External factors of environment affecting organisations
The word environment means the surrounding atmosphere and conditions for existence. It is very important for organisational leaders to know and understand the environment before they start doing business.
The external factors of the environment are factors that are not under the control of an organisation. These factors include social environment, political conditions, technological environment, government regulations and policies, accounting agencies like accounting standard board, resources in economy and cultural environment and demographics of people (Finance Discussion Form 2010).
The external environment comprises of all the outside factors that may have an impact on the workings of an organisation. The external environment is divided into 2 parts: directly interactive and indirectly interactive. A directly interactive type of environment has an immediate and firsthand impact upon an organisation. An indirectly interactive type of environment has a secondary and more distant impact on an organisation (Global Business Environment online Journal).
The category of directly interactive environmental forces includes owners, customers, suppliers, competitors, employees and employee unions (The External Environment online Article).
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Conversely, the category of indirectly interactive environmental forces includes social-cultural, political and legal, technological, economic and global influences. Indirectly interactive forces may impact one organisation more than another simply because of the nature of a particular business (Global Strategy online Article).
External factors that can affect a business are: social factors: how consumer, households and communities behave and their beliefs e.g. changes in attitude towards health or a greater number of pensioners in a population. Legal factors: the way in which legislation in society affects the business e.g. changes in employment laws on working hours. Economic factors: how the economy affects a business in terms of taxation, government spending, general demand, interest rates, exchange rates and European and global economic factors. Political factors: how changes in government policy might affect the business e.g. a decision to subsidise building new houses could be good for local brick works.
Technological factors: how the rapid pace of change in production processes and product innovation affect a business. And ethical factors: what is regarded as morally right or wrong for a business to do e.g. trading with countries which have a poor record on human rights would be seen as unethical (External factors that affect retail industry online Article).
Knowledge and understanding of the environment is vital for an organisation to know in order to be successful.
Outline of the company I have chosen for the purposes of my essay: PRIMARK
Primark Stores Limited is an Irish clothing retailer, operating over 200 stores in Ireland, the United Kingdom, the Netherlands, Germany, Spain, Portugal and Belgium. Within this area of responsibility, Primark stores outnumbered other clothing retailer business, with 161 stores overall distributed in three major regions: 125 in the United Kingdom, 34 in Ireland and 8 in Spain. Primark is known for selling clothes at the budget end of the market. The company's success is based on sourcing supply cheaply, making clothes with simple designs and fabrics, only making them in the most popular sizes, buying stock in huge bulks and varieties and not advertising. The company positions itself as marketing fashionable at cutthroat prices.
The original clothing store was established by Arthur Ryan and his collaborator Micaela Mitchell in Dublin Ireland in 1969. After various success in clothing business, great profits and gross income led them to open stores in local and regional areas. It acquired various premises in different business centres within its local and regional areas which eventually generate more profits and income.
Hence, these successes brought significant changes on Primark's retail business. The relevance of global trends and consumers' demands on lifestyle made Primark Store Limited reinvent its business scheme and management structure (The analysis on the external and internal environment of Primark retailing industry).
In the recent years Primark has received many awards for its products including the prestigious 'Retailer of the Year' award for 2 years in a row now (Primark website 2010).
Whilst the company's main headquarters are based in Ireland, the chain is a subsidiary of Associated British Foods plc (ABF), and is ultimately controlled by the Weston family through Wittington Investments (Primark Stores Ltd 2010).
The analytical framework I have selected for the company
The key environmental issue I have chosen for the basis of my analysis of Primark is PESTEL.
The term PESTEL stands for - Political, Economic, Sociological, Technological, Environmental & Legal. This term has been used regularly in the past 10 years and its true history is difficult to establish. Various other similar acronyms that have also been used include ETPS, STEP, PEST and STEEPLE (PESTLE analysis 2010).
I choose the PESTEL analysis tool as it is used by companies for business and strategic planning, marketing planning, business and product development and research reports. Hence, using this tool, companies can gain an understanding of the environment they operate in and take advantage of the opportunities and minimize the possible threats (Market Orientated Strategic Planning 2010).
PESTEL analysis is in effect an audit of an organisations environmental influence with the purpose of using this information to guide strategic decision-making. The assumption is that if the organisation is able to audit its current environment and asses potential changes, it will be better placed than its competitors to respond to changes. The PESTEL analysis is said to be a useful tool for understanding the 'big picture' of the environment in which an organisation is operating and for understanding risks associated with market growth or decline, potential and directing for an individual business or organisation.
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A PESTEL analysis is also used as a generic 'orientation' tool, finding out where an organisation or product is in the context of what is happening outside that will at some point affect what is happening inside an organisation. The six elements form a framework for reviewing a situation, and can also be used to review a strategy or position, direction of a company, a marketing proposition or idea (PEST Analysis is concerned With the Environmental Influences on a Business).
Description & discussion of PESTEL
Political Factors: These refer to government policies such as degree of intervention in the economy. Political decisions can impact on many vital areas for business such as the education of the workforce, the health of the nation and the quality of the infrastructure of the economy such as the road and rail system. This category also includes areas such as tax policy, employment laws, environmental regulations, trade restrictions and reform tariffs and political stability (Oxford University Press. (2007).
Economic factors: These refer to what is happening within the economy e.g. economic growth/decline, interest rates, exchange rates, inflation rate, taxation changes, wage rates, working hours, unemployment level, and recently recovered recession and credit crunch.
Sociological factors: These refer to the ever changing social trends in the markets, in which the company operates, culture norms, and expectations, health consciousness, population growth rate, age distribution, career attitudes, emphasis on safety and global warming. Change in social trends can also impact on the demand for a firm's products and the availability and willingness of individuals to work (The Pest or Pestle Analysis).
Technological factors: These refer to the fast developing and advancing world of technology. Change in technology can impact the work and dealings of an organisation. New technologies create new processes and procedures. Things that were not possible a couple of years back are now main stream. Online shopping, bar coding and computer aided design are all improvements to the way companies do business now as a result of better technology. Technology can also reduce costs in the long run, improve quality, and lead to innovation. These developments can benefit customers as well as organisations manufacturing the products.
Environmental factors: These refer to what is happening with respect to ecological and environmental issues i.e. climate and weather. Changes in the weather can impact on many industries including farming, tourism and insurance. With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider (PESTEL analysis of the macro-environment).
Legal Factors: These refer to the legal environment in which an organisation operates. Changes in legislation may have an impact on employment, access to materials, quotas, resources, imports/exports and taxation. In recent years in the UK there have been many significant legal changes that have affected companies' behaviour. The introduction of age discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are example of relatively recent law that affect an organisation's work and actions (PESTLE analysis 2010).
Applying the PESTEL framework to PRIMARK
In assessing the political, social, and economic factors external to the environment of Primark, we must consider different issues. Primark's business operations are subject to government policies and regulations. The business firm should conform to the set of policies and regulations stipulated and enforced by the government and policy making body while conforming to the set of regulations and policies, the firm should assume social responsibility as demanded by the global consciousness. Nowadays, business sectors no longer busied themselves to produce bonds of profits and income but deeply involved in social programs to promote social awareness and equality. Cultural and social behaviours of different consumers are important to consider when establishing or venturing business in the global landscape (The analysis on the external and internal environment of Primark retailing industry).
Furthermore, economic, environment, laws, and technology are inseparable entities in which influence the business operations. The economic stability of certain region can contribute allot to the business condition of certain firm, like Primark. Technology on the other hand, brought a tremendous effect to the status and development of business operations and marketing programs. It generates new trends in a rapid movement, which if organizations are unaware will impede growth and development (Pest Analysis 2010).
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Political factors: Primark's business operations are the aid of government policies and regulation for example providing proper working environment for workers. For dealing with workers and for improving their working conditions, the company is part of the Ethical trading Initiative (ETI). Primark's energy consumption in the UK is sourced against the green power generated and sold into the grid by British sugar (Article on Primark PESTEL ANALYSIS online).
However, as different political parties come into power they might change existing policies, laws and regulations so Primark would regularly have to assess its strategies with consideration to the political climate to comply with them e.g. if a law is passed raising the minimum wage rate for employees. The government can also pass a restriction law on import and export trade with other countries due to political circumstances and relations with the trading country. This might also have an impact in
Primark if they are getting their merchandise manufactured in that country.
Economic Factors: In 2008, Primark opened over 12 stores and has now moved its business to Europe. This shows signs of expansion and success Although Primark has mostly low priced merchandise, an increase in tax and VAT in an unstable economy can have a major affect on its sales making them go down. The only Primark can prepare itself for such a situation is by having update knowledge about the current economic state using the PESTEL analysis tool. The recent global recession and credit crunch left a lot of businesses helpless leading them to bankruptcy as the public's spending power was very low due to the circumstances with also led organisations to let people go increasing unemployment. All these factors could have a great impact on Primark's business. Hence, Primark must constantly assess its strategy with consideration to its PESTEL to ensure safety and protection against such events.
Sociological factors: Primark has received several awards for being retailer of the year. It has also won awards for being the best retailer of the year in the United Kingdom. However, social trends nowadays change rapidly. A product that is in demand today might not be so popular tomorrow. Primark needs to keep up to date with all these changes and trends. It must try to accommodate and deliver in respect to the change. Ageing and population level are 2 other factors that can have an impact of Primark's sale as the company mainly targets the young consumers aged between 16 to 35 years of age. Hence, Primark must constantly assess its strategy with consideration to its PESTEL to ensure its social stability and quick ability to deliver.
Technological factors: Due to the rapid advancement and development in the technology world things that were not possible a few years ago are now very easy and user. Technology has made a lot of complicated tasks very user friendly. The Internet is one perfect example of this. It is now possible to shop online in the comfort of their home. Primark has a lot of online shoppers on their website and benefits from this technological development.
Also in Primark's bid for world class, cutting edge management of its ethical auditing programme, it has signed a deal with BSE management systems for the provision of Entropy Software. The investment in Entropy software is a key part of Primark's ethical trade strategy, allowing all suppliers audits, non-conformances and remedial actions to be managed through the Entropy software platform, with much greater global visibility and management control.
Environmental factors: As a result of global warming and the adverse weather conditions in the recent times many companies and organisations are doing their part for the environment. Primark supports this campaign by using recycled paper bags instead of plastic bags. Even consumers are very conscience about these factors in saving the environment and support this. One of Primark's fears can be delayed shipment of goods from other countries due to bad weather conditions.
Legal factors: The local laws of a country can have an impact on all the organisations that operate there. If new laws are passed in relation to employment, national minimum wage or health and safety in the workplace then Primark will have to comply will all of them. In order to be up to date with all legislation and accommodate all changes Primark has to have knowledge and understanding of these laws and plan in advance. Hence, Primark must constantly assess its strategy with consideration to its PESTEL to ensure that their employment is fair and safe for its employees.
Primark can without difficulty diversify, giving its competitors a competitive environment with substantial financial power. Primark's offer to its customer is one of high quality merchandise, value for money, back by Primark's service promise. A strong consumer proposition has been developed by Primark brand and embodied in the line "Look Good, Pay Less". I conclude this discussion by mentioning that the UK clothing retail industry is facing high levels of competition between various players but the end result shows that the consumers are most benefitted from it (Article on Primark PESTEL ANALYSIS online).
Given this analysis we can say that each organization has its own external and internal problems to handle. The process in which we enable to identify and analyze such problems is by using proper management method of analysis PESTEL or STEEPLE. The importance of these methods is squared to the importance of the business itself.
Primark must constantly assess its strategy with consideration to its PESTEL analysis tool. External factors can also to some extent affect its internal and business operation. Hence, these methods are helpful for us to understand and underline the positive and negative factors affecting the external environment of an organization like Primark.
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