The Politics bit of PEST analysis

When most students try to think in a PEST framework, they are usually pretty confident when it comes to the bit on social and technological trends. Economics is a bit more tricky (to begin with) but the really hard part seems to be politics. It shouldn’t be really – politics is going on all around us, often in the form of changes to the legal and regulatory environment. Sometimes it’s on an even bigger scale than that, especially on an international level.

Click here the Economist reports how business in Egypt has been rocked by turmoil in recent weeks which extends way beyond the tourism industry. Western companies that cultivated many of the links they had there have wasted their time and money. Multinational companies especially have long known that regional and national political differences and issues have a great importance.

Any unrest in the Middle East is likely to impact on oil prices – and from there, the impact on petrol prices are felt by all firms and households. Economic growth and the best market opportunities are not always to be had in the most politically stable places. BP who have bounced from the politics of Washington (after their Gulf of Mexico oil spill) are now bogged down in difficult negotiations with the politically fragile Russian government regarding exploration in the arctic.

Doing business in China is always a sensitive area for negotiation. In fact, operating in any emerging market involves huge risks and gambles regarding the political climate – and not just abroad. Many western governments are tightening up how their firms must behave when dealing in highly corrupt business environments, for instance when paying bribes to secure contracts is commonplace. Executives who adopt what they regard as “local” rules in Thailand or Indonesia can find themselves facing prison sentences back home.

How do companies cope? There are no simple rules. Countries that are lumped together as emerging markets have very different political regimes. Local politics add yet more complexity. Perhaps firms need to look more carefully at the whole issue and to be less impressed by the appearance of stability. The rapid collapse of Egypt’s government should be food for thought for companies that have bet big on China (with its appearance of order) rather than India (with its messy democracy).