MGT Notes

Reference: Strategic Management (5e) – Frank T. Rothaermel (Pg 76)

The Economic External Factors (E in PESTEL) that affect a firm’s strategy are generally macroeconomic in nature. Some of them are :

1. Growth Rate : Growth Rates measure the change in the amount of goods and services produced by an economy. The real growth rate is the growth rate adjusted for inflation. This is an indicator of the current business cycle (expansion or contraction).

2. Employment : Growth Rates affect employment levels in an economy. During growth, unemployment usually falls and wages rise, since the availability of skilled labor is low. During a recession, unemployment typically rises and wages fall, since more skilled labor available in the labor pool.

3. Interest Rates: This measures the amount creditors are paid for use of their money & the amount debtors pay for using the money, adjusted for inflation. Interest rates are tied closely to consumer demand. As an example, when rates are low, more items tend to be bought on credit since it is easily available and this leads to economic growth through increased activity.

4. Price Stability : Price stability is rare and firms have to deal with fluctuations in the prices of goods and services. This factor is related to the amount of money in an economy. Times of inflation (where there is too much money chasing too few goods and services), lead to lower economic growth due to higher prices. While times of Deflation (occurring due to a sudden drop in demand) causes firms to have distorted expectations of the future and will generally prefer not to invest in new initiatives.

5. Exchange Rates : This factor comes into play when an economy trades products and services across national borders. When the home currency appreciates, it makes home exports more expensive for others which causes an overall lowering of demand. When the home currency depreciates, it makes foreign imports more expensive for the home country, also causing foreign purchasing power to go up.

These economic factors are ever present and rarely static.