their products or services. However, if the personal disposable income levels are low in a country, a premium pricing strategy will not be the best-fit pricing strategy for that market.

Since pricing is an imperative element of the marketing mix, the economic determinants of a country have a direct correlation with pricing strategies. Also, if the industry growth rate is high in a country, companies will not mind allocating additional funds to marketing channels given the scope of a high return on investment .

To cite an example, in the United States, Apple products have a normal perception among consumers given high-income levels in the country and the affordability associated with it. On the contrary, in emerging markets like India or Bangladesh with lower personal incomes , the perception of Apple products is that of premium segment products. So, the company can use this income disparity in emerging markets to market its products in association with a sense of financial superiority to consumers. On the other hand, the marketing approach will be different in the US.

4. Technological factors

In contemporary times, marketing has immense dependence on technological innovations. To explain, emerging technologies like AMP, 5G, blockchain, AI and other innovations are changing the marketing landscape for the better. For instance, the market size of AI in marketing is expected to reach 40.09 billion by 2025. This clearly speaks on behalf of a technological revolution transpring in marketing. With digital tools and automation software, companies have been highly successful in expanding their outreach in a targeted way.

Hence, from the marketing perspective, the technological environment in a country is a significant consideration for companies. The companies will have to determine the best-fit marketing strategies in alignment with the technologies supported by the country. For instance, if a country has a 5G infrastructure or not will be a key determinant for mobile marketing or online marketing. While China and the US already have an extensive 5G presence, developing nations are yet to launch 5G connectivity.

5. Cultural factors

Cultural factors include social trends, religious virtues, ethics, consumption patterns, and other factors that collectively form the culture of a place. With respect to marketing strategies, violating the cultural sentiments of a country or a significant religious group in the country can prove to be detrimental to a company. Having said that, in their promotional strategies, it is important that companies are considerate of the emotions and sentiments that are intrinsic to the prevailing culture.

For a better understanding, let us understand the configuration of the 4 Ps of the marketing mix. The 4Ps of the marketing mix include product, place, price, and promotion. Hence, from the marketing point of view, the product is a highly critical factor. Now, all of us know that pork products are against the cultural views of Islam. So, if a company introduces and markets pork products in an Islamic nation, it can prove to be a disastrous move.

6. Ecological factors

We have already discussed the ecological factors above. Not only are they important for the analysis of the macro environment in business but also in marketing. If natural resources are easily available to a firm in a geographical area, the operational costs will be low and the company can go for a moderate pricing strategy.

However, if the natural resources in an area are insufficient, the operational costs will be high and the companies will need to go for a premium pricing strategy to attain profits. Hence, ecological factors pertaining to a country or area can influence the marketing strategies in multiple ways. This makes the analysis of the macro environment in marketing with respect to ecological or natural factors indispensable.

Recommended Readings

An Explicit Description of Change Management Models

A Complete Guide on Porter Five Forces Model

To recapitulate, the macro environment, external to an organization, has a massive role to play in strategic planning for advancement and expansion. An effective understanding of the macro environment enables organizations to determine the best-fit strategies that are aligned with their strategic goals. This explains why business analysts and consultants give immense importance to the analysis of external business factors that define the macro environment.

How can businesses adapt to changes in the macro environment?

Adapting to changes in the macro environment is essential for business survival and growth and it can do so by

Monitoring trends: Stay informed about political, economic, social, technological, environmental, and legal changes that could impact the business.

Ensuring Flexibility: Build a flexible organizational structure and strategies that can adjust to shifting conditions.

Enabling Diversification: Expand the product or service portfolio to mitigate risks associated with changes in specific industries or markets.

Embracing Innovation: Embrace technological advancements to improve products, services, and operations.

How can businesses conduct a macro environment analysis to inform their strategies?

Business managers can perform a macro environment analysis by conducting a PESTEL analysis that would help them understand various factors such as political, economical, etc., and then gather data to analyze the impact of these factors. Then ultimately, formulate strategies accordingly.

What are the tools used for external analysis of the business environment?

A business manager can make use of PESTEL Analysis to examine the various factors that can influence business operations, and apply SWOT analysis to understand the threats and opportunities from the environment to a business.

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What is a PESTLE Analysis? Understanding Macro-Environmental Factors

Written by Raquel Alberdi

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Blog » What is a PESTLE Analysis? Understanding Macro-Environmental Factors

Every business is subject to its macro-environmental factors . That is to say, external factors outside of a business’s control (think the economy, environment, politics, etc.).

This is because a business can’t operate within a vacuum. The total addressable market will always impact it in some way, shape, or form.

And it’s a crazy old world we live in!

So, to mitigate its exposure to these external factors a business must be able to analyze its position and identify potential risks . This will help it better adapt to the uncertain changes that characterize the economy.

Now, there are several tried and tested tools for conducting an external analysis. Most of which, you’ve probably come across before:

• SWOT Analysis
• Porter’s Five Forces
• Scenario Planning
• Global Competitiveness Index

But perhaps the most important of them all is the PESTLE Analysis Framework .

Table of Content

What is PESTLE Analysis?

A PESTLE analysis, or sometimes referred to as a PEST or PESTEL analysis, is a business framework used to analyze the macro-environmental factors that impact a company’s overall performance.

The framework is broken down into 6 key external factors :

• Environmental
• Technological

Analyzing each factor is especially useful when entering an unknown market (especially abroad) or starting a new business .

As mentioned before, successful companies often use PESTLE analysis in conjunction with other macro-environment analysis tools such as SWOT and Porter’s Five Forces.

This gives businesses a thorough understanding of their position and a better ability to assess the risks specific to their industry.

With that wrapped up, let’s explore each external factor in more detail.

Political Factors

Political factors explore to what degree a government can influence, change, and impact your industry.

This could be through:

• Foreign trade policy
• Political stability
• Trade restrictions
• Environmental laws

Government policy also impacts areas such as healthcare , and education so will also need to be taken into consideration if related to your industry.

Economic Factors

These are factors that directly impact the economy’s performance (and indirectly, your business).

Some examples are:

• Inflation rates
• Interest rates
• Economic growth
• Unemployment rates
• Median household income
• Stock market trends
• Budget deficit

Changs or fluctuations to any one of these factors could impact a company’s purchasing power , product pricing , and market supply and demand .

Social Factors

Social factors focus on the cultural norms, customs, and values of a specific demographic where a company operates.

Potential social factors include:

• Education standard
• Cultural trends
• Age distribution
• Population growth rates
• Health and safety policies
• Buying habits
• Racial equality

Fully understanding the social environment within which you operate helps you identify both risks and opportunities perhaps missed by your competitors.

Technological Factors

Technological factors determine the level of innovation, research, and development within an industry and the potential impact it could have.

This could be identified by changes in:

• Mobile technology
• R&D capacity
• Digital technology
• Internet and communication infrastructure
• Manufacturing technology
• Distribution methods
• Levels of automation

Most businesses tend to focus heavily on the impact of digital technology. However, while clearly important, development in heavy industry , manufacturing, and distribution networks shouldn’t be overlooked either.

Legal Factors

Clearly, businesses must be aware of the “laws of the land” where they operate. It’s also vital to remain abreast of any upcoming legislation changes and whether or not it impacts your business.

Some potential legal factors include:

• Antitrust laws
• Taxation laws
• Consumer protection laws
• Health and safety regulations
• Employment laws
• Copyright and patent laws
• Data protection laws

Environmental Factors

Finally, you’ll need to look at the potential impact environmental factors could have on your business.

With consumers increasingly judging brands against their CSR (corporate sustainability responsibility) and the rise of global warming, these factors are typically ecological, and can include:

• Ethical product sourcing
• Regional NGO (non-profit organization) pressure
• Environmental offsets
• Renewable energy availability
• Natural resources

What is the difference between PESTEL and PESTLE Analysis?

There is none.

PESTEL and PESTLE analysis are the same things. They’re both acronyms for a macro-environmental business analysis framework.

The only difference is someone, somewhere, decided to swap the two last letters around causing utter chaos in business circles.

PESTLE is: P : Political E : Economic S : Social T : Technological L : Legal E : Environmental

…and PESTEL is: P : Political E : Economic S : Social T : Technological E : Environmental L : Legal

How to do a PESTLE Analysis

Undertaking a PESTLE analysis audit is simple. There’s a 4-step process for using the analysis framework and identifying specific external risks and how they affect your industry or business.

Step 1 – Brainstorm External Factors

The first thing to do is use the PESTLE framework to brainstorm all the external factors (from each of the 6 areas) in your industry. The key here is specificity . You’ll get value from the audit if it’s tailored to your business.

You might find using a PESTLE analysis template like the one below useful for your brainstorming session:

Step 2 – Identify Threats

The next thing to do is identify how these external factors could undermine or impact your business .

For example, if you’re in the oil and gas industry, any changes to consumer protection laws, local NGO pressure, and environmental concerns would heavily impact your business.

Just as the age distribution would impact your decision to open a toy store in a small town.

Step 3 – Take Action

If identified early, strategies can be put in place to minimize risk or enhance impact if the outcome is positive.

Step 4 – Review and Revise

To be effective, a PESTLE analysis should be conducted on an ongoing basis . Businesses that keep on top of macro-environmental factors, their changes, and the potential impact they have to give themselves a serious edge over their competitors.

PESTLE Analysis of Apple

To give you a better understanding of how the PESTLE analysis model works, I want to run through a real-life example of a well-known brand. And frankly, I can’t think of a better example than Apple!

So, let’s take a look.

Apple is an American technology company (we all know that) so what does that mean for the external political factors it faces?

Well, Apple Inc. just posted its highest quarterly revenue (a whopping $100-billion quarter ) meaning it’s subject to higher corporate taxation in the U.S.

Another political factor it has to consider is souring relations between the U.S. and China. In 2018, President Trump began adding tariffs to Chinese imports, sparking a trade war between the two countries.

This had a knock-on effect on Apple.

They source a lot of their parts from Chinese manufacturers meaning:

• Parts might have to be sourced outside of China
• Become a target for Chinese nationalist anti-American rhetoric
• See a reduction in popularity of their products in countries such as Japan

With this knowledge, Apple can begin to draw up contingency plans to minimize its risk exposure.

There’s both good and bad news on the economic front for China.

Apple’s products are largely sold in developed countries with typically strong, stable economies. There’s little risk of their target market weakening economically.

Furthermore, the economic growth rates of developing nations, particularly in Asia, means there are a host of new opportunities for Apple to expand its presence in previously inaccessible markets .

However, the “China” problem expands into the economic arena. Increased labor costs elsewhere could weaken the cost advantage of certain Apple products.

Society dictates that almost everyone needs a mobile phone these days. This is due to the increasing popularity of mobile-first social media platforms such as Whatsapp , TikTok , and Instagram

While it’s rather sad to see families sitting around the dinner table with eyes glued to screens, it’s good news for Apple.

People, at least for the time being, are socially mandated to buy smartphones.

However, China’s going to crop up again due to external social factors.

There are ethical concerns from many consumers about the purchase of products made in China. Their treatment of the Uighurs and imposition of strict new laws in Hong Kong has seen their public opinion just fall through the floor.

As tensions continue to rise, Apple might be forced to review its policy of working closely with the giant Asian superpower.

One growing external technological factor that’s of definite interest to Apple is the increasing use of mobile devices in business and education.

In fact, our students frequently attest to our business program’s online mobile accessibility as one of its standout features. It allows them to self-educate around their busy schedules, as and when it suits them.

Also, many businesses are turning to mobile devices to help their workforce. An example of this would be field sales reps using iPads to access their CRM data .

However, Apple isn’t the only one with skin in the technology game.

Their primary competitors Samsung and Google are hot on their heels. Google, for example, was able to roll out Android Pay less than a year after Apple Pay.

Increasing public concern about privacy and the invasive nature of modern digital advertising , governments are applying more pressure to software companies to be more open with their data usage .

This legal threat could potentially be problematic for iPads to access their CRM data .

It’s also no secret that Apple is planning on entering the automotive industry. This is another highly-regulated industry with potential insurance and litigation costs to cover.

Environment Factors

As a software company, Apple will always be susceptible to increased rates of electricity .

Not just because of the maintenance of data centers, but the number of manufacturing facilities it relies on to mass-produce its products.

Also, China.

There are still concerns about the handling of their manufacturing facilities regarding pollution and lack of investment in renewable energy sources .

If this external pressure increases, Apple may be forced to seek out new, expensive, alternative production facilities

Applying PESTLE Analysis To Your Business

Right, now it’s over to you!

Use the PESTLE analysis template provided in Step #1 to assess the macro-environmental factors affecting your business.

Remember, while the PESTLE analysis is a great tool, it should be used in conjunction with other analysis techniques such as SWOT and Porter’s Five Forces .

Also, don’t forget to conduct your analysis on a bi-monthly basis . The world’s moving fast and things are changing at an unprecedented rate. Falling behind competitors could be devastating for your business!

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PESTLE Analysis

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The PESTEL Framework Explained: 6 Important Factors

Last Updated: Apr 5, 2024 by Jim Makos Filed Under: PEST Analysis

The PESTEL framework is a strategic planning tool used by business and project managers. It helps analyze an organization’s external business environment. Effective use of the PESTEL framework can help identify six key external factors that greatly impact the organization’s operation and performance. Depending on the findings, the framework will lead to an easier and more efficient decision-making process. In the next six minutes, you’ll learn everything you need to know about the PESTEL framework and why organizations use it regularly.

What is the PESTEL Framework?

The PESTEL framework is a business planning tool that identifies and assesses how external factors (Political, Economic, Social, Technological, Economic, Legal) are affecting an organization or industry. Depending on the analysis results, businesses can improve their planning and respond to outside forces that are out of their control. The framework is also known as PESTLE analysis , which swaps the ‘E’ and ‘L’ factors.

PESTEL Framework External Factors

PESTEL factors are often present in other types of similar analyses. Business managers can choose any, based on the nature of the organization and the factors they wish to study. These different frameworks help to identify key factors to acknowledge, understand, and potentially use to their advantage. These include:

• STEP or the more popular PEST analysis that misses the Legal and Environmental factors
• STEEP analysis is based on the PESTEL framework minus the Legal part
• STEEPLE analysis that adds the Ethical factors
• STEEPLED analysis that includes the same factors plus ethical and demographic factors

I have discussed some characteristics of these external factors below. For a more detailed breakdown of these factors, check out this article . The article will help you determine which factors are more important to the company’s strategy. This might serve as preliminary inspiration. However, you will have to dig deeper into the details to make accurate decisions.

What exactly do the categories in the PESTEL framework consist of? Each is unique and offers a broad understanding related to factors involving politics, economy, social traits, tech uses, environment, and legalities.

Political Factors in the PESTEL Framework

Politics plays an important role in business. This is because there is a balance between systems of control and free markets. As global economics supersedes domestic economies, companies must consider numerous opportunities and threats before expanding into new regions. It also applies to firms identifying optimal areas for production or sales. Political factors may even help determine the location of corporate headquarters.

This category can sometimes combine laws (from the legal group) since the government and their bills are closely linked. Some of the political factors you need to watch and include in your PESTEL framework are:

• Tax policies
• Stability of government
• Entry mode regulations
• Social policies (e.g. social welfare etc.)
• Trade regulations (e.g. the EU & NAFTA)
• Trade traffics
• Labor regulations
• Health & Safety

You may find a more extensive list of political factors and how they affect businesses here .

Economic Factors in the PESTEL Framework

Economic factors are metrics that measure the health of any economic region. The economic state will change many times during the organization’s lifetime. You must compare the current levels of inflation, unemployment, economic growth, and international trade to better carry out your strategic plan.

General economic factors, such as goods, services, monetary value, and currency, will affect any business or product. Indicators like exchange rates, GDP , and inflation are critical to management. They can tell when it is a good time to borrow and help determine how an economy might react to certain changes.

Some examples of economic factors you can take into account in your PESTEL framework are:

• Disposable income of buyers
• Credit accessibility
• Unemployment rates
• Interest rates
• Exchange rates

You may find a more extensive list of economic factors and how they affect businesses here .

Social Factors in the PESTEL Framework

Social factors assess the mentality of individuals or consumers in a given market. These are also known as demographic factors. This category focuses on buying behavior and how consumer needs can affect the value and necessity of a product or service. The following are some social factors to focus on in your PESTEL framework:

• Population demographics: (e.g. aging population)
• Distribution of Wealth
• Changes in lifestyles and trends
• Educational levels
• Cultural differences
• Ethnicities

You may find a more extensive list of social factors and how they affect businesses here .

Technological Factors in the PESTEL Framework

This step entails recognizing the potential technologies available. Technological advancements can optimize internal efficiency and prevent a product or service from becoming obsolete. The role of technology in business is increasing each year, and this trend will continue because R&D drives new innovations.

Recognizing evolving technologies to optimize internal efficiency is a great asset in management. But there are a few threats. Disruptive innovations such as Netflix affect DVD players’ business. The best strategy is to adapt to the changes. Your strategies should sidestep threats and embrace opportunities.

Technology is continuously evolving — and not just digital technology, although the use of applications, websites, and similar products is on the rise. But even technology related to manufacturing, distributing, or communicating with consumers/employees must be considered too.

This is a large challenge for management. Below is a list of common technological factors to become part of a PESTEL framework:

• New discoveries and innovations
• Rate of technological advances and innovations
• Rate of technological obsolescence
• New technological platforms (e.g. VHS and DVD)

You may find a more extensive list of technological factors and how they affect businesses here .

Environmental Factors in the PESTEL Framework

Sometimes referred to as ‘ecological’ factors as well, these PESTEL external factors involve physical changes. Think less of the workplace environment—which would apply to communication among employees—and more about how locations are affected.

Both consumers and governments penalize firms for adversely affecting the environment. Governments levy huge fines upon companies for polluting. Companies are also rewarded for having a positive impact on the environment. Consumers are willing to switch brands if they find a business ignoring its environmental duties.

The impact on the environment is a rising concern. Note that the environment benefits the company too. Running water for a hydro-power plant is an example.

A few common environmental factors of the PESTEL framework are:

• Waste disposal laws
• Environmental protection laws
• Energy consumption regulation
• Popular attitude towards the environment

You may find a more extensive list of environmental factors and how they affect businesses here .

Legal Factors in the PESTEL Framework

This final step involves learning about the laws and regulations in your region. In other words, ways in which particular laws may affect business, ideas, or concepts. It is critical to avoid unnecessary legal costs. The laws are created by policymakers and government bodies, which is why they are sometimes weaved within the political section of PESTEL analysis. But the regulations here focus on the well-being of consumers or society rather than benefiting the agencies that crafted the laws.

This is the last factor in the PESTEL framework. These factors overview the legal elements. Often, start-ups link these elements to the political framework. Many legal issues can affect a company that does not act responsibly. This step helps to avoid legal pitfalls. You should always remain within the confines of established regulations.

Common legal factors that companies focus on include:

• Employment regulations
• Competitive regulations
• Health and safety regulations
• Product regulations
• Antitrust laws
• Patent and Copyright infringements
• Import/Export laws

You may find a more extensive list of legal factors and how they affect businesses here .

Why use the PESTEL Framework?

When you go through each of the six categories and apply the research to your business, product, or concept, you will understand what is standing in the way of its success. It is common to conduct a PESTEL analysis before serious decisions. Managers might conduct it before any large projects are undertaken. Understanding all the influencing factors is the first step to addressing them.

You can’t override copyright laws, just as you can’t lower taxes or inflation rates. But you can understand what percentage of taxes will cost your business each quarter. Or what it means for the economy, as a whole, if inflation rates skyrocket.

With this understanding in place, you can use it to your advantage. Especially compared to competitors who don’t use the PESTEL framework.

Remember, there are many factors other than these which can have an effect on business success.  The evaluation is a one-to-one process. Each company should do it for themselves and find the key drivers of change. You must identify the factors which have strategic and competitive consequences.

Analyzing the total macro-environment is an extensive task. Even though, it is complex, understanding the PESTEL framework of basic influences will allow you to maintain an organized and strategic approach. These will isolate each opportunity or threat.

After writing down the PESTEL framework, company managers can create strategies. The macro-environmental factors will shape the strategies. I am sure that the thinking process will be as sensitive as current and future environmental factors.

If you are planning to align strategies for your company, I suggest you conduct a PESTEL analysis first ( here’s a step-by-step guide on how to do it). It is always good to have more information about the surroundings. The PESTEL framework really helps make better decisions.

Ecommerce · Strategy · Consulting

PESTLE Analysis: The Macro-Environmental Analysis Explained

by Martin Heubel

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Unstable market conditions are one of the biggest threats to the success of any company. For decades, managers have used the PESTLE framework to assess the opportunities and risks of their organisation’s macro environment.

Events such as the Brexit referendum or the coronavirus pandemic have had a significant impact on the way companies operate. But even smaller changes such as the introduction of new laws or technologies can pose a significant threat and force companies to react quickly.

If political and macro-economic changes are not recognised by businesses and included in their strategic planning process , attentive competitors can easily take advantage of this shortcoming.

But worry not! Today, you’re going to learn how to analyse your businesses macro environment with the PESTLE framework.

This article will cover:

Political Factors

Economic factors, social factors, technological factors, legal factors, environmental factors.

• How to do a PESTLE Analysis (incl. Template)

What is PESTLE Analysis

The PESTLE analysis is a concept first mentioned by Harvard Business School professor Francis J. Aguilar. He introduced the framework back in 1964 in his book “ Scanning the Business Environment “.

Since then, the PESTLE analysis has become a popular strategic tool to assess the macro environment of organisations worldwide.

The framework categorises the six forces of p olitics, e conomics, s ocio-culture, t echnology, e nvironment and l aw.

The PESTLE framework begins with an analysis of the political landscape. That’s because the political stability of a country is probably the biggest priority for any commercial organization.

Unstable conditions or extreme changes in government direction pose a major threat to ongoing operations. They can also lead to a dependency on political goodwill, making it almost impossible to operate economically.

While this is less likely to be the case in democratic states, totalitarian states often have centrally controlled economic systems. These severely restrict any form of business activities or even make them impossible in the first place.

For example, in conflict regions where civil wars prevail, or political power changes are frequent, companies are better off building local distribution networks than setting up nationwide production facilities.

But also relatively stable political conditions can pose challenges:

Take the European Union as an example:

Different legislative, anti-trust, and tax guidelines apply in each country. German domestic and foreign policies will differ widely from the ones in France or Poland.

Organisations need to be aware of the political movements in countries they operate in to minimise the risk of becoming the target of government action.

Typical political factors of a PESTLE analysis, include:

• Government policies
• Political stability
• Foreign trade policies
• Tax policies
• Labour laws
• Trade restrictions

In addition to the political situation, economic aspects play an important role when assessing a company’s macro environment.

The factors to be considered are manifold:

Currency stability, wealth and income distribution, unemployment rates, economic growth rates, wage costs or inflation rates are only a small excerpt of what managers should consider when analysing macroeconomic factors.

These factors can have a direct impact on the growth and profitability of a company.

Before entering a market, decision-makers must ask themselves whether the market is economically attractive and suitable for the intended operation.

Typical economical factors of a PESTLE analysis, include:

• Economic growth
• Exchange rates
• Interest rates
• Inflation rates
• Disposable income
• Unemployment rates

Following on from the economic analysis of a market, the analysis of socio-cultural characteristics provides an insight into the existing values, norms, institutions, education levels and consumption patterns of a population.

Put simply, this information allows businesses to outline the structures and values of a society.

However, managers need to take extra care in this part of the PESTLE analysis:

That’s because they often fall victim to predefined stereotypes when analysing geographically-distant markets.

The socio-cultural factors should always be assessed by several stakeholders with different backgrounds to ensure an objective evaluation of a market.

Typical social factors of a PESTLE analysis, include:

• Population growth rate
• Age distribution
• Career attitudes
• Safety emphasis
• Health consciousness
• Lifestyle attitudes
• Cultural barriers

In today’s age, almost every company is dependent on modern technologies.

Whether it’s due to the use of digital sales channels or the precise manufacturing of products with modern production facilities.

The rise in technological complexities also increasingly influence strategic decisions in companies.

When assessing environmental factors with the PESTLE framework, decision-makers must consider the technological progress of their time.

Managers can do this by asking a set of questions, like:

• Does the technological progress and infrastructure of a region meet the requirements of the plans to build a new manufacturing plant?
• Do specific technological standards exist with the entry into a new market, which must be met to build an effective supply chain?
• Are there any emerging technologies posing a threat of substitution ?

Typical technological factors of a PESTLE analysis, include:

• Technology incentives
• Level of innovation
• R&D activity
• Technological change
• Technological awareness

The legal framework is a central component in the analysis of a company’s macro environment. Even though this area is ranked at the lower end of the PESTLE framework, it is the most important for many companies.

For example, organisations within the EU have to consider at least three legal systems :

• The legislation in the country of the headquarters or production,
• The respective legal system of the country or countries in which the products are sold.
• Additional laws from the European Union that facilitate (or limit) business activities.

These legal systems often deprive managers of the flexibility they seek.

Advertising bans for certain product categories or special requirements for product design must be considered and taken into account on a country by country basis.

The resulting challenges often affect the entire marketing mix and can be costly to solve.

Typical legal factors of a PESTLE analysis, include:

• Discrimination laws
• Antitrust laws
• Employment laws
• Consumer protection laws
• Copyright and patent laws
• Health and safety laws

Environmental factors not only assess the climatic and topographical conditions of a country. They also evaluate a country’s availability of resources.

This is important, as products in regions with extreme climatic conditions have to meet different requirements than in their country of origin.

A car in the desert of Dubai has to meet different criteria than in Germany. European carmakers had to adjust their production to ensure their cars would stop catching fire in the UAE, following multiple reports back in 2005.

Geographical distances also pose a challenge for the distribution of products.

Mountains, rivers or other geographical conditions can quickly become a hurdle for transporting raw materials or goods.

Managers must carefully consider whether the ecological-geographical conditions of a region match their organisation’s strategic ambitions.

Typical environmental factors of a PESTLE analysis, include:

• Environmental policies
• Climate change
• Pressure from NGO’s

How to do a PESTLE Analysis (Free PDF Template)

Conducting the PESTLE analysis can be overwhelming. But with my easy-to-use template, it becomes a lot more manageable!

Simply print out the below template and start researching your industry.

A couple of great places to start your research are:

• statista.com
• ec.europa.eu

Free PESTLE Template

Simply click on the image to get redirected to the high-res PDF.

Over the past decades, the PESTLE Analysis has proven to be an effective concept to assess an organisation’s macro environment.

Its simple setup allows managers to anticipate future business threats and to take action to avoid or minimise their impact by incorporating them into their organisation’s strategic decision-making.

As with any analysis, it reflects the moment and is based on the current knowledge of those carrying it out. That’s why it is recommended to conduct the PESTLE analysis regularly.

Need help analysing your macro-environment?

If you want to better understand the factors that affect your business, get in touch . I offer tailored advice to help you assess your macro environment.

Enjoyed this article? Here are more things you might like:

What is Business Strategy? – Increase your chances of success and understand what it takes to build an effective business strategy.

Porter’s Five Forces Analysis – A complete guide to Michael E. Porter’s 5 Forces Analysis to help you assess your competitive landscape.

The Product Life Cycle – A complete breakdown of the individual stages of the product life cycle to plan your next marketing moves.

What is PESTEL Analysis? Definition, Benefits, Examples, Strategic Management and Best Practices

By Paul VanZandt

Published on: February 2, 2023

Table of Contents

What is PESTEL Analysis?

Pestel analysis framework, pestel analysis examples and factors, key benefits of applying pestel analysis, pestel analysis in strategic management, top 5 best practices for pestel analysis.

PESTEL analysis is defined as a business impact study that aims to understand the effects of 6 key external factors, which are politics, economics, social, technology, environmental, and legal.

Initially designed in 1967 as a business planning tool, this method was then known as PEST, with environmental and legal factors joining the list as regulations and business environmental factors became larger business influences.

The PESTEL analysis technique is a key tool for a company’s management team during enterprise strategic planning. When correctly done, this analysis technique can help anticipate future challenges and opportunities. This technique is especially helpful when formulating a strategic business plan that methodically takes both internal and external influences on the business into account.

The PESTEL analysis framework is a strategic tool used by businesses and organizations to assess and analyze the macro-environmental factors that can impact their operations and decision-making. PESTEL represents the acronym for Political, Economic, Social, Technological, Environmental, and Legal elements. By examining these six categories, businesses can gain a better understanding of the external forces and trends that may affect their industry and develop strategies to adapt or capitalize on them. Here’s an overview of each component:

• Political: This is by far the largest external factor affecting a business. This includes analysis of local, regional, and national political landscape. Government policies directly affect the rate of business tax payable, employee laws, general state of law and order, business compliances, and general ease of doing business. For example, if the rate of tax in one state is much higher than a relatively comparable state that charges businesses much lower taxes, then businesses may find it more prudent and competitive to move their business.
• Economic: Economic influences are macro-financial factors such as a state or national GDP growth, inflation or deflation rate, foreign currency debt, federal reserve interest rates and changes, and more. These factors play a key role in determining target markets to sell to and where to distribute the products or services. These economic factors may have varied effects depending on the type of business. For example, for a raw material miner, a rise in the prices of the material will have a positive effect on the business, which is basically an inflationary environment. However, other businesses that purchase these raw materials to produce finished goods and products will face business challenges in absorbing these higher prices of production. Often it leads to a price hike of the final product itself which is then borne by the consumer, which may reduce demand for the product/ service.
• Social: While far less widely impactful than political or economic factors, social factors can sometimes lead to significant business effects. For example, the theme and visuals of a marketing campaign for a consumer-facing product would be very different in the Middle Eastern region than that of American or European regions. However, if the product or service is technical and aimed at other businesses, then such a product may run the same campaign across regions with just a change in language. Companies catering to any consumer band will have to keep themselves aware of the impact of social movements, cultural shifts, and sensitivities, not just for customers but also for employees. This is a key impact that factors into enterprise human resource planning, product planning, and marketing content.
• Technological: Earlier referred to as simply technical, the technological factors today have a significant impact on any business. From agriculture to SaaS, technology continues to impact product/ service efficiency, disruptive innovations, and internal HR management efficiency. A company that is able to study breakthroughs in tech and its impact on the future of its products, services, and human resources, will also be able to better plan for business continuity and growth to beneficially leverage these changes rather than get caught off guard by them. For example, companies that already had a remote-work technology stack and policies incorporated into the work culture managed to handle COVID lockdowns much better. This in turn also proved to be a strategic advantage over any competition that couldn’t service customers or acquire new ones due to lack of technology stack or delay in absorbing new tech and setting policies.
• Environmental: This new addition to the original PEST analysis was done when enterprises in the 21st century began to understand the real and measurable impact of environmental factors on their bottom line. Factors such as carbon tax, natural disasters, availability of water and natural resources, and human migrations can have a significant impact, especially on certain businesses and their future plans. Additionally, many businesses are placing increased awareness on carbon neutrality and ecological output. This can sometimes alter their manufacturing, distribution, or supply chain processes.
• Legal: These are external factors emerging out of political factors but are focused on regulations related to labor hiring and firing, business conduct and operations, and taxation. A well-known example would be the Euro region’s GDPR regulation, which impacted almost every business website on how they collect visitor data.

A PESTEL analysis is a strategic tool used by businesses and organizations to assess and analyze the external macro-environmental factors that can impact their operations and decision-making. Here’s an example of a PESTEL analysis for a fictional company in the renewable energy industry:

1. Political Factors:

• Government policies and regulations promoting renewable energy sources.
• Tax incentives for renewable energy projects.
• International political stability affecting trade and investments.
• Energy security policies.

2. Economic Factors:

• Economic stability and growth in the company’s target markets.
• Exchange rates and their impact on imported components.
• Funding and financing options for renewable energy projects.
• Consumer disposable income and its influence on demand for renewable energy.

3. Social Factors:

• Growing awareness and concern for environmental sustainability.
• Changing consumer preferences towards clean and green energy sources.
• Demographic trends that may affect energy consumption patterns.
• Public perception of renewable energy technologies.

4. Technological Factors:

• Rapid advancements in renewable energy technologies.
• Research and development opportunities in the sector.
• Potential for cost-effective energy storage solutions.
• Integration of smart grids and IoT in the energy sector.

5. Environmental Factors:

• Influence of climate change on the generation and utilization of energy.
• Environmental regulations and emissions standards.
• Availability of renewable energy resources (e.g., sunlight and wind).
• The company’s carbon footprint and sustainability initiatives.

6. Legal Factors:

• Environmental protection laws and regulations.
• Intellectual property protection for innovative technologies.
• Trade restrictions and tariffs affect the renewable energy supply chain.
• Health and safety regulations for employees.

By analyzing these factors, the company can better understand the opportunities and threats in its external environment. This analysis can inform strategic decision-making, risk management, and the development of a competitive advantage in the renewable energy industry. It’s important to note that the significance of these factors may vary depending on the industry, location, and specific circumstances of the company being analyzed.

Let’s dive into the enterprise benefits brought about by conclusions drawn using PESTEL analysis:

• Better threat anticipation and management

An enterprise that has planned for all the key 6 external factors highlighted in PESTEL, is in a position where they have a wider and more in-depth understanding of any threats emerging out of external factors. This helps businesses make plans for contingencies, to avoid the threat or to deal with it in the most prudent way possible.

• Increased chances for business continuity during disasters

Business disasters can be natural, political, geopolitical, or economic. Companies who are actively aware of these shifting landscapes have more capacity to absorb these challenges and ensure business continuity and perhaps even growth during such periods. A recent example would be the sudden rise in Federal Reserve interest rates to tackle inflation in 2022 where many companies who had taken business loans based on floating interest rates (especially to stay afloat during COVID lockdowns) now found themselves paying 3-4 times in interest amount within just a year. This rate hike however was much discussed and anticipated and businesses that repaid or maintained sufficient cash margins accounting for anticipated rate hikes, have a much better chance of ensuring the financial stability of the firm.

• Competitive tech-stack

PESTEL analysis included technology as a key factor that keeps the management team aware of the level of maturity of the company’s tech stack vis-a-vis competition and what is available in the market. Consider this against a CTO trying to convince the board of tech investment without the right macro context.

A company’s management team may be composed of more experienced but demographically older members. A PESTEL analysis enables the management to keep themselves tech-savvy and aware of the latest technology and its benefits to enterprise growth. These tech investments may span across the organization chart such as improving human resource management efficiency, better employee surveying for feedback, better quality customer data collection, better enterprise data management, planning product and service improvements/ innovations, etc.

• New opportunities identification

External factors are not just threats and compliance, they can and often are filled with business opportunities to be explored. A change in the landscape can be an opportunity for the entity who is already prepared to take advantage. For example, while GDPR regulations led to a reduced volume of business inquiries from websites, they also improved the quality of these leads who were now more sales-ready. This was because visitors who gave their consent to be contacted by sales or cookie tracking for better product recommendations or receive newsletters on the product etc, were clearly more ready to make a purchase. Companies who invested more, not less, on the website quality and better quality online resources post-GDPR, were able to leverage improved lead quality and therefore better sales opportunities in the European market.

• Focused strategic planning

A company’s strategic plan is the overarching business operations and growth plans that drive every other objective. PESTEL analysis is a primary tool for an enterprise’s management team seeking to create a realistic, achievable, and competitive strategic plan that takes into account all external factors. While several other methods also take into account external opportunities and threats, it is only PESTEL that clearly breaks down for the management team the 6 factors that allow for a broad, yet in-depth analysis of external business influences.

Learn more: What is a MoSCoW Analysis?

A PESTEL analysis is a valuable tool in the field of strategic management. It is used to assess and analyze the macro-environmental factors that can affect an organization’s strategic decisions and long-term planning. Strategic management involves setting the direction and goals of an organization, and the PESTEL analysis helps in understanding the external factors that can impact this process. Here’s how a PESTEL analysis is relevant in the context of strategic management:

• Identifying Opportunities and Threats: By examining Political, Economic, Social, Technological, Environmental, and Legal factors, organizations can identify both opportunities and threats in their external environment. This information is critical for crafting strategies that leverage opportunities and mitigate threats.
• Scenario Planning: PESTEL analysis aids in scenario planning, where organizations can consider various future scenarios based on different combinations of these external factors. By doing so, they can develop strategies that are robust and adaptable to various potential futures.
• Strategic Decision-Making: Understanding the external environment through a PESTEL analysis is essential for making informed strategic decisions. It helps in shaping business strategies that align with the current and future landscape.
• Risk Management: Organizations can use PESTEL analysis to assess risks associated with changes in the external environment. For example, changes in government regulations, economic downturns, or technological disruptions can pose risks to the organization, and a PESTEL analysis can help identify and manage these risks.
• Innovation and Adaptation: The Technological and Environmental factors in a PESTEL analysis can guide innovation and adaptation efforts. It can help organizations stay ahead of technological advancements and align their strategies with environmental sustainability.
• Global Expansion: For organizations considering international expansion, a PESTEL analysis is crucial for understanding the unique factors and challenges in each target market. It helps in tailoring strategies to fit specific international environments.
• Regulatory Compliance: The Legal factors in the analysis help in identifying legal requirements and compliance issues that can affect the organization’s strategies. This is particularly relevant in industries with high regulatory oversight, such as healthcare or finance.
• Stakeholder Communication: Understanding the Social and Environmental factors can aid in effective communication with stakeholders. It enables organizations to demonstrate their commitment to societal and environmental concerns, which can be a key part of their strategic positioning.

PESTEL analysis is a fundamental component of strategic management. It provides a comprehensive view of the external environment, allowing organizations to make informed decisions, plan for the future, and adapt to changes in their operating environment. It helps in crafting strategies that are not only relevant but also resilient in a dynamic and complex world.

1. Get the latest data

Every contributing factor in PESTEL analysis requires the management team to have access to facts and figures. For example, for economic factors, one needs inflation data, central bank interest rate charts, GDP trends, etc. Often a small change in this core data collection can lead to significant changes in perception and reality.

For example, if the inflation rate threshold is 2% for the US Federal Reserve, and it changes to 3% in two or three consecutive quarters, it may trigger the Fed to hike rates to bring inflation down. However, if the company only had access to 1-year-old data, then this event would not have been factored into the enterprise plan.

It is therefore critical to ensure that the latest released data across all PESTEL factors are accessed and taken into account for planning and analysis stages.

2. Prioritize facts over forecasts

Since PESTEL is used for future enterprise strategic planning, by default there is some level of forecasting involved. However, the key is to ensure that facts are not stretched to fit a desirable narrative, especially when evaluating political and economic factors which are quite dynamic and hard to predict by nature.

3. Get a second opinion

Whether the management team has hired a consultant, or external agency or is conducting the analysis internally, it is always a best practice to get a second opinion before framing final conclusions from the report. This is because, while PESTEL relies on data, many factors have qualitative aspects that can always use a second perspective.

4. Incorporate results in all levels enterprise of enterprise planning

The conclusions of the PESTEL analysis are usually directed toward strategic planning, and management needs to ensure that the conclusions are trickled down to all levels of company planning. For instance, decisions stemming from online legal and compliance requirements need to be streamed down to the execution teams where marketing, web development, and legal teams collaborate for accurate implementation.

5. Use visual software for presentation

Visual tools such as FrescoPad have built-in templates to brainstorm and visually present PESTEL analysis results. The technique of PESTEL analysis itself is a collaborative effort across department leaders in the management team spread across geographic locations and requires in-depth qualitative and quantitative discussions. This software helps to make the analysis process interactive and makes it easier to save and share conclusions in a visual format.

Learn more: What is SWOT Analysis Framework?

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Better Knowledge. Your Insight Is Sharper

Macro Environment: Factors and Their Impacts on Business

Updated on August 13, 2023 by Ahmad Nasrudin

The macro environment is dynamic and keeps changing from time to time. In comparison, changes in demographic factors may take a long time, but not for other factors such as technology and the economy.

For example, globalization makes it difficult for domestic companies to avoid external shocks. The economy has become increasingly intertwined from country to country. Thus, shocks in one country, such as the 2008 crisis, spread quickly to other countries. It creates a rapid and dramatic contagion effect.

Likewise, technology brings significant changes to the market. The world is getting online. Changes in technology are disrupting many conventional businesses, such as retail. It also introduces new business models, such as ride-hailing services.

What is a macro environment?

The macro-environment refers to the factors and forces outside the company which affect business operations. Every change in these factors can impact the competitive environment and the company’s internal environment. But the company has no control over its changes.

• The competitive environment , or industry environment, is around the company’s external stakeholders. It is formed through the relationships and linkages between companies and their stakeholders, such as competitors, governments, suppliers, customers, local communities, creditors, etc.
• The internal environment  includes aspects within the organization, such as corporate culture, organizational structure, and company resources.

The macro environment is vital because it exposes opportunities and threats to the company. Thus, failure to adapt to changes makes companies lose opportunities to exploit external opportunities to build competitive advantage. Or, it exposes the risk where the company fails to address external threats, leading to business failure.

• See also : A Learning Material on Business Environment: Factors and Their Influence on Companies

Factors in the macro environment

The macro-environment comprises seven factors, namely:

• Political factors
• Economic factors
• Socio-cultural factors

Technological factor

Environmental factor.

• Legal factors

We briefly PESTEEL these seven factors.

Please remember these six factors can be local, national, or global. Thus, their exposure will also differ between  businesses .

Take economic factors as an example. For example, trade protection by trading partners is a global rather than a local issue. The policy affected domestic export-oriented companies. However, it is less significant for companies if their revenue comes from local sales.

Political factor

Developments in the political environment can significantly expose businesses to opportunities and threats. Changes in taxation, laws, and government policies are examples.

In addition,  the political environment  also includes political stability, corruption, rule of law, and institutional strength. For example, a change in a country’s leadership might create political instability and policy uncertainty, which raises business concerns.

Economic factor

Economic factors  include many variables, such as:

• Economic growth
• Interest rate
• Exchange rate
• Unemployment rate

The economic environment also includes government policies such as fiscal policy, monetary policy, and trade policy. They all affect business operations, either directly or indirectly.

For example, an increase in import tariffs reduces competition in the market. It makes foreign goods more expensive when they arrive in the domestic market, making them less competitive.

Take exchange rates as another example. For example, a depreciating exchange rate makes aluminum imports more expensive. The increase has a direct impact on car manufacturers. Meanwhile, service companies may not be directly affected. They may be exposed to depreciation if automakers increase prices to maintain profitability.

Economic factors can also have an indirect impact by influencing consumers’ purchasing power and spending patterns. For example, an increase in interest rates makes borrowing more expensive. Consumers responded to this condition by reducing demand for durable goods, which have relied on loans to purchase them.

Socio-cultural factor

These factors include demographic factors related to changes in the population and its composition (such as age, sex, race, education, religion, and ethnicity). In addition, there are socio-cultural factors.

Socio-cultural factors  include aspects such as:

• Social class
• A religious norm
• Distribution of wealth
• Shared practices, values, norms, and behaviors
• Social standards and traditions

Socio-cultural factors influence business in several ways. First, it affects consumer spending patterns and behavior. For example, the middle class spends more on services than the lower class. The middle class also has higher education, influencing their spending patterns.

Second, it influences practices and culture within the organization. For example, employees’ social values, traditions, and beliefs shape the workplace’s culture.

Technological advances have disrupted several conventional businesses. For example, e-commerce makes traditional retail bankrupt. They also influence production techniques and communication channels.

Technology also affects work practices, such as working from home. Moreover, they are bringing a new business model as introduced by Uber through its ride-hailing service.

The technological factor  includes not only outputs such as the internet, 3D printers, fiber optic technology, and nanotechnology. However, the knowledge surrounding its development is also essential, including research and development.

Environmental factors include natural resources, physical environment, or natural ecological conditions. This factor is becoming increasingly important as environmental issues have increased recently.

Natural disasters, global warming, and pollution expose many businesses. Logistical disruption due to natural disasters is an example.

Consumers and governments have also increased their concern for the environment and sustainability for future generations. As a result, these factors have influenced consumer demand patterns for products and prompted the government to launch related policies and regulations.

Legal factor

Legal factors are closely tied to political factors. For example, political stability significantly influences changes in laws and government regulations. Unstable politics can encourage inconsistency in laws or regulations issued by government regimes.

Legal aspects affect business in many areas, including:

• Competition
• Labor practices
• Consumer protection
• Product health and safety
• Environmental regulations

How the macro environment affects the business

On the one hand, changes in the macro environment affect decisions, profitability, and operations. On the other hand, companies do not have absolute control to direct their impact in their favor.

Therefore, companies need to consider these factors in strategic planning. For example, they forecast interest rates in the next few years to inform investment decisions.

Let’s take the insurance company as a case.

Insurance companies earn premium income. In addition, their revenue also comes from investment. Let’s narrow the discussion to investment income.

Insurance companies must predict future trends to obtain optimum return on investment at a tolerable risk level. For example, they forecast economic indicators such as stock and bond price indices, interest rates, economic growth, and inflation. The forecast is helpful for properly allocating investments to asset classes.

Say, an insurance company predicts the central bank will raise policy rates next year. Among asset classes, rising interest rates significantly expose bond prices. Higher interest rates push bond prices down. So, for example, the company might reduce its exposure to bonds.

Dynamic, but not all strategic

The factors in the above macro environment are dynamic. They change from time to time. And the changes bring both opportunities and threats to businesses.

However, businesses have varying exposure to these factors. Some factors can have a more significant effect on specific industries but not on other industries.

For example, an increase in interest rates has a more significant impact on the banking industry than manufacturing. Meanwhile, inflation was more important for food and beverage companies than utility companies.

So, we don’t have to include all the factors when analyzing a company. Just focus on the significant aspects of the company.

Analyze changes in the macro environment and their impact

Businesses must identify the most uncertain factors and significantly affect business operations. They need to sort out the main factors in the macro environment and determine their significance.

The steps in analyzing the macro environment involve the following stages:

• Identify and sort out the most uncertain and most significant key factors affecting the company.
• Determine the future trend for each factor and whether it is moving in a favorable direction or not.
• Classify each factor as an “opportunity” or a “threat.”
• Evaluate how significant the opportunities or threats affect the company’s performance and how significant the opportunities are

We use the results in a SWOT analysis. Next, we map and relate these opportunities and threats to the company’s internal strengths and weaknesses. Companies should be able to optimize opportunities by exploiting existing internal strengths and minimizing threats impacting internal weaknesses.

• Micro Environment: Factors and Their Influence On Business
• A Study Material on Business Environment: Factors and Their Influence on the Company
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• Why is the Business Environment Important? What are the Factors?

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Macro Environment: What It Means in Economics, and Key Factors

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

What Is a Macro Environment?

A macro environment refers to the set of conditions that exist in the economy as a whole, rather than in a particular sector or region. In general, the macro environment includes trends in the gross domestic product (GDP), inflation, employment, spending, and monetary and fiscal policy. The macro-environment is closely linked to the general business cycle as opposed to the performance of an individual business sector.

Key Takeaways

• The macro-environment refers to the broader condition of an economy as opposed to specific markets.
• The macro-environment can be affected by GDP, fiscal policy, monetary policy, inflation, employment rates, and consumer spending.
• The state of the macro environment affects business decisions on things such as spending, borrowing, and investing.

Investopedia / Paige McLaughlin

Understanding the Macro Environment

The macro-environment refers to how the macroeconomic conditions in which a company or sector operates influence its performance. Macroeconomics deals with aggregate production, spending, and the price level in an economy as opposed to individual industries and markets.

The amount of the macro environment's influence depends on how much of a company's business is dependent on the health of the overall economy. Cyclical industries are heavily influenced by the macro environment, while basic staple industries are less influenced. Industries that are highly dependent on credit to finance purchases and business investments are strongly influenced by changes in interest rates and global financial markets.

The macro-environment can also directly affect consumers’ ability and willingness to spend. Luxury goods industries and big-ticket consumer goods can be highly impacted by fluctuations in consumer spending. Consumers’ reactions to the broad macro-environment are closely monitored by businesses and economists as a gauge for an economy’s health.

Factors of the Macro Environment

Analyzing the macro environment is an important part of strategic management. Business analysts often conduct a PEST (political, economic, socio-cultural, and technological) analysis to identify macro-economic factors that currently affect or in the future may affect business. Some of the key factors composing the macro environment include the following:

Gross Domestic Product

Gross Domestic Product (GDP) is a measure of a country’s output and production of goods and services. The Bureau of Economic Analysis releases a quarterly report on GDP growth that provides a broad overview of the output of goods and services across all sectors. An especially influential aspect of GDP is corporate profits for the economy, which is another measure of an economy’s comprehensive productivity.

Inflation is a key factor watched by economists, investors, and consumers. It affects the purchasing power of the US dollar and is closely watched by the Federal Reserve. The target rate for annual inflation from the Federal Reserve is 2%. Inflation higher than 2% significantly diminishes the purchasing power of the dollar, making each unit less valuable as inflation rises.

Employment levels in the United States are measured by the Bureau of Labor Statistics, which releases a monthly report on business payrolls and the status of the unemployment rate. The Federal Reserve also seeks to regulate employment levels through monetary policy stimulus and credit measures. These policies can ease borrowing rates for businesses to help improve capital spending and business growth, resulting in employment growth.

Consumer Spending

Consumer spending made up 54% of the U.S. GDP in the second quarter of 2021 and is widely considered to be an important indicator of macroeconomic performance. Slow growth or decline in consumer spending suggests a decline in aggregate demand, which economists consider to be a symptom or even a cause of macroeconomic downturns and recessions. 

Monetary Policy

The Federal Reserve’s monetary policy initiatives are a key factor influencing the macro environment in the United States. Monetary policy measures are typically centered around interest rates and access to credit. Federal interest rate limits are one of the main levers of the Federal Reserve’s monetary policy tools. The Federal Reserve sets a federal funds rate for which federal banks borrow from each other, and this rate is used as a base rate for all credit rates in the broader market. The tightening of monetary policy indicates rates are rising, making borrowing more costly and less affordable.

Fiscal Policy

Fiscal policy refers to government policy around taxation, borrowing, and spending. High tax rates can reduce individual and business incentives to work, invest, and save. The size of a government’s annual deficits and total debt can influence market expectations regarding future tax rates, inflation, and overall macroeconomic stability. Government spending drives borrowing and taxation; it is also widely used as a policy tool to try to stimulate economic activity during slow times and make up for sluggish, consumer spending and business investment during recessions.

What Are the Differences Between a Micro and Macro Environment?

The micro environment refers to the factors within a company that impact its ability to do business. Micro environmental factors are specific to a company and can influence the operation of a company and management's ability to meet the goals of the business. Examples of these factors include the company's suppliers, resellers, customers, and competition.

The micro environment is specific to a business or the immediate location or sector in which it operates. In contrast, the macro environment refers to broader factors that can affect a business. Examples of these factors include demographic , ecological, political, economic, socio-cultural, and technological factors.

What Is Macro Environment Analysis?

Macro environment analysis is part of a company's strategic management that enables it to analyze and identify potential opportunities and hazards that might impact the business. The goal is to prepare management in advance with information that assists them in making operational decisions.

Some companies will employ analysts trained to evaluate macro-environmental factors and provide recommendations based on their research. These analysts will review broad macro-environmental forces related to such factors as politics, the economy, demographics, and technology.

What Is an Example of a Macro Environment?

Political factors are an example of a macro-environmental force that can impact a business. These include laws or government regulations governing companies or the industry in which they operate.

For example, a government can enact tariffs that increase the cost of an imported good a company needs to manufacture its products. Rather than paying the tariff, the company can look for a domestic source for these goods that is cheaper than the imported good. If they can't find a domestic source, they will have to purchase the more expensive imported goods. In many cases, the company will need to pass the additional cost on to the consumer in the form of increased product prices. This could reduce the company's revenue if sales decrease because of the company's higher prices.

U.S. Bureau of Economic Analysis. " Gross Domestic Product ." Accessed Sept. 3, 2021.

U.S. Bureau of Economic Analysis. " U.S. Economy at a Glance ." Accessed Sept. 3, 2021.

Federal Reserve Board. " Why does the Federal Reserve aim for inflation of 2 percent over the longer run? " Accessed Sept. 3, 2021.

U.S. Bureau of Labor Statistics. " Local Area Unemployment Statistics: Unemployment Rates for States ." Accessed Sept. 3, 2021.

U.S. Bureau of Labor Statistics. " Current Employment Statistics - CES (National) ." Accessed Sept. 3, 2021.

Federal Reserve Bank of St. Louis. " Real GDP and Its Components, Quarterly, Seasonally Adjusted ." Accessed Sept. 3, 2021.

Federal Reserve Board. " Review of Monetary Policy Strategy, Tools, and Communications: 2019-2020 Review: Overview ." Accessed Sept. 3, 2021.

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External Factors Affecting Your Business: Macro Environment

There are six macro environmental factors that can affect your business. These six factors are called PESTEL.

Last week we talked about external factors affecting your business, and we focused on the Micro Environment factors . I.e. the immediate external factors affecting your business – the factors you have some control over.

In today’s article, we’ll talk about your business Macro Environment Factors I.e. factors you have almost no control over.

The PESTEL framework is useful not just for examining your company’s macro environment, but for identifying opportunities and threats open to your business.

What Does PESTEL Stand For?

P – Political factors affecting your business E – Economic factors affecting your business S – Social and Cultural factors affecting your business T – Technological factors affecting your business E – Environmental factors affecting your business L – Legal factors affecting your business

What Does This Mean For Your Business?

Within each of these six factors are sub-factors that can affect the way your company operates and the way you market your products or services.

Each PESTEL factor is made up of individual sub-factors that can impact on the way your business operates, and the way you approach marketing.

A thorough PESTEL analysis should provide you with information that includes an extensive list of external factors your business is susceptible to, the potential impact it has on your company, its impact on marketing, and whether it poses an opportunity or a threat to you.

Related Post : External Factors Affecting Your Business: Micro Environment

In-depth Look at PESTEL Analysis

Political factors affecting your business.

These factors are all to what degree a government and government policy may impact on a company, a specific industry or the economy in general.

Political factors to consider

• Election and Post election activities including riots
• Political and government stability
• Instability in a foreign market
• Political orientation
• Taxation policies
• Pressure groups
• Trade Union strength (including Trade restrictions and foreign trade policy)
• Environmental law

Political factors more than often, impact companies and how they do business. For example, during the Kenya 2017 elections, there were several pre- and post-election riots, which affected not just the hospitality and tourism industry but also the construction industry.

For a foreign company hoping to expand their business to Kenya, 2017 was not the right time for such a move, because of the tense political climate, and the unstable market.

This applies not only to businesses planning on expanding to other countries but also to local businesses. Using Kenya once again as an example. They restrict professional services such as Architects. from running online or offline advertisements such as Facebook ads, Google ads, billboards, TV or radio advertisements.

It is important for local and foreign businesses planning on expanding to a new country to respond to current and expected future legislation and adjust their business strategies accordingly.

You should also keep in mind the impact these political factors have on a country’s education system, infrastructure, and health regulations. These are all factors that need to be taken into account when assessing the attractiveness of a potential market.

Economic Factors Affecting Your Business

These factors impact on the economy and its performance, which in turn directly impacts your business and its profitability.

Economic factors can be further broken down into macro-economical and micro-economical factors.

Macro-economical factors deal with the management of demand in any economy. Governments use interest rate control, taxation policy and government expenditure as the main mechanisms they use for this.

Micro-economic factors are all about the way people spend their incomes. This has a large impact on B2C companies in particular.

Economic factors to consider

• Business cycles
• Economic growth
• Inflation rates
• Employment or unemployment rates
• Foreign Exchange rates
• Unemployment levels
• Raw materials cost
• Patterns of ownership
• Disposable income of consumers and businesses

For example, the disposable income of the middle class and lower class customers in Kenya has dropped as the survey shows that 50% of Kenyan households earn below Ksh 10,000($100 USD) Monthly. Local and foreign businesses must consider what this means for their business success.

Social And Cultural Factors Affecting Your Business

These are factors that involve the shared belief and attitudes of the population. The impact your company’s products and services brings to market have on society must be considered.

This area of your business macro environment represents the demographic characteristics, norms, customs and values of the population within which your business operates.

Any elements of the production process or any products/services that are harmful to society should be eliminated to show that your company is taking social responsibility.

Socio-Cultural factors to consider

• Demographics
• Cultural barriers
• Social issues        
• Education levels
• Consumerism

You cannot ignore the impact these factors have on your business as they have a direct effect on how marketers understand customers and what drives them. Understanding this PESTEL factor will help you or your marketing team to better understand your customer’s needs and wants.

In addition, it also says something about the local workforce and its willingness to work under certain conditions.

Technological Factors Affecting Your Business

These are factors relating to innovation in technology that can affect not just your business but the operations of your industry and the market. 

Technology is constantly changing and these changes can influence whether to enter certain industries, launch a product, or even the decision to outsource your production activities abroad.

Technological factors to consider

• Developments in technology (These can be new ways of producing goods and services, new ways of distributing goods and services, or new ways of communicating with target markets)
• Government investment in technology        
• Product life cycles
• Technology incentives

Other technological factors to consider is the level of innovation, automation, research and development (R&D) activity, technological change and the amount of technological awareness that a market possesses.

Knowing what is going on in your industry technology-wise, will help you prevent your company from spending a lot of money on developing a technology that would become obsolete soon because of disruptive technological changes elsewhere.

The skills and knowledge applied to the production, and the technology and materials needed for the production of products and services can also impact the smooth running of the business and must be considered.

Environmental Factors Affecting Your Business

Environmental factors relate to the influence of the surrounding environment and the impact of ecological aspects. Admittedly, these factors have only become important in the last two decades.

Nevertheless, Earth’s renewal of its natural resources such as forests, agricultural products, marine products, etc must be taken into account. There are also natural non-renewable resources such as oil, coal, minerals, etc that may also impact your business production.

Environmental factors to consider

• Green issues
• Climate change and Global warming
• Sustainability        
• Environmental protection
• Environmental pressure groups

Environmental factors have become important because of the increasing scarcity of raw materials, pollution targets and carbon footprint targets set by governments.

These factors include ecological and environmental aspects such as weather, climate, environmental offsets and climate change which may especially affect industries such as tourism, farming, agriculture, and insurance. Growing awareness of the potential impacts of climate change is also affecting how companies operate and the products they offer.

With the rise in importance of CSR (Corporate Sustainability Responsibility), this element of PESTEL is becoming more important.

Legal Factors Affecting Your Business

Every business must understand what is legal and allowed within the territories they operate in. You also must know any change in legislation and the impact this may have on the way your business operates.

Legal factors to consider

• Competition law
• Employment law
• Foreign trade regulation        
• Environmental protection legislation
• Consumer protection legislation

Several political factors overlap with legal factors but it is important to keep in mind that political factors are led by government policy, whereas legal factors must be complied with.

If your business operates across several countries or even several states within a country where each state has different legislation, then this becomes tricky.

In addition, you want to know of any potential changes in legislation and the impact it may have on your business in the future. I recommend having a legal adviser or attorney to help you with these factors.

Related Post :  How To Analyze Your Business Standing In the Market (SWOT)

Now that you know all the external factors affecting your business environment, both macro and micro, it’s time to consider the likelihood of them affecting your business, and how important these factors are in terms of marketing.

Do A PESTEL Analysis!

• For each of the PESTEL factors, select sub-factors that are relevant to your business. List the key factors from the macro environment under each of the PESTEL factors.
• Make notes about ways in which these key factors might impact on marketing. For example, have higher oil prices led to customers using their cars less for shopping and so an increase in shopping online?
• Consider the potential impact it has on your company. What is the potential severity of the impact of this factor? Assign a rating of high, medium or low as far as you can determine.
• Decide on the time frame, whether short, medium or long. Ask yourself “When is this factor likely to impact? Will it be within the next few months, or this year, or in the longer term?”
• Consider whether each factor provides an opportunity or a threat. Is the factor likely to result in a positive opportunity or a negative threat?
• Next, consider the implications it has on your business. Is this trend on the increase, or is it reducing in the impact it might have?
• Lastly, gauge its relative importance. How important is this factor to the business and to marketing?

Answering these questions, and completing the analysis will give you a better and clearer picture, not only of the impact environmental factors are having on your business but also of how this might change in the near future and which need priority attention.

After you have completed a PESTEL analysis, you should be able to use this to help you identify your company’s strengths and weaknesses for a SWOT Analysis , which will in turn help you develop business growth strategies.

In the next Article, we’ll discuss the internal factors affecting your business

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8.3 A Firm's External Macro Environment: PESTEL

• What makes up a firm’s external macro environment, and what tools do strategists use to understand it?

The world at large forms the external environment for businesses. A firm must confront, adapt to, take advantage of, and defend itself against what is happening in the world around it to succeed. To make gathering and interpreting information about the external environment easier, strategic analysts have defined several general categories of activities and groups that managers should examine and understand. Exhibit 8.4 illustrates layers and categories found in a firm’s environment.

A firm’s macro environment contains elements that can impact the firm but are generally beyond its direct control. These elements are characteristics of the world at large and are factors that all businesses must contend with, regardless of the industry they are in or type of business they are. In the Exhibit 8.4 , the macro environment is indicated in blue. Note that the terms contained in the blue ring are all “big-picture” items that exist independently of business activities. That is not to say that they do not affect firms or that firm activities cannot affect macro environmental elements; both can and do happen, but firms are largely unable to directly change things in the macro environment.

Strategists study the macro environment to learn about facts and trends that may present opportunities or threats to their firms. However, they do not usually just think in terms of SWOT. Strategists have developed more discerning tools to examine the external environment.

PESTEL is a tool that reminds managers to look at several distinct categories in the macro environment. Like SWOT, PESTEL is an acronym. In this case, the letters represent the categories to examine: p olitical factors, e conomic factors, s ociocultural factors, t echnological factors, e nvironmental factors, and l egal factors. When using PESTEL to analyze a specific firm’s situation, overlap between different categories of PESTEL factors can sometimes happen just as it can with SWOT.

Remember our earlier example: When urban millennials decide that car ownership is no longer attractive, car manufacturers’ sales are threatened. However, those same manufacturers might be able to adapt their sales methods to offer millennials car-sharing services, taking advantage of the opportunity to earn revenue from millennials who want access to cars for vacations or big shopping trips. PESTEL can also reveal multiple impacts from a single element in the external environment. For example, decreasing interest in car ownership among urban millennials would be a sociocultural trend. However, the technological connectedness of those same urban millennials is exactly what makes it possible for ride-sharing services such as Uber and Lyft to thrive: their services are app based and provide convenience both by connecting drivers and passengers quickly and by making transactions cashless.

Exhibit 8.5 illustrates the components of PESTEL, which will be discussed individually below.

Political Factors

Political factors in the macro environment include taxation, tariffs, trade agreements, labor regulations, and environmental regulations. Note that in PESTEL, factors are not characterized as opportunities or threats. They are simply things that a firm can take advantage of or treat as problems, depending on its own interpretation or abilities. American Electric Power, a large company that generates and distributes electricity, may be negatively impacted by environmental regulations that restrict its ability to use coal to generate electricity because of pollution caused by burning coal. However, another energy firm has taken advantage of the government’s interest in reducing coal emissions by developing a way to capture the emissions while producing power. The Petra Nova plant, near Houston, was developed by NRG and JX Nippon, who received Energy Department grants to help fund the project. 6 Although firms do not directly make government policy decisions, many industries and firms invest in lobbying efforts to try to influence government policy development to create opportunities or reduce threats.

Economic Factors

All firms are impacted by the state of the national and global economies. The increased interdependence of individual country economies has made evaluating the economic factors in a firm’s macro environment more complex. Firms analyze economic indicators to make decisions about entering or exiting geographic markets, investing in expansion, and hiring or laying off employees. As discussed earlier in this chapter, employment rates impact the quantity, quality, and cost of employees available to firms. Interest rates impact sales of big-ticket items that consumers normally finance, such as appliances, cars, and homes. Interest rates also impact the cost of capital for firms that want to invest in expansion. Exchange rates present risks and opportunities to all firms that operate across national borders, and the price of oil impacts many industries, from airlines and transportation companies to solar panel producers and plastic recycling companies. Once again, any scenario can be a threat to one firm and an opportunity to another, so economic forces should not be assumed to be intrinsically good or bad.

Sociocultural Factors

Quite possibly the largest category of macro environmental factors an analyst might examine are sociocultural factors . This broad category encompasses everything from changing national demographics to fashion trends and many things in between. Demographics , a subset of this category, includes facts about income, education levels, age groups, and the ethnic and racial composition of a population. All of these facts present market challenges and possibilities. Firms can target products to specific market segments by studying the needs and preferences of demographic groups, such as working women (they might need day-care services but not watch daytime television), college students (who would be interested in affordable textbooks but couldn’t afford to buy new cars), or the elderly (who would be willing to pay for lawn-mowing services but might not be interested in adventure tourism).

Changes in people’s values and interests are also included in this category. Environmental awareness has spurred demand for solar panels and electric and hybrid cars. A general interest in health and fitness has created industries in gyms, home gym equipment, and organic food. The popularity of social media has created an enormous demand for instant access to information and services, not to mention smartphones. Values and interests are constantly changing and vary from country to country, creating new market opportunities as well as communication challenges for companies trying to enter unfamiliar new markets.

Technological Factors

The rise of the Internet may be the most disruptive technological change of the last century. The globe has become more interconnected and interdependent because of the fast, low-cost communications the Internet provides. Customer service agents in India can serve customers in Kansas because technology has advanced to the point that the customer’s account information can be instantly accessed by the service provider in India. Entrepreneurs around the world can reach customers anywhere through companies such as eBay, Alibaba, and Etsy, and they can get paid, regardless of their customers’ currency, through PayPal. The Internet has enabled Jeff Bezos, who started an online bookselling company called Amazon in 1994, to transform how consumers shop for goods.

How else have technological factors impacted business? The Internet is not the only technological advance that has transformed how businesses operate. Automation has increased efficiency for manufacturers. MRP (materials requirement planning) systems have changed how companies and their suppliers work together, and global-positioning technology has helped construction engineers manage large projects more accurately. Consumers and firms have nearly unlimited access to information, and this access has empowered consumers to make more-informed buying decisions and challenged firms to develop ways to analyze the large amounts of data their businesses generate.

Environmental Factors

The physical environment, which provides natural resources for manufacturing and energy production, has always been a key part of human business activity. As resources become scarcer and more expensive, environmental factors impact businesses more every day. Firms are developing technology to operate more cleanly and using fewer resources. Political pressure on businesses to reduce their impact on the natural environment has increased globally and dramatically in the 21st century. In 2017, London, Barcelona, and Paris announced their plans to ban cars with internal combustion engines over the next few decades, in order to combat air-quality issues. 7

This external environment category often overlaps with others in PESTEL because concern for the environment is also a sociocultural trend, as more consumers look for recycled products and buy electric and hybrid cars. On the political front, firms are facing increased regulation around the world on their carbon emissions and natural resource use. Although SWOT would characterize these factors as either opportunities or threats, PESTEL simply identifies them as aspects of the external environment that firms must consider when planning for their futures.

Legal Factors

Legal factors in the external environment often coincide with political factors because laws are enacted by government entities. This does not mean that the categories identify the same issues, however. Although labor laws and environmental regulations have deep political connections, other legal factors can impact business success. For example, in the streaming video industry, licensing fees are a significant cost for firms. Netflix pays billions of dollars every year to movie and television studios for the right to broadcast their content. In addition to the legal requirement to pay the studios, Netflix must consider that consumers may find illegal ways to view the movies they want to see, making them less willing to pay to subscribe to Netflix. Intellectual property rights and patents are major issues in the legal realm.

Note that some external factors are difficult to categorize in PESTEL. For instance tariffs can be viewed as either a political or economic factor while the influence of the internet could be viewed as either a technological or social factor. While some issues can overlap two or more PESTEL areas, it does not diminish the value of PESTEL as an analytical tool,

Concept Check

• Describe a firm’s macro environment.
• What does PESTEL stand for? How do managers use PESTEL to understand their firm’s macro environment?

Ethics in Practice

Sustainability and responsible management: can lego give up plastic.

“In 2012, the LEGO Group first shared its ambition to find and implement sustainable alternatives to the current raw materials used to manufacture LEGO products by 2030. The ambition is part of the LEGO Group’s work to reduce its environmental footprint and leave a positive impact on the planet our children will inherit.” 8

Danish toy company LEGO announced in 2015 that it would invest almost $160 million dollars into its efforts to meet the goal it announced in 2012. You know LEGO—they are the colored plastic bricks that snap together to make toys ranging from Harry Potter castles to Star Wars fighter craft. The family-owned company was founded in 1932 by Ole Kirk Christiansen and has since grown to be the world’s number one toy brand. 9

Given that LEGO and plastic seem to go hand in hand, why would the company want to give up on the material that makes their toys so successful? LEGO’s manufacturing process relies on plastic to make highly precise plastic bricks that always fit together securely and easily. Replacing the plastic with another material that is durable, can be brightly colored, and can be molded as precisely is a difficult task. LEGO’s leadership has decided that a strategic position based on fossil fuels is not sustainable and is making plans now to transition to a more environmentally friendly material to manufacture its products.

Switching from oil-based plastic might make economic sense as well. Manufacturers who rely on petroleum-based products must weather volatile oil prices. LEGO’s raw materials costs could skyrocket overnight if the price of oil climbs again as it did in 2011. That price spike was due to conflict in Libya and other parts of the Arab world, 10 something entirely beyond the control of any business.

Technological innovations in bio-based plastics may be the answer for LEGO, 11 which is working with university researchers around the globe to find a solution to its carbon-footprint problem.

Sources: Trangbæk, Roar Rude (2016). “LEGO Group to invest 1 Billion DKK Boosting Search for Sustainable Materials.” https://www.lego.com/en-us/aboutus/news-room/2015/june/sustainable-materials-centre. Accessed July 29, 2017; Brand Finance (2017). “Toys 25 2016.” http://brandfinance.com/images/upload/brand_finance_toys_25_2017_report_locked.pdf Accessed July 29, 2017; Holodny, Elena (2016). TIMELINE: The tumultuous 155-year history of oil prices. Business Insider . http://www.businessinsider.com/timeline-155-year-history-of-oil-prices-2016-12 Accessed July 29, 2017; and Peters, Adele (2015). “Why LEGO is Spending Millions to Ditch Oil-Based Plastic.” Fast Company . https://www.fastcompany.com/3048017/why-lego-is-spending-millions-to-ditch-oil-based-plastic Accessed July 29, 2017.

• How would you approach this issue if you were the manager in charge of sourcing raw materials for LEGO? How would PESTEL analysis inform your actions?
• What PESTEL challenges is LEGO trying to address by changing the raw materials used in its products?
• Explain what favorable PESTEL factors support LEGO’s efforts.

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6.3 A Firm’s External Macro Environment: PESTEL

• What makes up a firm’s external macro environment, and what tools do strategists use to understand it?

The world at large forms the external environment for businesses. A firm must confront, adapt to, take advantage of, and defend itself against what is happening in the world around it to succeed. To make gathering and interpreting information about the external environment easier, strategic analysts have defined several general categories of activities and groups that managers should examine and understand. Exhibit 6 .2  illustrates layers and categories found in a firm’s environment.

A firm’s macro environment contains elements that can impact the firm but are generally beyond its direct control. These elements are characteristics of the world at large and are factors that all businesses must contend with, regardless of the industry they are in or type of business they are. In the Exhibit 6 .2 , the macro environment is indicated in blue. Note that the terms contained in the blue ring are all “big-picture” items that exist independently of business activities. That is not to say that they do not affect firms or that firm activities cannot affect macro environmental elements; both can and do happen, but firms are largely unable to directly change things in the macro environment.

Strategists study the macro environment to learn about facts and trends that may present opportunities or threats to their firms. However, they do not usually just think in terms of SWOT. Strategists have developed more discerning tools to examine the external environment.

PESTEL is a tool that reminds managers to look at several distinct categories in the macro environment. Like SWOT, PESTEL is an acronym. In this case, the letters represent the categories to examine: p olitical factors, e conomic factors, s ociocultural factors, t echnological factors, e nvironmental factors, and l egal factors. When using PESTEL to analyze a specific firm’s situation, overlap between different categories of PESTEL factors can sometimes happen just as it can with SWOT.

Remember our earlier example: When urban millennials decide that car ownership is no longer attractive, car manufacturers’ sales are threatened. However, those same manufacturers might be able to adapt their sales methods to offer millennials car-sharing services, taking advantage of the opportunity to earn revenue from millennials who want access to cars for vacations or big shopping trips. PESTEL can also reveal multiple impacts from a single element in the external environment. For example, decreasing interest in car ownership among urban millennials would be a sociocultural trend. However, the technological connectedness of those same urban millennials is exactly what makes it possible for ride-sharing services such as Uber and Lyft to thrive: their services are app based and provide convenience both by connecting drivers and passengers quickly and by making transactions cashless.

Exhibit 6 .3  illustrates the components of PESTEL, which will be discussed individually below.

Political Factors

Political factors in the macro environment include taxation, tariffs, trade agreements, labor regulations, and environmental regulations. Note that in PESTEL, factors are not characterized as opportunities or threats. They are simply things that a firm can take advantage of or treat as problems, depending on its own interpretation or abilities. American Electric Power, a large company that generates and distributes electricity, may be negatively impacted by environmental regulations that restrict its ability to use coal to generate electricity because of pollution caused by burning coal. However, another energy firm has taken advantage of the government’s interest in reducing coal emissions by developing a way to capture the emissions while producing power. The Petra Nova plant, near Houston, was developed by NRG and JX Nippon, who received Energy Department grants to help fund the project. 6 Although firms do not directly make government policy decisions, many industries and firms invest in lobbying efforts to try to influence government policy development to create opportunities or reduce threats.

Economic Factors

All firms are impacted by the state of the national and global economies. The increased interdependence of individual country economies has made evaluating the economic factors in a firm’s macro environment more complex. Firms analyze economic indicators to make decisions about entering or exiting geographic markets, investing in expansion, and hiring or laying off employees. As discussed earlier in this chapter, employment rates impact the quantity, quality, and cost of employees available to firms. Interest rates impact sales of big-ticket items that consumers normally finance, such as appliances, cars, and homes. Interest rates also impact the cost of capital for firms that want to invest in expansion. Exchange rates present risks and opportunities to all firms that operate across national borders, and the price of oil impacts many industries, from airlines and transportation companies to solar panel producers and plastic recycling companies. Once again, any scenario can be a threat to one firm and an opportunity to another, so economic forces should not be assumed to be intrinsically good or bad.

Sociocultural Factors

Quite possibly the largest category of macro environmental factors an analyst might examine are sociocultural factors . This broad category encompasses everything from changing national demographics to fashion trends and many things in between. Demographics , a subset of this category, includes facts about income, education levels, age groups, and the ethnic and racial composition of a population. All of these facts present market challenges and possibilities. Firms can target products to specific market segments by studying the needs and preferences of demographic groups, such as working women (they might need day-care services but not watch daytime television), college students (who would be interested in affordable textbooks but couldn’t afford to buy new cars), or the elderly (who would be willing to pay for lawn-mowing services but might not be interested in adventure tourism).

Changes in people’s values and interests are also included in this category. Environmental awareness has spurred demand for solar panels and electric and hybrid cars. A general interest in health and fitness has created industries in gyms, home gym equipment, and organic food. The popularity of social media has created an enormous demand for instant access to information and services, not to mention smartphones. Values and interests are constantly changing and vary from country to country, creating new market opportunities as well as communication challenges for companies trying to enter unfamiliar new markets.

Technological Factors

The rise of the Internet may be the most disruptive technological change of the last century. The globe has become more interconnected and interdependent because of the fast, low-cost communications the Internet provides. Customer service agents in India can serve customers in Kansas because technology has advanced to the point that the customer’s account information can be instantly accessed by the service provider in India. Entrepreneurs around the world can reach customers anywhere through companies such as eBay, Alibaba, and Etsy, and they can get paid, regardless of their customers’ currency, through PayPal. The Internet has enabled Jeff Bezos, who started an online bookselling company called Amazon in 1994, to transform how consumers shop for goods.

How else have technological factors impacted business? The Internet is not the only technological advance that has transformed how businesses operate. Automation has increased efficiency for manufacturers. MRP (materials requirement planning) systems have changed how companies and their suppliers work together, and global-positioning technology has helped construction engineers manage large projects more accurately. Consumers and firms have nearly unlimited access to information, and this access has empowered consumers to make more-informed buying decisions and challenged firms to develop ways to analyze the large amounts of data their businesses generate.

Environmental Factors

The physical environment, which provides natural resources for manufacturing and energy production, has always been a key part of human business activity. As resources become scarcer and more expensive, environmental factors impact businesses more every day. Firms are developing technology to operate more cleanly and using fewer resources. Political pressure on businesses to reduce their impact on the natural environment has increased globally and dramatically in the 21st century. In 2017, London, Barcelona, and Paris announced their plans to ban cars with internal combustion engines over the next few decades, in order to combat air-quality issues. 7

This external environment category often overlaps with others in PESTEL because concern for the environment is also a sociocultural trend, as more consumers look for recycled products and buy electric and hybrid cars. On the political front, firms are facing increased regulation around the world on their carbon emissions and natural resource use. Although SWOT would characterize these factors as either opportunities or threats, PESTEL simply identifies them as aspects of the external environment that firms must consider when planning for their futures.

Legal Factors

Legal factors in the external environment often coincide with political factors because laws are enacted by government entities. This does not mean that the categories identify the same issues, however. Although labor laws and environmental regulations have deep political connections, other legal factors can impact business success. For example, in the streaming video industry, licensing fees are a significant cost for firms. Netflix pays billions of dollars every year to movie and television studios for the right to broadcast their content. In addition to the legal requirement to pay the studios, Netflix must consider that consumers may find illegal ways to view the movies they want to see, making them less willing to pay to subscribe to Netflix. Intellectual property rights and patents are major issues in the legal realm.

Note that some external factors are difficult to categorize in PESTEL. For instance tariffs can be viewed as either a political or economic factor while the influence of the internet could be viewed as either a technological or social factor. While some issues can overlap two or more PESTEL areas, it does not diminish the value of PESTEL as an analytical tool,

CONCEPT CHECK

• Describe a firm’s macro environment.
• What does PESTEL stand for? How do managers use PESTEL to understand their firm’s macro environment?

ETHICS IN PRACTICE

Sustainability and responsible management: can lego give up plastic.

“In 2012, the LEGO Group first shared its ambition to find and implement sustainable alternatives to the current raw materials used to manufacture LEGO products by 2030. The ambition is part of the LEGO Group’s work to reduce its environmental footprint and leave a positive impact on the planet our children will inherit.” 8

Danish toy company LEGO announced in 2015 that it would invest almost $160 million dollars into its efforts to meet the goal it announced in 2012. You know LEGO—they are the colored plastic bricks that snap together to make toys ranging from Harry Potter castles to Star Wars fighter craft. The family-owned company was founded in 1932 by Ole Kirk Christiansen and has since grown to be the world’s number one toy brand. 9

Given that LEGO and plastic seem to go hand in hand, why would the company want to give up on the material that makes their toys so successful? LEGO’s manufacturing process relies on plastic to make highly precise plastic bricks that always fit together securely and easily. Replacing the plastic with another material that is durable, can be brightly colored, and can be molded as precisely is a difficult task. LEGO’s leadership has decided that a strategic position based on fossil fuels is not sustainable and is making plans now to transition to a more environmentally friendly material to manufacture its products.

Switching from oil-based plastic might make economic sense as well. Manufacturers who rely on petroleum-based products must weather volatile oil prices. LEGO’s raw materials costs could skyrocket overnight if the price of oil climbs again as it did in 2011. That price spike was due to conflict in Libya and other parts of the Arab world, 10 something entirely beyond the control of any business.

Technological innovations in bio-based plastics may be the answer for LEGO, 11 which is working with university researchers around the globe to find a solution to its carbon-footprint problem.

Sources: Trangbæk, Roar Rude (2016). “LEGO Group to invest 1 Billion DKK Boosting Search for Sustainable Materials.” https://www.lego.com/en-us/aboutus/news-room/2015/june/sustainable-materials-centre. Accessed July 29, 2017; Brand Finance (2017). “Toys 25 2016.” http://brandfinance.com/images/upload/brand_finance_toys_25_2017_report_locked.pdf Accessed July 29, 2017; Holodny, Elena (2016). TIMELINE: The tumultuous 155-year history of oil prices. Business Insider . http://www.businessinsider.com/timeline-155-year-history-of-oil-prices-2016-12 Accessed July 29, 2017; and Peters, Adele (2015). “Why LEGO is Spending Millions to Ditch Oil-Based Plastic.” Fast Company . https://www.fastcompany.com/3048017/why-lego-is-spending-millions-to-ditch-oil-based-plastic Accessed July 29, 2017.

• How would you approach this issue if you were the manager in charge of sourcing raw materials for LEGO? How would PESTEL analysis inform your actions?
• What PESTEL challenges is LEGO trying to address by changing the raw materials used in its products?
• Explain what favorable PESTEL factors support LEGO’s efforts.

Source contents: Principles of Management and Organizational Behavior . Please visit OpenStax for more details: https://openstax.org/subjects/view-all

Introduction to Management and Organizational Behavior Copyright © by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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Micro And Macro Environment Factors That Affect Your Business

Every business is affected by a myriad of factors. In other words, an organization as such can never exist and operate “in a vacuum”. It is a part of a larger entity known as the business environment. In broad terms, this environment can be divided into two categories. The first one is the micro-environment. This category influences the functionality of a particular business itself. The latter one is the macro-environment which affects the operation of all existing business entities out there.

The two categories may be different, but both are essential to understand in order to truly see your business in its full context. You have to be knowledgeable about the business environment in order to be able to track and comprehend how various factors affect your company.

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What is the micro-environment?

The micro-environment is the environment that has a direct impact on your business. It is related to the particular area where your company operates and can directly affect all of your business processes. In other words, it consists of all the factors that affect particularly your business. They have the ability to influence your daily proceedings and general performance of the company. Still, the effect that they have is not a long-lasting one.

The micro-environment includes customers, suppliers, resellers, competitors, and the general public.

What is the macro-environment?

The macro-environment is more general - it is the environment in the economy itself. It has an effect on how all business groups operate, perform, make decisions, and form strategies simultaneously. It is quite dynamic, which means that a business has to constantly track its changes. It consists of external factors that the company itself doesn’t control but is certainly affected by.

The factors that make up the macro-environment are economic factors, demographic forces, technological factors, natural and physical forces, political and legal forces, and social and cultural forces.

Key Differences Between Micro Environment and Macro Environment

Here are the major difference between micro and macro environment:

For a company, the microenvironment is its closest circle of neighbors, like suppliers and customers. The macroenvironment is like the whole city it operates in, with big forces like the economy and culture affecting everyone.

While microenvironment factors are like close contacts who impact only a specific business, macroenvironment forces are akin to weather changes that affect all players in the market.

While businesses can tweak some microenvironmental factors, like choosing suppliers or targeting specific customers, macro forces like inflation and government policies are completely out of their control.

The firm feels the immediate and regular ripples of the microenvironment, whereas the macroenvironment casts a broader, slower-moving shadow.

On a daily basis, a firm feels the direct sting of the microenvironment – competitors, customers, and suppliers. The macroenvironment, like the economy or government policies, casts a longer shadow, affecting businesses more subtly over time.

Micro-environment factors:

The kind of customer base that your company attracts, as well as the reasoning behind purchasing your product, are going to highly affect the way you create marketing campaigns. Besides, when it comes to choosing product photography ideas to display the advantages of items on offer, you have to look up to the marketing principles you’ve defined as the core.Your customers can be B2C, B2B, international, local, and so on. Adopting a cloud-based contact center can help streamline communication and support for these diverse customer segments.

Important factors related to customers are:

• Stability of demand
• Prospects of sale growth
• Relative profitability
• Intensity of competition

If a supplier of a particular product is the largest, or even the only one, they are certainly going to have a big influence on how successful your business is.

The suppliers are extremely important factors as:

• Key link in the value delivery process
• Insurance that your business has the necessary resources
• Essential determinants in terms of price increase or decrease

If you decide to sell your product via a third party reseller, or middlemen such as wholesalers and retailers, then the success of your marketing is going to be highly dependent on them. If let’s say, a certain retail seller has a strong reputation, it will pass on to your product.

As a link between you and the customer, they are important in terms of these factors:

• Distribution
• Financial mediation

Competitors

Logically, every business that sells the same or a similar kind of product as you do is your competition on the market . So, their sale and marketing tactics matter to you a lot. You need to answer various questions, such as how their product and its price affect yours and how you can make use of that in order to gain an edge over them.

The three factors that matter in this case are:

• Desire competition
• Product form competition
• Brand competition

The general public

Of course, every business organization has in its best interest to appease to the general public. Every step that you take needs to be viewed from their perspective as well. It is extremely important how your actions affect others because their opinion can be the one thing that either pushes you towards success or pulls you down from the pedestal.

So, the general public is very important in terms of:

• Public opinion
• Environmental pollution

Macro-environment factors

Economic factors.

Basically, the very environment of the economy can have an effect on two essential aspects – your company’s levels of production and the decision-making process of your customers.

Some examples of economic factors affecting business:

• Interest rates
• Exchange rates
• Demand / Supply

Demographic forces

Every chunk of the market is affected by universal demographic forces . These are age, education level, cultural characteristics, country and region, lifestyle, and so on.

The crucial variables include:

• How income variables influence business
• Age variables that affect business
• Geographic Region Variables
• Education Level as a Variable

Technological factors

These factors are related to skills and ability that are implemented into production, as well as all the materials and technology that a particular product requires to be made. They are essential and can have a big impact on how well your business is running. It boils down to even the most basic factors, such as what kind of maintenance trolleys you use in order to preserve your tools and equipment for as long as you possibly can.

Some of the most common technological factors are:

• Internet connectivity
• 3D technology
• Speed/power of computer calculation
• Engine performance and efficiency
• Security in terms of cryptography
• Wireless charging

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Natural and physical forces

Every business must also take into account the very planet and its resources. There are those that can be renewed, such as forests and agricultural products, and those that cannot, such as coal, minerals, oil, and the like. Both are strongly related to production. So, natural and physical forces can be:

• Climate change
• Availability of both non-renewable and renewable resources
• Laws that regulate the environment
• Survival of particular biological species

Political and legal forces

The market develops according to the political and legal environment in various areas. This means that every business needs to be up to date with such forces worldwide to be able to make the right decisions.

This generally includes legal factors such as:

• Copyright law
• Employment law
• Discrimination law
• Health and Safety law
• Import/Export law

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Social and cultural forces

Finally, it is crucial to understand that the product that you bring to the market can have a strong impact on society. For example, your production needs to eliminate every practice that is hazardous to society, and show that it is socially responsible. There is a wide variety of social and cultural factors, some of them being:

• Purchasing habits
• Level of education
• Religion and beliefs
• Consciousness about health issues
• Social classes
• Structure and size of a family
• Growth rate of the population
• Emigration and immigration rates
• Life expectancy rates and age distribution
• Different lifestyles

SWOT analysis

The SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) is useful both for understanding the micro and the macro factors. The former two are internal and affect the very business, while the latter are external and not under the organization’s control.

In terms of strengths, you should ask yourself what you are good at, what value you bring, what kind of difference you make, and so on. On the other hand, when it comes to weaknesses, you need to evaluate your dependency on outside vendors, aspects that need to be improved, and so on.

Opportunities are related to favorable circumstances that the company needs to make use of in order to improve its position on the market. Threats are factors that cannot be controlled but need to be acknowledged. This includes political, economic, and customer trends, as well as debts and costs.

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Two Sides of the micro and macro factors - Chance or Threat?

Both the micro and macro environments present challenges and opportunities for businesses. These can be seen as two sides of the same coin, where the same factor can be both a threat and an opportunity depending on how a business reacts.

Microenvironment

Opportunities

• Identifying unmet customer needs: Understanding customer preferences and desires in your immediate vicinity can lead to developing new products or services tailored to your local market.
• Building strong relationships with suppliers and distributors: Fostering close partnerships can result in better deals, more reliable supply chains, and increased efficiency.
• Outmaneuvering local competitors: Analyzing competitor strategies and weaknesses can help you differentiate yourself and attract customers.
• Leveraging local events and trends: Participating in local events or catering to specific cultural trends can generate positive publicity and attract new customers.
• Changes in customer preferences: Shifts in local tastes or purchasing behaviors can quickly hurt your sales.
• Disruptions in your supply chain: Local supplier issues or logistical problems can impact your production and availability of products.
• Intensified competition: Increased competition in your immediate area can put pressure on your prices and market share.
• Negative local publicity: Bad reviews, scandals, or negative local image can significantly damage your business reputation.

Macroenvironment

• Taking advantage of economic growth: Expanding businesses during economic booms can lead to increased profits and market share.
• Adapting to technological advancements: Embracing new technologies can improve efficiency, reach new customers, and offer innovative products or services.
• Capitalizing on favorable government policies: Tax breaks, subsidies, or other government initiatives can create new business opportunities.
• Addressing social and environmental concerns: Aligning your business with sustainability practices or addressing social issues can attract customers and investors.
• Economic downturns: Recessionary periods can decrease consumer spending and hurt your business revenue.
• Disruptive technological shifts: Emerging technologies can render your current products or services obsolete.
• Uncertain political or legal landscape: Changes in government regulations or political instability can create risks and disrupt operations.
• Climate change and environmental factors: Extreme weather events, resource scarcity, or stricter environmental regulations can impact your business.
• Remember, these are just examples, and the specific opportunities and threats will vary depending on your industry, location, and size. It’s crucial for businesses to constantly monitor both the micro and macro environments and develop strategies to adapt and thrive in a changing landscape.

In Conclusion

Both micro and macro factors have a strong influence on how successful your business is. Every decision that you make needs to take these two environments into consideration. Your marketing strategies have to be based on them as well, if you truly want them to be lucrative, and retain a reputable position on the market.

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1.3: Systemic or “Macro” Factors That Affect Financial Thinking

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Learning Objectives

• Identify the systemic or macro factors that affect personal financial planning.
• Describe the impact of inflation or deflation on disposable income.
• Describe the effect of rising unemployment on disposable income.
• Explain how economic indicators can have an impact on personal finances.

Financial planning has to take into account conditions in the wider economy and in the markets that make up the economy. The labor market , for example, is where labor is traded through hiring or employment. Workers compete for jobs and employers compete for workers. In the capital market , capital (cash or assets) is traded, most commonly in the form of stocks and bonds (along with other ways to package capital). In the credit market , a part of the capital market, capital is loaned and borrowed rather than bought and sold. These and other markets exist in a dynamic economic environment, and those environmental realities are part of sound financial planning.

In the long term, history has proven that an economy can grow over time, that investments can earn returns, and that the value of currency can remain relatively stable. In the short term, however, that is not continuously true. Contrary or unsettled periods can upset financial plans, especially if they last long enough or happen at just the wrong time in your life. Understanding large-scale economic patterns and factors that indicate the health of an economy can help you make better financial decisions. These systemic factors include, for example, business cycles and employment rates.

Business Cycles

An economy tends to be productive enough to provide for the wants of its members. Normally, economic output increases as population increases or as people’s expectations grow. An economy’s output or productivity is measured by its gross domestic product or GDP, the value of what is produced in a period. When the GDP is increasing, the economy is in an expansion, and when it is decreasing, the economy is in a contraction. An economy that contracts for half a year is said to be in recession ; a prolonged recession is a depression . The GDP is a closely watched barometer of the economy (see Figure 1.4).

Over time, the economy tends to be cyclical, usually expanding but sometimes contracting. This is called the business cycle . Periods of contraction are generally seen as market corrections, or the market regaining its equilibrium, after periods of growth. Growth is never perfectly smooth, so sometimes certain markets become unbalanced and need to correct themselves. Over time, the periods of contraction seem to have become less frequent, as you can see in Figure 1.4. The business cycles still occur nevertheless.

There are many metaphors to describe the cyclical nature of market economies: “peaks and troughs,” “boom and bust,” “growth and contraction,” “expansion and correction,” and so on. While each cycle is born in a unique combination of circumstances, cycles occur because things change and upset economic equilibrium. That is, events change the balance between supply and demand in the economy overall. Sometimes demand grows too fast and supply can’t keep up, and sometimes supply grows too fast for demand. There are many reasons that this could happen, but whatever the reasons, buyers and sellers react to this imbalance, which then creates a change.

Employment Rate

An economy produces not just goods and services to satisfy its members but also jobs, because most people participate in the market economy by trading their labor, and most rely on wages as their primary source of income. The economy therefore must provide opportunity to earn wages so more people can participate in the economy through the market. Otherwise, more people must be provided for in some other way, such as a private or public subsidy (charity or welfare).

The unemployment rate is a measure of an economy’s shortcomings, because it shows the proportion of people who want to work but don’t because the economy cannot provide them jobs. There is always some so-called natural rate of unemployment as people move in and out of the workforce as the circumstances of their lives change—for example, as they retrain for a new career or take time out for family. But natural unemployment should be consistently low and not affect the productivity of the economy.

Unemployment also shows that the economy is not efficient, because it is not able to put all its productive human resources to work.

The employment rate , or the participation rate of the labor force, shows how successful an economy is at creating opportunities to sell labor and efficiently using its human resources. A healthy market economy uses its labor productively, is productive, and provides employment opportunities as well as consumer satisfaction through its markets. Table 1.3.1 shows the relationship between GDP and unemployment and each stage of the business cycle.

At either end of this scale of growth, the economy is in an unsustainable position: either growing too fast, with too much demand for labor, or shrinking, with too little demand for labor.

If there is too much demand for labor—more jobs than workers to fill them—then wages will rise, pushing up the cost of everything and causing prices to rise. Prices usually rise faster than wages, for many reasons, which would discourage consumption that would eventually discourage production and cause the economy to slow down from its “boom” condition into a more manageable rate of growth.

If there is too little demand for labor—more workers than jobs—then wages will fall or, more typically, there will be people without jobs, or unemployment. If wages become low enough, employers theoretically will be encouraged to hire more labor, which would bring employment levels back up. However, it doesn’t always work that way, because people have job mobility—they are willing and able to move between economies to seek employment.

If unemployment is high and prolonged, then too many people are without wages for too long, and they are not able to participate in the economy because they have nothing to trade. In that case, the market economy is just not working for too many people, and they will eventually demand a change (which is how most revolutions have started).

Other Indicators of Economic Health

Other economic indicators give us clues as to how “successful” our economy is, how well it is growing, or how well positioned it is for future growth. These indicators include statistics, such as the number of houses being built or existing home sales, orders for durable goods (e.g., appliances and automobiles), consumer confidence, producer prices, and so on. However, GDP growth and unemployment are the two most closely watched indicators, because they get at the heart of what our economy is supposed to accomplish: to provide diverse opportunities for the most people to participate in the economy, to create jobs, and to satisfy the consumption needs of the most people by enabling them to get what they want.

An expanding and healthy economy will offer more choices to participants: more choices for trading labor and for trading capital. It offers more opportunities to earn a return or an income and therefore also offers more diversification and less risk.

Naturally, everyone would rather operate in a healthier economy at all times, but this is not always possible. Financial planning must include planning for the risk that economic factors will affect financial realities. A recession may increase unemployment, lowering the return on labor—wages—or making it harder to anticipate an increase in income. Wage income could be lost altogether. Such temporary involuntary loss of wage income probably will happen to you during your lifetime, as you inevitably will endure economic cycles.

A hedge against lost wages is investment to create other forms of income. In a period of economic contraction, however, the usefulness of capital, and thus its value, may decline as well. Some businesses and industries are considered immune to economic cycles (e.g., public education and health care), but overall, investment returns may suffer. Thus, during your lifetime business cycles will likely affect your participation in the capital markets as well.

Currency Value

Stable currency value is another important indicator of a healthy economy and a critical element in financial planning. Like anything else, the value of a currency is based on its usefulness. We use currency as a medium of exchange, so the value of a currency is based on how it can be used in trade, which in turn is based on what is produced in the economy. If an economy produces little that anyone wants, then its currency has little value relative to other currencies, because there is little use for it in trade. So a currency’s value is an indicator of how productive an economy is.

A currency’s usefulness is based on what it can buy, or its purchasing power . The more a currency can buy, the more useful and valuable it is. When prices rise or when things cost more, purchasing power decreases; the currency buys less and its value decreases.

When the value of a currency decreases, an economy has inflation . Its currency has less value because it is less useful; that is, less can be bought with it. Prices are rising. It takes more units of currency to buy the same amount of goods. When the value of a currency increases, on the other hand, an economy has deflation . Prices are falling; the currency is worth more and buys more.

For example, say you can buy five video games for $20. Each game is worth $4, or each dollar buys ¼ of a game. Then we have inflation, and prices—including the price of video games—rise. A year later you want to buy games, but now your $20 only buys two games. Each one costs $10, or each dollar only buys one-tenth of a game. Rising prices have eroded the purchasing power of your dollars.

If there is deflation, prices fall, so maybe a year later you could buy ten video games with your same $20. Now each game costs only $2, and each dollar buys half a game. The same amount of currency buys more games: its purchasing power has increased, as has its usefulness and its value (Figure 1.3.2 ).

Inflation is most commonly measured by the consumer price index (CPI), an index created and tracked by the federal government. It measures the average nationwide prices of a “basket” of goods and services purchased by the average consumer. It is an accepted way of tracking rising or falling price levels, indicative of inflation or deflation. Figure 1.9 shows the percent change in the consumer price index as a measure of inflation during the period from 1979 to 2008.

Currency instabilities can also affect investment values, because the dollars that investments return don’t have the same value as the dollars that the investment was expected to return. Say you lend $100 to your sister, who is supposed to pay you back one year from now. There is inflation, so over the next year, the value of the dollar decreases (it buys less as prices rise). Your sister does indeed pay you back on time, but now the $100 that she gives back to you is worth less (because it buys less) than the $100 you gave her. Your investment, although nominally returned, has lost value: you have your $100 back, but you can’t do as much with it; it is less useful.

If the value of currency—the units in which wealth is measured and stored—is unstable, then investment returns are harder to predict. In those circumstances, investment involves more risk. Both inflation and deflation are currency instabilities that are troublesome for an economy and also for the financial planning process. An unstable currency affects the value or purchasing power of income. Price changes affect consumption decisions, and changes in currency value affect investing decisions.

It is human nature to assume that things will stay the same, but financial planning must include the assumption that over a lifetime you will encounter and endure economic cycles. You should try to anticipate the risks of an economic downturn and the possible loss of wage income and/or investment income. At the same time, you should not assume or rely on the windfalls of an economic expansion.

• Business cycles include periods of expansion and contraction (including recessions), as measured by the economy’s productivity (gross domestic product).
• An economy is in an unsustainable situation when it grows too fast or too slowly, as each situation causes too much stress in the economy’s markets.
• the rates of employment and unemployment,
• the value of currency (the consumer price index).
• Financial planning should take into account the fact that periods of inflation or deflation change the value of currency, affecting purchasing power and investment values.
• business cycles,
• changes in the economy’s productivity,
• changes in the currency value,
• changes in other economic indicators.
• Go to http://www.nber.org/cycles.html to see a chart published by the National Bureau of Economic Research. The chart shows business cycles in the United States and their durations between 1854 and 2001. What patterns and trends do you see in these historical data? Which years saw the longest recessions? How can you tell that the U.S. economy has tended to become more stable over the decades?
• Record in your personal financial journal or in My Notes the macroeconomic factors that are influencing your financial thinking and behavior today. What are some specific examples? How have large-scale economic changes or cycles, such as the economic recession of 2008–2009, affected your financial planning and decision making?
• How does the health of the economy affect your financial health? How healthy is the U.S. economy right now? On what measures do you base your judgments? How will your appreciation of the big picture help you in planning for your future?
• How do business cycles and the health of the economy affect the value of your labor? In terms of supply and demand, what are the optimal conditions in which to sell your labor? How might further education increase your mobility in the labor market (the value of your labor)?
• protecting against recession,
• hedging against inflation,
• mitigating the effects of deflation,
• taking realistic advantage of periods of expansion.