PESTLE Analysis and the Resource-Based Theory

Introduction

Organizations often determine their intended objectives and goals before establishing their specific course of action to help them accentuate and realize their goals. However, the most appropriate course of action can only be verified after a thorough analysis of the industry’s characteristics to determine the forces that influence its interplay. Although organizations have the power to influence internal aspects that afflict their operations, they have little influence on the external business environment that forms the industry’s characteristics. Such external environmental factors include barriers to entry of new business firms or players, the buying power of the customers, the threat of substitutes that buyers can rely on, as well as the industry suppliers’ bargaining power and the overall intensity of competition within the industry. These aspects are so powerful that they may derail an organization’s resolve to achieve its objectives and goals. Thus, analysis of the characteristics helps in determining the exact plans and strategies that the organization may employ. This paper seeks to analyze, through the help of relevant strategic management theories, the effectiveness of any business organization undertaking an analysis of the industry characteristics in its strategic management process.

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PESTLE Theory

The PESTLE analysis involves investigations of the industry’s environment on six most important fronts, including political, economic, and social aspects whose forces have a bearing on the actual performance of an organization (PESTLE Analysis, 2013). Additionally, it entails analyzing the technological, legal, and environmental aspects that also determine the probability of an organization achieving success in its operations (PESTLE Analysis, 2013).

Political aspects

All industries at least exist within a political framework. Even the global industry does not remain uniform concerning individual countries and their existing political frameworks, which form unique guidelines and specifications that are most likely to interfere with business performance. The political aspect refers to the government organization and its enacted policies that establish how businesses operating within their area of jurisdiction can operate (Ekpenyong & Umoren, 2010, p. 28).

A business organisation must analyze the components of the political aspect. These include tariffs, trade control, government stability, bureaucracy, and corruption level among many others to understand on how to institute its specific course of actions (Ekpenyong & Umoren, 2010, p. 30). Higher tariffs may mean that firms operating within the industry have set relatively higher prices to cater for high operation costs. In essence, strategic management in this scenario would call for the firm to seek for ways of achieving low costs in order to attract more buyers, including acquiring supplies in large quantities so that it may benefit from economies of scale advantages (Cullen & Parboteeah, 2010, p. 23).

On the other hand, excessive trade control measures by the government may mean that the industry is not lucrative because the players lack ample room to compete against each other. The profits may be low overly, meaning that the firms may not see the need to focus on improving their individual quality performance because it may turn out to be quite expensive (Cullen & Parboteeah, 2010, p. 23). However, such a characteristic of the political environment may be critical in establishing a management strategy that focuses on improving the quality performance levels of the firm so that it may attract more consumers. Although the industry may be less competitive, attracting more buyers will enhance the profit margins and help in driving the competitors out of business because they will lack the necessary financial muscle (Guislain, 2003, p. 65).

Economic aspects

The economic aspects often are unique to a country or a particular region. These aspects are described in terms of inflation rates, unemployment trends, labor costs, growth rates, trade flows, and patterns, as well as fiscal policies and price fluctuations among other features (Galeotti, 2007, p. 429). An analysis of a specific industry’s characteristic that determines a generally higher labor cost will most definitely imply that the firms use a huge amount of their revenues in paying wages and salaries. Thus, for such a firm to remain operational and support the high costs of labor, it will be required to raise its prices to create an equally bigger revenue base. An alternative strategy for a firm seeking to, or already operating within the industry would be to hire a smaller number of workers such that it may control its overall expenses. However, other strategies, such as targeting a reduction of the inventory costs and integrating internal operations with those of the suppliers and distributors may help in containing the escalating costs of operations. As a result, the firm would still benefit from its initiated competitive advantage and perform according to its profit maximization objectives.

Higher inflation rates within an industry may imply that the firm may still have to tackle the challenge of higher prices in order to optimize its profits. The appropriate strategy may call for the firm to contain its overall cost of operations so that it may create a healthy revenue base (Galeotti, 2007, p. 430). This may also be transformed into higher profits for the organization. Thus, from the analysis and realization of the specific characteristics that determine the industry or operation, a firm can understand clearly what challenges lie ahead and use the information gathered to draw up a responsive strategy that would enable it to register its anticipated results.

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Social aspect

The success of a given firm’s performance in business depends heavily on the social construct of the surrounding environment (Kew & Stredwick, 2005, p. 81). The individual characteristics of a social aspect that influence business operations include the educational level, health consciousness, emphasis on safety, buying habits, general lifestyles, and religious beliefs among other factors. An organization’s business mission and objective must inculcate these important factors if at all it anticipates registering success in a given environment. For instance, a society with very low education levels may not necessarily appreciate the need for higher quality products or services (Auzair, 2011, p. 237). A majority of the buyers in such a community would rather acquire cheaper products that are manufactured with inferior quality than spend more on high-quality products. Such knowledge would call on the management to devise strategies that focus on segmenting the market according to the population compositions of the educated and illiterate to manufacture quality and inferior products in respective quantities. While the firm would be serving both classes of consumers that make up the market, it would also be concentrating on maximizing its profits by availing products or services that best suit the classes (Auzair, 2011, p. 237).

Religious beliefs are incorporated within a firm’s products or services because they drive the specific choices that buyers make. Among the Muslim society, for instance, women are required to observe conservative behaviors and practices in the manner they dress, such that they are not expected to wear any revealing dresses (Altinay & Wang, 2011, p. 675). However, the same cannot be said of Christian believers, whose teachings may not be too harsh on the way people choose to dress. A design firm that deals in clothes, therefore, would be forced to produce long women dresses if it operated in a predominantly Muslim market (Altinay & Wang, 2011, p. 677). In contrast, the same firm or marketer would find it more appealing to design short and revealing dresses if it operated in a market that was predominantly less conservative in its religious beliefs and teachings, such as Christianity setting. Ignoring such an important social aspect would result in losses for the marketer, thereby weakening the much-needed competitive edge.

Technological aspect

Technology currently acts as one of the most integral requirements for organizations and companies with a high capability of enhancing business performance (Kew & Stredwick, 2005, p. 83). The technological environment involves factors like basic infrastructure level, technology incentives, the total spending required for research and development, the general internet infrastructure penetration, and access to the latest technology. Although technology is critical in supporting the performance of a business, great care must also be taken when acquiring it because it is expensive and widely varied (Tapp & Hughes, 2004, p. 284). A particular technological innovation may not necessarily be what an organization requires at that particular time, meaning that scrutiny is required before deciding to buy. A country with relatively poor developed technological infrastructure is expensive to operate in because it would force an organization to spend much of its resources in trying to establish the necessary basic framework.

The firm would, therefore, need to establish alternative strategies that would enable it to enjoy the benefits of technology, while at the same time maintaining its operational costs as low as possible in order to continue attaining competitive advantage (Tapp & Hughes, 2004, p. 285). Other competitors in the same industry could be located in environments where they enjoy good technological infrastructure, thus making it difficult to compete with them. The firm may opt to work collaboratively with a technological firm to enable it to enjoy the technological advantages that lack within the country. Such a strategy may be too expensive for the company, but the collaboration may see the two firms enter into an agreement that would allow payment of services and products delivered done over a stretched out period.

The idea is to analyze the technological environment and determine the basic requirements that may be missing, but which the organization may hardly do without in executing its operations (Kew & Stredwick, 2005, p. 85). The basis of identifying the basic requirements should be to enable the company to achieve greater operational advantage over its competitors in the same industry and acquire the same without immediately transferring the related costs to buyers. The firm would eventually achieve efficiency in its performance, making its operations lean compared to those of the competitors. This would make the firm achieve a competitive advantage. This competitive advantage is critical since it may force competitors out of business, particularly if they are unable to acquire a similar technology (Tapp & Hughes, 2004, p. 285).

Legal aspects

The legal force is another important industry characteristic since it constitutes the rules and regulations that generally define how the industry players operate and act. Several factors make up the legal force, including regulations on employment, data protection, health and safety of the workers, copyright and patents, anti-trust law, and discrimination laws. The firm has to adhere to these requirements if at all it expects to be allowed to conduct its operations within any jurisdiction (Kew & Stredwick, 2005, p. 83). The objective and mission of the firm, therefore, will have to be fashioned in such a way that they may allow the firm the opportunity to continue with its operations within the acceptable legal limits.

An extensive health and safety regulation requirement would force a firm to utilize more of its resources in ensuring that it implements the requirement. Workers will require extensive training on health and safety. This will, consequently, require the firm to meet the costs of the activity (Kew & Stredwick, 2005, p. 84). Supervisors and managers will also require periodic trainings and refresher courses to ensure the teams of workers operating under their command are always safe. Failure to meet these standards may mean that the firm’s operating license may be withdrawn altogether, or the company required to pay high fines to the authorities.

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The firm may take the responsibility of devising a precise strategy that ensures comprehensive efforts are directed toward achieving efficient health and safety standards (Kew & Stredwick, 2005, p. 83). Although at the initial stages the program would require heavy spending, the strategy would eventually pay off because fewer funds would be expended in trying to address the same aspect repeatedly. Instead, the saved resources could be used in other important areas, thereby allowing the firm to maximize its operations overly.

Environmental/ecological aspects

The general environment has a bearing on the performance and operations of a firm. Environmental aspects involve factors like weather, climate changes, recycling of materials, management of waste materials, as well as pollution of water and air and regulatory requirements on pollution of the environment. Any industry relies on the makeup of the environment. It is, therefore, critical that a firm undertakes an extensive study of the environmental factors before establishing operational strategies (Kew & Stredwick, 2005, p. 85).

A regulatory requirement in a country that requires firms to recycle their waste materials will call upon the firm’s management to consider investing in the area. This means may mean the firm acquiring incinerators and employing employees with skills and knowledge on environmental management (Guislain, 2003, p. 67). Such a move is complex as it interferes with the organization’s focus on achieving its prime objective in business. It may also be too expensive for the firm, thereby affecting its revenue and profit magnitudes in the long run (Guislain, 2003, p. 70). However, the management may still devise an alternative strategy even in the face of such challenging circumstances by seeking to outsource the services of a special company that mainly focuses on environmental issues. This may reduce the costs that the firm would have otherwise expended if it had focused on managing its environmental matters, while at the same time helping the firm achieve efficiency in its prime business.

The Resource-Based Theory

This theory considers a firm’s ability or inability to operate within the external environment based on the resources that it owns internally. In particular, this theory begins by carrying out a thorough internal analysis of the firm to classify individual resources (Montresor, 2004, p. 410). Once this happens, the firm would be able to appraise the resources in terms of their strengths and weaknesses based on what other industry competitors own or have control over. This also helps in the process of identifying opportunities such that the already scrutinized resources can be utilized in the best possible and optimal way (Montresor, 2004, p. 411).

Understanding the internal resources of the firm enables the management to have power over the decisions that would eventually be made concerning the strategy. Unlike in the PESTLE theory where the external industry characteristics are determined first, the resource-based theory takes a reverse approach that begins with the internal resources owned by the firm (Montresor, 2004, p. 412). However, the process still heavily takes into consideration the external industry characteristics. The results obtained are used to benchmark the strength and weaknesses of the internal resources. The main external factor that follows the internal resource analysis is the determination of the competitor’s strengths and weaknesses in terms of their resources.

Determining that a competing firm has a limited number of skilled workers, for instance, assures an organization of an obvious advantage that enhances its competitive edge over that of the other industry players. At this initial stage of strategic planning, therefore, the organization can maintain focus on the ways through which it may further augment its resource advantage that it enjoys over its competition (Foss & Klein, 2006, p. 39) even as it progresses with the other stages of devising the full-scale plan.

Capabilities

Identification of the firm’s capability follows after conducting an appraisal of the resources. At this stage, the firm is more concerned about the exact activities, operations, or projects that it may pursue. The resultant outcome surpasses what the rivals can do. This stage is still relevant in considering the characteristics of the industry because it specifically identifies resource inputs that are needed to enhance each of the identified capabilities. The capability phase focuses mainly on bridging the gap through outsourcing from external sources where the company’s internal resources were noted to have weaknesses in the previous stage (Foss & Klein, 2006, p. 39).

Resources and capabilities form the integral source of strategy direction because the entire mission and objective of the firm rely on these two important factors. In formulating the mission statement of the organization, the question sought to be answered identifies what the business is (Foss & Klein, 2006, p. 39). The answer is defined by the exact market that the firm wishes to serve, including determining who the exact customers are and what their needs are. However, customers’ needs are volatile in any business situation. The firm, therefore, needs to thoroughly analyze the extent to which it may continue serving the changing needs. This calls for a comprehensive analysis of the industry’s characteristics, including taking into consideration aspects like fashion and buying trends.

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Competitive advantage

Nevertheless, keeping in touch with changing customer tastes and trends may not be achieved easily if at all the company cannot or fails to build a competitive advantage over its rivals. This objective is only achievable when the firm considers using its internal resources effectively concerning the external industry characteristics. Importantly, the competitive advantage of the firm results from appraising the potential of generating rent about the resources, as well as the capabilities that have already been identified.

The competitive advantage must be sustainable to provide the firm with a continuous advantage over its industry competitors and other aspiring new entrants. For instance, a company such as Apple Inc. operates in an industry that relies heavily on technological know-how. However, the company boasts of a highly skilled workforce. This assures Apple of a great competitive advantage over its other competitors in the industry. The external industry situation further enhances the company’s strong market position given that there is a huge shortage of innovative expertise that can be employed by Apple’s competitors as a strategy of counteracting its force (Jinjin, 2013, p. 95). Firms in this industry can only reassure themselves of a highly competitive workforce by spending a huge part of their resources to internally enhance the skills of their personnel.

Thus, Apple Inc. is assured of a rich potential of competitive advantage because it sits on a higher-priced resource, that of highly trained and experienced workers that most of its competitors like Research In Motion (RIM) and Nokia have recently been lacking. This internal capability and resource contrast heavily with the industry characteristics. The industry is defined by a shortage of qualified personnel. The actualization of profit maximization for Apple, in this case, calls for a strategy that relies effectively on its internal capability and resource, which none of the industry players have similar command over (Jinjin, 2013, p. 98). Another important aspect of competitive advantage is the extent of the suitability of the returns. The internal resource, which is analyzed based on the external industry characteristic, must be of higher returns to enable the organization to gain from the competitive advantage.

Strategy

The eventual strategy of the firm is determined by alternatives that best exploit the resources and capabilities of the firm. The resources and capabilities within the firm are stronger about a comparison made to the external industry characteristics (Hurtado, 2010, p. 32). The objective of the strategy is to ensure that it draws optimum performance from its resources and capabilities that other industry players lack the advantage or ability to exploit.

Competitors and industry players are a crucial part of the industry characteristic. In this regard, understanding their capabilities enables the firm to strengthen itself in a way that disadvantage competitors. Analyzing the industry characteristics may not necessarily demand that the film begins with its internal characteristics and resources. Instead, an external analysis of the characteristics may be used to determine what other firms or competitors have in exact terms, including their resources and capabilities (Hurtado, 2010, p. 33). Once this is ascertained, the company can sit down and establish ways of building its internal capability and resource-base. The aim of doing this is to take full advantage of the industry situation.

In sustaining the business strategy, the firm also needs to identify its own resource gaps and conversely work toward filling them (Hurtado, 2010, p. 34). In the case of Apple Inc., although the firm enjoys superior capability over its rivals, it equally faces challenges within its resources that pose as a challenge to its operation. These challenges are what the firm’s management should work tirelessly to eliminate (Hurtado, 2010, p. 35). An example of such a resource challenge faced by the technology company is on microchips. The company heavily relies on microchips for all its handheld devices. This crucial resource is not wholly under the control of the company as it relies on supplier firms to provide the same (Hurtado, 2010, p. 35). Apple should invest its resources toward replenishing, upgrading, and augmenting this important resource base so that it can continuously create and sustain its competitive advantage over the rivals.

Conclusion

Strategic management is an important aspect of the performance of business for organizations and firms whose basis relies on analysis of industry characteristics. The PESTLE concept divides the industry characteristics into six major forces that a firm needs to analyze thoroughly before devising its strategy. The forces include political, economic, social, technological, legal, and environmental influences. In terms of politics, a firm needs to analyze aspects like tariffs, government stability, and corruption levels in a country or region to determine its strategy. Economic forces comprise of aspects like inflationary rates, interest rates, and growth rates. These factors have a direct influence on a company’s revenue and its profit margins. Knowledge of this characteristic of the industry would enable a company to come up with supportive strategies that sustain it to achieve its mission and objective. The technological force comprises of infrastructure like internet availability and penetration. The resource-based theory, on its part, identifies the need for firms to analyze industry characteristics in the form of competitors’ resources and capabilities and make a comparison with the internal resource and capability of the firm. In all instances, the external characteristic of the industry must be analyzed such that the firm can use the resultant findings to establish a more superior strategy to accentuate its objective.

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