Transcription Doc

The Macro-Environment

Note: This transcription document is a text version of the upGrad videos present in this session. It
is not meant to be read independently, but can be used to complement your video watching
experience.

Video 1

Speaker: Sandeep Nair

One of the fundamental truths about doing business is that no company operates in a vacuum.
Yet, this is one of the most commonly ignored aspects of business.

When people think about business, the focus is often on what the company is doing. They tend to
downplay the role that the macro environment plays. This is why we are going to learn about the
PESTEL Framework, which focuses on the macro environment, that a company operates in.

The PESTEL Framework comes in a range of flavours, something that a quick Wikipedia search will
tell you. However, the gist of the PESTEL Framework is that a firm’s macro environment can be
defined along six factors - political, economic, sociocultural, technological, environmental and
legal. These six factors abended together to form the PESTEL Framework.

The PESTEL Framework is used to analyse the broader environment that may have or direct or
tangential impact on the business of a company.

Now, the two main advantages of using PESTEL Framework to analyse the micro environment
are:

The PESTEL Framework utilises cross functional skills and expertise. To perform a PESTEL
analysis, companies need to bring together multiple teams from within the organisation - legal,
marketing, finance, product, supply chain, operation etc., as all of their inputs are needed to
effectively conduct the analysis. This helps align different divisions by fostering camaraderie
between them and discourages silo mentality.

Second, a PESTEL analysis helps reduce the impact of potential threats to an organisation. The
PESTEL framework trains a company to keep an eye on the broader environment in which it

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operates. It helps the company make sense of the wider world and how changes in it affect their
strategy.

For instance, at first glance, a monetary policy decision like lowering interest rates may not
directly affect a Machine tooling shop. However, lower interest rates mean easier access to
capital, and that can mean reduced barriers of entry into the machine tooling industry.

This can thus increase competitive rivalry for the machine tooling shop. A periodic PESTEL analysis
can help reveal threats of this nature.

Having understood the advantages of using the PESTEL framework, it is important to understand
its disadvantages and limitations.

One major challenge that companies face in using the PESTEL framework is that it can be applied
as broadly or as narrowly as they want to.

If it is applied too broadly, it can result in a situation that is referred to as paralysis by analysis.
This is when a firm spends too much time, money and resources worrying about the implications
of a macro environmental factor, such as a policy change by the government instead of focusing
on its core competencies. Needless to say, this is a wasteful exercise.

On the other hand, if the framework is supplied to narrowly, perhaps by not inviting all the
required team members in for the analysis, the firm will end up failing to identify potential
opportunities or threats.

Clearly, a balance needs to be struck here. As there is no simple rule that companies can follow
while striking this balance; they need to figure this out on their own, which can take some
iterations.

The other challenge that companies face in using the PESTEL framework is that the access to
quality macro environmental information can be limited at times. This is a problem that smaller,
newer companies face more commonly as they do not have the experience to track and interpret
the rapidly changing macro environment. Hence, for such companies, the effectiveness of this
exercise can be on the lower end.

Having understood the benefits and limitations of the PESTEL framework, you are now ready to
dive deeper into its specifics

Video 2

Speaker: Sandeep Nair

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Political factors that affect the macro economic environment include the political climate in the
country and the strength of federal institutions.

Facebook has run into multiple privacy and freedom of speech issues with the governments of the
countries it operates him. Since, it is a social media platform used by nearly a third of the world's
population, it is natural that many people use Facebook to communicate with each other and with
the world in general.

This means that Facebook will continue to face difficult questions about free speech and privacy,
which will continue to thrust Facebook deeper into the political spectrum of the markets it
operates in.

For instance, Mark Zuckerberg has had to face multiple congressional enquiries into business
practises at Facebook in relation to election interference, hate speech propagation and privacy
concerns, in the US, India and other countries.

Let's look at another example. Nuclear power plant manufacturers like Atom Straw Export, which
built the Kudankulam Nuclear power plant in collaboration with Nuclear Power Corporation of
India Ltd., have had to face multiple delays and threat of project closures because of politically
and environmentally motivated opposition to the plant.

In February 2012, the Indian Prime Minister Dr. Manmohan Singh went so far as to blame foreign
NGOs for organising and funding the protests at the plant.

Video 3

Speaker: Sandeep Nair

Economic factors include the general economic climate and specific factors such as unemployment
rate, interest rates, savings rates, GDP growth, trade deficits, etc. No economic structure in
today's world exists in a vacuum. Almost all macro-economic decisions are taken with political
incentives in mind.

This is why businesses try to keep themselves abreast of all political developments and in some
cases actively try to influence them.

Examples, post 2010, most companies, especially consumer product goods focused their attention
on developing markets like Southeast Asia, Latin America and China instead of Europe and the
Americas, since economic potential for growth slowed down in developed countries; relative to the
developing markets.
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This, coupled with the fact that developing nations began offering economic incentives for shifting
production to their shores, resulted in multimillion-dollar investment from CPG Industries to build
manufacturing plants in these markets.

Examples of these include the several special economic zones established in India, China, Vietnam
and Indonesia to help entice manufacturing with less red tape and tax benefits.

This in turn, had trickle down effects; as manufacturing strengthened the local economies in these
countries, the local currency also strengthened. Thus, reducing the incentive to manufacture
offshore. Just goes to show that no strategy is eternally great.

Let's look at another example. The classic motor bike segment in India languished for a long time,
with Royal Enfield as the only player of any significance. Most world-renowned motorbike grants
refused to enter India because of many reasons.

The primary ones among them where a lack of incentives to manufacture and high tariffs on
importing. For a long time, the tariff on CBU or completely built up units for Harley Davidson bikes
was 100%. Though it has come down now.

In Harley Davidson’s case, the reduction of tariff was the direct result of political intervention.
These adverse economic conditions resulted in artificial protection for Royal Enfield from
competition. This created a monopoly condition, and Royal Enfield became complacent.

They didn't bother to innovate and keep up with the times, and as a result, their sales declined as
Indian bike riders lost interest in the 300 CC plus segment. Overprotective economic conditions
can stifle innovation, competition and growth.

Video 4

Speaker: Sandeep Nair

Socio-cultural factors include the societal values, attitudes, cultural norms and lifestyle changes
that happen in continually evolving societies.

For example, there has been a marked shift in consumer behaviour in recent times towards a
more healthier lifestyle. This has resulted in massive growth in various industries like health food,
fitness centres, biohacking, health services etc.

It has also negatively impacted the bottom line of unhealthy products like cigarettes, sugary
drinks, etc., with such companies having to diversify their portfolio to balance loss of sales.
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For instance, Coca-Cola has been on a journey to reinvent itself as a total beverage company and
gradually reduce sugar content across its entire portfolio. It started providing zero sugar versions
of its drinks and branched out into mineral water, fruit juices, ready to serve teas, etc.

Similarly, the level of acceptance of society towards minority rights, women's rights and LGBTQ
rights has risen across the world; especially in western countries. At the same time, we have
witnessed a rise in communal and religious tensions.

Businesses have to be cognizant of these socio-cultural changes while they communicate with
consumers to prevent PR disasters that can result in loss of sales.

For example, Tanishq had to pull their Ekatvam ad depicting the wedding of a Hindu bride to a
Muslim groom after it generated controversy in India.

Video 5

Speaker: Sandeep Nair

Technological factors include the pace of technical change and developments that can impact
existing or new industries. This is one of the fastest yet clearest to understand changes.

Technological advances have resulted in the closure or weakening or revolutionisation of several

industries. Handloom textiles after the advent of industrial revolution, Telegram after the advent
of telephone, ships as a means of intercontinental travel and transport after the advent of aero
planes, banking after the advent of the Internet, etc., are some examples.

In today's day and age, a deep understanding of the technological factors affecting or enabling an
industry, may be one of the most important levers of a PESTEL analysis.

Consider these examples. access to technology is helping millions of small and medium
enterprises across India and Indonesia have better access to credit and improved cash flow
through apps like KhataBook and BukuWarung. This helps to mobilise a portion of the economy
which other ways would have been hard pressed to contribute to GDP growth during economic
downturns.

Technology is also helping companies reach out to customers in areas of the world they would not
have had access to previously.

For example, an African company specialising in African themed interior decoration for business
places or homes can now serve clients in cities as far away as London, Paris and Madrid.
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 Video 6

Speaker: Sandeep Nair

Environmental factors include ecological and environmental forces, such as the weather, climate,
etc., these factors affect different industries differently, since all industries do not contribute
equally to, or are not really affected equally by environmental concerns.

For example, nuclear energy or chemical plants are seen suspiciously by most citizens, since the
downside risk to life and livelihood in case something goes wrong is disproportionately high. Case
in point are the well-known Chernobyl disaster and Bhopal gas tragedy.

Industry members in these industries often need to pass through stringent government checks
and balances, and also create contingency plans for ensuring the safety of neighbouring towns or
cities in case of a disaster. This makes it a capital-intensive industry.

Another example is that areas like Japan and California are subject to constant threats of
earthquakes and tsunamis.

Hence, building construction in such areas are costlier, since they need to take into account
earthquake protection measures and need to be stronger and higher of quality than usual
construction.

Also, climate change concerns directly led to the growth of carbon credits markets and eco-
tourism. Carbon credits were devised as a market-oriented mechanism to reduce greenhouse gas
emissions. Companies get a set number of credits which decline over time. They can sell any
access to another company.

In eco-tourism, travellers prefer to travel and stay using environmentally friendly methods, often
exploring new locations in their quest.

Video 7

Speaker: Sandeep Nair

Legal factors referred to the regulations and laws with which companies must comply, such as
consumer laws, labour laws and anti-trust laws and occupational health and safety regulations.

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Additionally, there could be several industry specific laws as well; especially in the banking and
financial sectors.

Industries like fast food chains, hospitals and retail and e-commerce are affected significantly by
minimum wage legislation in developed countries because of the large amount of relatively
unskilled labour, the employee.

This is the reason by a lot of such industries outsource their back-end operations to developing
countries where such laws either are not strong or are difficult to enforce like, say, Vietnam, China
and India.

Let's take another example. The infamous antitrust case led by the US government against
Microsoft in 1998 alleged that Microsoft was violating fair competition rules by enforcing the
bundling of Internet Explorer browser with its operating system in an apparent attempt to chalk
out the business of Netscape, it's competitor.

Microsoft lost this case and had to settle for allowing PC manufacturers to adopt non- Microsoft
software.

Video 8

Speaker: Sandeep Nair

Recent report by Avendus capital estimates that the electric vehicle industry in India is likely to
become a 50,000-crore opportunity in India by 2025. The increasing focus on adverse impact on
climate due to internal combustion engines is a big reason behind this potential opportunity.

As things stand, the EV industry in India and indeed around the world is in its nascent stage. But
it makes sense for us to try and explore how the industry is placed strategically.

Let's start with the political conditions. Politically, the EV or electric vehicle industry is a potential
golden goose and hence will receive a lot of support from the government.

In 2012, the government unveiled the National Electric Mobility Mission Plan 2020 with the aim of
improving national fuel security using hybrid and electric vehicles. Additionally, the government
started faster adoption and manufacturing of hybrid and electric vehicles, also called FAME, to
provide incentives for purchasing electric vehicles.

Government policies have also announced subsidies to the tune of $1.4 billion to buyers, while
also imposing a hike on import terrorists to encourage manufacture of these vehicles in India.

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Clearly, they see this as an opportunity to boost the local economy while also securing energy
independence. All this evidence points to the conclusion that the EV industry will continue to
receive policy and legal support from the government for the foreseeable future.

Next, let's look at the economic conditions. From a macro economic standpoint, continued focus
on EV development in India is beneficial to the Indian economy and climate, since it will reduce
dependence on imported oil, increased GDP and reduce emissions.

However, there are other economic realities to consider. Most electric vehicles depend on lithium
ion cells for storing charge. However, lithium ion cells are very expensive and lithium is not
available in India. This means we will have to rely on imports which are quite expensive.

Additionally, most electric vehicles currently sold in India provide a range of 102-110 kilometres
per charge and cost upwards of eight lakhs. This is not a feasible option for most cost sensitive
and mileage conscious Indians.

In addition to all this, there is also the economic cost associated with changing over from a
dependence on internal combustion engines to electric vehicles. Thousands of workers will need
to be retrained or laid off.

In the short term and in the absence of a new tax structure, there would be an income loss to the
government as well.

A recent study by the Council on Energy, Environment and Water said that a 30% penetration of
electric vehicles would result in a combined value loss of ₹2 trillion to the oil and automobile
sector.

Now, let's look at the socio-cultural conditions. From a socio-cultural point of view, urban India is
ready for electric vehicles. Introducing electric vehicles to the Indian roads in a mass will help
reduce gas emissions and noise pollution, two big banes of Indian cities.

It will also be a big hit amongst the environmentally conscious consumer class who care about
how their purchases and lifestyle affect the environment in which they live.

However, there's also a section of people who will miss the throaty roar and hands on nature of
internal combustion engines and will shy away from shifting to the relatively quieter and less
powerful electric vehicles.

Next, let's understand the technological factors. The technology behind manufacturing electric
vehicles is not an esoteric secret. Several car manufacturers across the world have been working
on this since the 1980s and before. But scalable mass production has not yet been achieved by
many car manufacturers, except perhaps Tesla.
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The reason behind this is a lack of demand and not a lack of technology. However, an area of
concern is the support infrastructure required to sustain and grow the widespread adoption of
electric vehicles.

Charging points would need to be constructed at regular intervals, and they will need to be
maintained regularly. This will be a tough task, especially in areas with mountainous terrain.

Also, for mass adoption of electric vehicles, the manufacturing will need to be scaled up. For that
to happen, there needs to be an ecosystem of suppliers and spare parts manufacturers that need
to come up.

Additionally, an entire generation of mechanics will need to be retrained in electric vehicle repair.
All this will take time, money and effort.

Let's now move on to environmental factors. The adoption of electric vehicles will drastically
reduce the level of pollution in Indian cities, especially metros like Delhi and Mumbai.

However, this is not completely straightforward as one might presume. Electric vehicles will need
electricity to charge. In India, electricity is produced primarily by burning coal. And if the demand
for electricity goes up suddenly due to millions of electric vehicles on the roads, the greenhouse
gas emissions from the coal fired electric plants will negate the advantage offered by the electric
vehicles.

Hence, India will also need to work parallelly to increase the share of green energy sources like
wind and sun power or solar in electricity generation.

Finally, let's analyse the legal factors. The legal and regulatory framework that can impact the
adoption of electric vehicles in India are in their nascent stage.

As, I mentioned before; the National Electric Mobility Mission plan and the faster adoption and
manufacturing of hybrid and electric vehicles in India are the main policy frameworks currently.

Even though the government is encouraging increased private ownership of electric vehicles, the
primary focus is on widespread use of electric vehicles in public transportation and getting private
players to rope in cab aggregators to switch to electric vehicles. We can expect the legal
framework to get more solidified as the adoption increases.

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