THE FUNCTIONS OF THE PESTEL MODEL
A PESTEL analysis is a business measurement tool. PESTEL is a short form for Political, Economic, Social, Technological, Environment and Legislative factors, which are used to assess the market for a business or organisational unit.
The PESTEL analysis is a useful tool for understanding the environmental influences in which organisation are operating, and the opportunities and threats that lie within it. By understanding the environment in which is operating can take advantage of the opportunities and minimise the threats. Specifically the PESTLE analysis is a useful tool for understanding risks associated with market growth or decline, and as such the position, potential and direction for a business or organisation.
PESTLE analysis is in effect an audit of an organisation’s environmental influences 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 assess potential changes, it will be better placed than its competitors to respond to changes.
PESTLE analysis can be used for business and strategic planning, marketing planning, organisational change, business and product development and research reports. To be effective a PESTLE needs to be undertaken on a regular basis. Organisations that do analyses regularly and systematically often spot trends before others thus providing competitive advantage.
The Purpose and Function of PESTEL Analysis
The purpose of the PESTEL analysis to assess the industry which and company is in. The analysis is to help make decisions and to plan for future events which they operate in the organisation. In addition PESTEL analysis helps to understand the limited influence or impact and all factors that influence an organisation but are out of its direct control. An organisation on its own cannot affect these factors, nor can these factors directly affect the profitability of an organisation. But by understanding these environments, it is possible to take the advantage to maximise the opportunities and minimise the threats to the organisation. Businesses need to take a pro-active approach and be ahead of these changes, rather than hurriedly making alterations to products and processes in a reactive way. This can be achieved through a PESTEL analysis, i.e. an investigation of the Political, Economic, Social, Technological and Legal influences on a business. These forces are continually in a state of change.
Political factors are how and to what degree a government intervenes in the economy. Political changes are closely tied up with legal changes and it continually being updated in a wide range of areas. Specifically, political factors include areas such as tax policy, environmental regulations, trade restrictions and reform, tariffs, and political stability. Political factors may also include Social and employment legislation and it will provide information about potential opportunities and threats around labour changes, for example skills shortages.
Economic changes are closely related to social ones. The economy goes through a series of fluctuations associated with general booms and slumps in economic activity. In a boom nearly all businesses benefit and in a slump most lose out. Other economic changes that affect business include interest rate, exchange rates and the rate of inflation. In addition Stage of business cycle, Unemployment and labour supply, Labour costs likely changes in the economic environment. These factors have major impacts on how businesses operate and make decisions. Businesses will be more encouraged to expand and take risks when economic conditions are right. For example low interest rates and rising demand.
Social factors include health consciousness and include the cultural aspects, career attitudes, population growth rate, age distribution and emphasis on safety. A major component of this is a change in consumer behaviour resulting from changes in fashions and styles. Trends in social factors affect the demand for an organisation’s products and how that organisation operates.
Technological factors include technological aspects such as reduction in communications costs and increased remote working, automation and Impact of Internet. New technologies are continually being developed and the rate of change itself is increasing. The creation of databases and electronic communications have enabled vast quantities of information to be shared and quickly distributed in a modern company enabling vast cost reductions, and often improvements in service. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation.
Environmental factors include ecological and environmental aspects such as weather, climate, and climate change, which may especially affect industries such as tourism, farming, and insurance. Furthermore, growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer, both creating new markets and diminishing or destroying existing ones.
Legal factors include discrimination law, consumer law, antitrust law, labour law, and health and safety law. These factors can affect how a company operates, its costs, and the demand for its products. In addition this may impact access to materials, quotas, resources, taxation imports and exports etc.
Discussion of most pressing issues of company currently facing on
ADMAC is the well reputed Real Estate Management and construction company in UAE. Over the past 30years the company successfully completed number of real estate residential projects in UAE. Due to nature of the ADMAC with particular reference to how it has running itself and the current economic climate the assessment of external factors by a PESTEL analysis has been crucial in ADMAC success. This is becourse ADMAC has taken into account the implication for consumers, employees, associated organisation and the company mission statement. Each external factor would have been and continues to be examined and categorised in terms of whether its implication is negative or positive large or minor significance, continues impact so on.
Whether the scanning of ADMAC, economy downturn in UAE is most pressing issue of the company has faced. Following discussion is to explain how it impacts the company.
Past recent years there was economy boom at UAE, more development projects, infrastructure projects and real estate project was started and huge amount of money was invested. The sharp increase in construction, along with other key factors, has meant the industry was seeing a lack of skilled and unskilled construction staff. The demand for certain categories of employees and skill is also influenced by changes in social structure in an economy. Firms employing in construction have greatly enhanced the worth of technicians, surveyors and engineers during the last couple of years. In that time the firms are offer generally high salaries and wages due to competition of workforce of industry.
The boom of economy now over, while the present it going to down little by little, therefore the climate of economic and labour market in UAE is low. Companies operating in fields like ADMAC have compelled to reduce their workforce due to high competition and short of new real estate construction projects. ADMAC have maintained excess workforce up to now but still excess labour turnover creates unnecessary expense and reduces efficiency to the firms. In some situations even after implementing some of the cost saving initiatives, redundancies can still become inevitable and this can pose significant challenges for an employer as many complex issues need to be address including legal, compensation, natural turnover of workers of the company and future economic changes of the region.
Most property markets are certainly influenced by the forces of supply and demand. In the economy boom time thousands of new residents and workers are arriving in UAE causing demand for property to increase. In that time, many firms like ADMAC were having more than enough real estate construction projects. Unfortunately economy is now downturn, therefore many residential properties are not rented out or relinquish. The result of that is either ADMAC or other firms in the field are unable to get value for money from the residential properties where they were invested.
On present economy climate of UAE, the investors are not investing a new residential project. Therefore competition between contractors are high due shortage of residential project. As a result ADMAC used to reduce their profit and risk markups to win the new contracts. In this reason the company profitability is squeezed or some financial losses due to unexpected risk in the construction.
The above impacts are currently most pressing issue of ADMAC and those are occurring company financially unstable.
4.1.0 Example of PESTEL.
POLITICAL
The UAE Government has established a Federal Real Estate Regulatory Authority in order to co-ordinate regulatory efforts at the local and federal level. [source: EstateDubai.com] The main concern of the authority is about foreign property developers, who wholly finance their projects from local banks, without sufficient capital. Some foreign developers even depend on the local banks for complete funding, putting the lenders at risk of losing their finances, when the developer fails to complete their projects, or flee the country, leaving behind a huge debt. The government intention a regulation is to limit the finance being made available to foreign developers, who do not have a stake in the capital of their projects. So that regulation is help to keep real estate sector safe during the recession time.
Over the last few years the UAE’s real estate property market seen remarkable growth. The local burgeoning real estate property industry is anchoring the UAE government’s economic diversification efforts. Favourable government policy frameworks and active participation of private sector have facilitated one of the world’s most desirable economy environments in terms of investments and revenue generation. Further, population growth, rapidly increasing economy, progressing service sector and promising travel and tourism sectors, rising purchasing power and strong consumer confidence are driving the industry. The modern shopping malls anchoring modern hypermarkets, highly developed free trade zones, shopping events and relaxed tax provision provide auxiliary growth thrust to the real estate sector.
ECONOMY
Economic conditions are influenced by political and government policy, being a major influence affecting government decisions. The UAE’s central bank was keeping interest rates low to encourage economy growth in the country during the recession time. [www.arabianbusiness.com]. Interest rates play an important role in real estate activity. High interest rates tend to freeze the real estate market. If the interest rates are low, housing is more affordable and also is encourage homeowners to upgrade their houses. This will increase the demand of Real Estate market. In other hand interest rates affect the cost of capital and therefore to what extent a business grows and expands, it will be attractive for company to invest and grow with expectations of being profitable.
Oil Company in UAE has decided to increase petrol prices by 11% which is highest percentage of gulf region.[source: Khaleej Times]. This price hike of the construction materials is attributed to the increase in fuel prices as they have directly impacted the construction and transportation costs, thus having a multiplied effects and a significant decrease in profit margins of the company.
SOCIAL
The UAE is very receptive to inflows of educated skilled people. The expatriate community is one of the largest in the world. However, for the most part the process for obtaining a visa is very simple and most applications are accepted. In this reason, UAE construction and real estate sector not expecting shortage of skilled workforce in the country near future.
The UAE is a traditional Muslim country where the teaching of Islam plays a vital role in every aspect of life. From politics to education, from business to foreign relations, people look to Islam for direction. Thus the women have many more restriction as per their traditional teaching. Although, the society is slowly accepting women in the workplace.
According to recent reports, now more than ever women are entering the workforce and even starting their own businesses, which is a significant improvement considering the restrictions women face. For the construction sector, women of the UAE and their continuing advancement mean a potential market with wide possibilities.
TECHNOLOGY
Technology is widely recognised by on strategic management as part of the organization and the industry part of the model as it is used for the creation of competitive advantage. Today, this means using computers wherever possible is to be easy organisation work process. Keep detailed record that can be accessed immediately, make financial transaction faster. Maintain the necessary level of stock factories or retail outlets or speed up communication via the Internet and emails.
The effectiveness of company’s advertising, marketing and promotional programs. The new technology of internet and television which use special effects for advertising through media. They make some products look attractive.
ENVIRNMENT
UAE new infrastructure facilitate plan including high speed metro projects and road project interconnecting with seven emirates will foster higher development and maturity in the real estate market. The prices of properties located close to metro stations and bus stations are already beginning to rise, marking the first signs of a transportation plan effect on the property market. The trend implies that with just three months left for the opening of Metro’s Red Line, home buyers are already beginning to take into consideration the ease of transport when choosing their home. This is a positive sign for real estate market, which has had a difficult year with the prices of flats and villas.
One of the main reasons UAE is gaining popularity and attracting investors and visitors is the attractions it has to offer. Here the sun shines all around the year and the city offers a taste of exotic and exiting pleasures to all its visitors, irrespective of their age. All the modern facilities and infrastructure of the west combined with eastern hospitality and local customs make one feel like home in UAE. This has led to many people migrating here for work and living in the mild weathered heaven. This increased the demand for real estate and property and renowned developers and builders stepped in to adorn UAE with the world’s most exciting towers, shopping plazas, residential duplexes and business complexes. [source :BuyDubaiproperty]
LEGAL
Legislations pertaining to issuance of permanent resident status for foreigners purchasing a freehold property in select housing projects will further strengthen the real estate market in UAE. Recently, UAE government reviewing their property market regulation to assess the impact of the global financial crisis on current economy climate in the country, which has been hit due to an outflow of capital. According to the Gulf news “The UAE federal government is reviewing the issue of freehold property visas linked to foreigners’ ownership of properties in different emirates”. It is positive news and will bring a lot of faith and confidence in the market and “freehold visas” is to attract foreign investors to real estate sector in UAE.
Mortgage Law No 14 for 2008, legalizing the housing finance sector in a 35-article law includes all procedures concerning a mortgage and its legal effects on the concerned bodies, as well as execution procedures on the mortgaged property, and the relations between the mortgage lender and borrower based on international best practices. The law will help better regulate the emirate’s growing real estate market, partly tainted by project delays and corruption probes.
The law stipulates that mortgage contracts be registered with the Land Department, specifying the size of the loan, the repayment period and the value of the property. The law makes all mortgage deals that are not registered with the Land Department null and void, allowing the department to better regulate property and mortgage transactions. The law also requires that mortgages taken out on properties be sold by registered financial institutions, and be insured. It also regulates relations between both parties involved in the mortgage process, and the Land Department, which is responsible for implementing the law and ensuring the rights of both parties. Under the law, mortgage lender shall be a bank, financial institution or a finance company licensed by the UAE Central Bank to practice the activity of property finance. The law will definitely boost investor confidence in the real estate market of Dubai and expand the housing finance sector.
6.0.0 Conclusion
Business planning at planned levels is a continuing process by which the long-term objectives of a company may be formulated, and subsequently attained, by means of long-terms planning actions designed to make their impact on the company as a whole. Corporate planning also involves deciding the policies of the company in pursuit of its objectives. Thus business aims and ethical considerations are brought together.
PESTEL analysis looks at the external environment influence and is an appropriate strategic tool for understanding the environment in which business operates, enabling the company to take advantage of the opportunities and minimise the threats faced by their business activities. When strategic planning is done correctly, it provides a solid plan for a company to grow into the future.
With a PESTEL analysis, the company can see a future of time, and be able to clarify strategic opportunities and threats that the organisation faces. By looking to the external environment to see the potential forces of change looming on the future, firms can take the strategic planning process out of the field of today and into the future.