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PESTEL Analysis of American Express
Posted by Freddie Murphy on Aug-02-2021
At EssayPandas, we can help you complete different MBA assessment projects and theoretical frameworks like PESTEL/PEST/STEP analysis of different companies. For instance, American Express' PESTEL analysis will mainly focus on the external Macro-Environmental factors such as Political, Economic, Social, Technological, Environmental, and Legal, that can directly affect American Express.
A detailed PESTEL Analysis can help managers explore three inter-related environments, i.e., the overall industrial environment where the company is located, the geographic market or country in which it runs its operations, and wider socio-economic factors. Below is a demonstration of how this PESTEL analysis can be written step by step. Ask us for custom PESTEL Analysis help if you still find it difficult.
1. Model introduction
PESTEL is an acronym for Political, Economic, Social, Technological, Environmental, and Legal Analysis. This environment scanning tool is mainly used to understand the external macro-economic influences on the industry, a particular sector, business, and its product/service offerings. These environmental forces are considered external as they cannot be controlled by a firm. However, an in-depth PESTEL analysis of American Express can enhance the companies’ readiness to handle external environmental turbulence. It is one of the most widely used strategic planning and management tools that help management in assessing the impact of different environmental factors on the business and identifying the threats and opportunities that reside in the external environment. By gaining an in-depth understanding of the external environment, management can make wise strategic decisions according to the underlying context.
PESTEL analysis is a simple and easy to apply environment scanning framework that facilitates the understanding of the broader business environment. It encourages organizational management to think strategically, and quickly respond to the external environment changes to avoid or reduce the negative impact on business operations. It also encourages the management to analyze the external business environment from different possible dimensions. However, conducting a detailed PESTEL analysis involves extensive time, and the model cannot offer a full picture of the environmental complexity. Moreover, the model does not clearly highlight the complex inter-connectedness between different external environmental forces. Despite these limitations, the model is still extensively employed to make important business decisions. Model is found to be particularly helpful when firms need to make international expansion decisions. The effectiveness of this model increases when it is combined with other strategic planning tools.
2. Application of PESTEL Model on American Express
2.1 Political factors in the PESTEL framework
2.1.1 What are political factors?
‘Political factors’ are the first component of the PESTEL framework that exert a strong impact on the business, and play an important role in determining the business’ long-term sustainability. Some examples of political factors are taxation policies and trade regulations that governments can levy around the year and it may influence the overall business environment. A strong presence at the international stage increases the vulnerability of American Express to a variety of political, structural, and systematic risks. To ensure long-term survival, American Express should consider the following political factors to enhance the readiness to changing political environment dynamics:
Political stability is important for business organizations as it influences customer and investor confidence, and therefore, has a wide impact on the economy. High political instability has serious implications for the consumption, investment, and economic growth of businesses. Currently, the geographic area in which American Express is actively present is experiencing some political instability due to internal and external conflicts. Inability to understand and handle the prevailing political chaos can inhibit the company from achieving its growth objectives, and management will be reluctant to invest in new capital.
Uncertainty in the political environment refers to the frequency of changes in government policies and regulations. Frequent policy changes affect business performance and make decision-making more challenging due to prevailing uncertainty. American Express should actively scan the political environment to ensure quick adaptation with changing policies and reset the strategic priorities accordingly.
2.1.4 Governance system
The current governance system is based on democracy, which makes the business environment friendly for American Express . American Express can benefit from the economic freedom offered by the democratic governance system, which promotes entrepreneurship and free trade.
2.1.5 Pressure groups in government
Pressure groups can affect the business environment by finding strong allies in the media. These groups pressurize the organizations by arranging protests and running marketing campaigns. American Express needs to keep an eye on the activities of these pressure groups as they can influence the government’s policies, which may ultimately affect the overall business environment. American Express should closely collaborate with these groups to win their trust and should invest in ethical and social activities to develop closer ties with society.
A transparent governance structure is crucial for promoting a friendly business environment. American Express is currently facing several issues due to corruption and lack of transparency. This lack of transparency is mainly linked with the prevailing political uncertainty and instability. Due to corruption, fraudulent activities are on the rise, business activities like licensing and contracting have become more challenging, and law enforcement has weakened, which is hampering the stakeholders’ trust in the business entities and government institutions. Overall, rising bureaucratic corruption is halting economic growth, resulting in reduced growth opportunities for business organizations like American Express.
2.1.7 Fiscal policy (taxation)
While making the expansion decisions, American Express should carefully review the industry-specific taxation policies. . The taxation policies will be more favourable for industries that are on top government priorities. Currently, governments in many developing countries are interested in reducing corporate taxes in an attempt to attract foreign direct investment. American Express should consider these countries, as it will be easier to make profits and invest in the innovation, new product and research and development activities due to low tax rate.
2.1.8 Trade policies
The business expansion decision of American Express should also consider the prevailing trade regulations, and management should prefer the regions with free or flexible trade agreements. The region under consideration is currently reducing the trade restrictions to ease the environment for foreign business players, which increases the attractiveness of this region for American Express , which is seeking international business growth opportunities.
2.2 Economic factors in the PESTEL framework
2.2.1 What are economic factors?
Economic factors- the second component of PESTEL framework, comprise multifaceted variables that directly affect the businesses’ ability to achieve their economic objectives. American Express must gain an in-depth understanding of these factors to anticipate the short-term and long-term business growth in the chosen sector. Some of the key economic factors are explained below:
2.2.2 The efficiency of financial markets
High financial market efficiency shares a strong positive relationship with overall economic growth, making capital accumulation and goods/service production easier. Therefore, American Express needs to choose the countries with highly efficient financial markets so that it could easily accumulate financial and human capital. By keeping an eye on the financial market efficiency, American Express can successfully stay ahead of the competition.
2.2.3 Economic growth rate
American Express should review the economic growth rate of the countries while making international expansion decisions. Countries with high economic growth rates provide more opportunities to pursue long-term growth objectives. A slow economic growth rate leads towards more cautious spending by consumers, which can directly affect American Express’s revenue growth.
The rising inflation rate can have a negative impact on the revenue growth of American Express as its decreases the purchasing power of money and discourages consumer spending on goods and services.
2.2.5 Exchange and interest rate
Fluctuations in the exchange rate can affect business profitability. American Express should study the exchange rate fluctuations to make accurate anticipations so that the undesired trade and business performance consequences could be avoided. High-interest rate means American Express will make high-interest payments, and taken loans will cost more in the long run.
2.2.6 Industry lifecycle stage
Entering in mature industries that are approaching saturation point can achieve growth objectives more challenging for American Express . Therefore, the industry lifecycle stage must be considered while choosing the countries for international expansion.
2.2.7 Demand and supply of labour
The performance of American Express heavily depends on the skills and competencies of its workforce. The timely availability of skilled workers is crucial for American Express to stay ahead of the competition. American Express should analyze the labour demand and supply trends to understand how workers with the required skills set could be successfully recruited. A rigid labour market with powerful worker unions can cause various problems for American Express . Like, it may pressure the American Express to give an unfair wage raise, or may halt the production process by giving a strike call. Hence, it is important to analyze the labour market dynamics, anticipate the key trends and adapt the talent management strategies accordingly.
2.3 Social factors in the PESTEL framework
2.3.1 What are social factors?
In the PESTEL framework, social factors represent the key demographic characteristics, social values, norms, and customs of the society in which business organization functions. American Express must carefully handle the social factors, as failure to adapt according to the socio-cultural environment has driven many highly successful business organizations towards failure. This article section discusses the implications of some key social factors for American Express .
2.3.2 Consumption behaviour
The consumption behaviour shares a strong link with the economic factors. When consumers have more disposable income and are willing to spend more on goods and services to improve their lifestyle, it provides exciting growth opportunities to American Express , as introducing new products and services to these customers is easier, and revenue growth chances also remain higher. However, as modern consumers are becoming more demanding, it is important for American Express to carefully analyze their consumption/spending patterns preferences so that the marketing mix strategies could be adapted accordingly. It is also important for American Express to understand whether the consumption is driven by utilitarian or hedonic motivations. Another important consumer behaviour variable that can affect the American Express’s performance is the degree of ethnocentrism. Higher ethnocentrism can make the business environment more challenging for American Express while operating in the international markets.
High population growth and rising proportion of young population segment are two favourable demographic indicators for American Express , when it specifically targets young consumers with its products/services. Other than that, it is also important for American Express to study the host country’s attitude towards migration, as a positive attitude in terms of welcoming the immigrants from different cultural backgrounds indicates the importance of adopting effective diversity management practices. American Express should adapt its marketing strategies to ensure diversity and inclusion. A positive attitude towards migration also reflects that American Express can easily recruit staff from diversified cultural backgrounds. High workplace diversity is often linked with higher productivity, better innovation, and improved overall firm performance.
2.3.4 Social equality
Social class stratification and respect for hierarchy are some important social factors that can influence the business, marketing, and human resource management strategies of American Express . A hierarchal structure with formal work culture suits American Express when entering countries with high power distance. Similarly, higher social stratification also indicates the need to adopt effective market segmentation strategies, as American Express cannot target multiple segments from different social classes with the same marketing mix.
2.3.5 Cultural and societal norms
Each country has its unique cultural norms, values, and traditions, which reflect consumer behavior. Inability to adapt the product/service offerings according to local cultural traditions can cause serious harm to the business. American Express must conduct extensive research to gain local consumer knowledge. Being an international firm from a culturally distant home market, it could be difficult for American Express management to understand the delicate cultural nuances. For this purpose, American Express can develop a business partnership with local market players that could offer in-depth information about cultural norms and values that influence consumers’ perceptions and attitudes towards the brand.
Another important factor to be considered when developing business strategies is the gender role in that particular society. The marketing and advertising strategies in a highly patriarchal culture would be adapted according to prevailing patriarchal norms, otherwise, American Express can receive a backlash from consumers and general society. The gender roles in that particular society could also affect the human resource management strategies of American Express , as the company will find it difficult to ensure gender diversity across all management levels in countries where women are considered primarily responsible for managing domestic responsibilities.
2.4 Technological factors in PESTEL framework
2.4.1 What are technological factors?
In today’s business world when technological development pace is accelerating, and business organizations are extensively investing in emerging technologies to stay ahead of the competition, it is important for American Express to study and anticipate the existing and future technological trends to ensure long-term business survival. This article section outlines some technological factors that have important implications for American Express .
2.4.2 Technological infrastructure
American Express should prefer countries with well-developed technological infrastructure, as supportive technological infrastructure makes it easier for a firm to achieve its cost reduction, innovation, and value creation objectives. Well-developed technological infrastructure also reflects that it will be harder for American Express to derive sustainable competitive advantage from technology, which could be easily imitated by competitors.
2.4.3 Technological innovations
Technological innovation rate and development can affect the overall market and industry. By studying the emerging technological innovation trends, American Express will be able to understand the new product development rate, product life cycle length, and innovative features being mostly liked by consumers. Research into consumers’ attitudes towards emerging innovative digital technologies can help American Express in understanding whether shifting to e-commerce will benefit more than opening a physical outlet. Competitors’ investment in automation technologies to reduce costs can compel the American Express to shift from manual to automated procedures, particularly when people in general in that particular society are tech-savvy. By investing in the right technological innovations, American Express can optimize the user experience, achieve operational efficiencies, and position itself as an innovative organization.
2.4.4 Research and development
The research and development trend in chosen industry/region reflects the pro-activeness of firms towards introducing innovative solutions for consumers’ needs. However, American Express must refine its understanding of how emerging technological innovations can benefit the firm besides creating value for customers. Extensive investment in research and development activities would be required in markets characterized by disruptive technologies. However, it is important for American Express to adopt a long-term horizon, and do not expect a short-term return from its research and development efforts.
2.5 Environmental factors in the PESTEL framework
2.5.1 What are environmental factors?
Environmental analysis has gained significant importance in the contemporary business environment due to the increased vigilance of stakeholders towards sustainability and environment protection. American Express should gain an in-depth understanding of environmental regulations to avoid lawsuits and reputational harm in the market. Implications of some important environmental factors are discussed below.
2.5.2 Environmental regulations
Stringent environmental regulations in many countries are pressurizing business organizations to reduce environmental harm. In response, American Express should adopt responsible production practices, encourage responsible consumption practices among its targeted consumers, try to improve its brand image on sustainability grounds, and ensure full compliance with the international and local environmental regulations, as inability to do so can draw the serious, reputation damaging criticism from relevant stakeholders.
2.5.3 The growing use of renewable energy
The emergence of renewable technologies to reduce dependence on natural resources has emerged as a powerful trend in various sectors. American Express should evaluate the extent to which a country’s technological infrastructure supports the use of renewable technologies to capture this environmental trend. In some world regions, governments offer attractive subsidies on the use of renewable energy sources. By taking the advantage, American Express can incur investment in renewable energy sources to achieve sustainable business development objectives.
2.5.4 Industry norms of recycling, waste management, and optimum resource utilization
In some countries, the adoption of the closed-loop, circular economy principle is becoming a common norm in some industries/regions. Industries with supportive institutional mechanisms can make material recycling and re-using easier. Similarly, in some countries, customers take an active part in the recycling process. American Express can benefit from these sustainability trends and use them as a tool to not only reduce the environmental costs but also achieve economic objectives in form of reduced production costs.
Lastly, weather conditions need to be considered as operational cost, efficiency, and employee productivity can derive a strong influence from the local weather conditions. Weather conditions also shape consumer behaviour, and require American Express to integrate flexibility into its supply chain operations.
2.6 Legal factors in the PESTEL framework
2.6.1 What are legal factors?
Unlike political factors that offer a broader view, legal factors provide more detailed and specific information related to different laws and regulations, mainly including- employment laws, health and safety laws, intellectual property laws, and consumer protection laws. American Express can face expensive lawsuits if it fails to comply with the host countries’ legislations.
2.6.2 Employment laws
Employment law is an umbrella term that covers various laws protecting employees’ rights, such as fair wage, equality, equity, inclusion, fairness, health, and safety. In some countries, there is no effective enforcement of employment laws, but some countries impose strict penalties upon violation of any of the employees’ stated rights. While entering/operating in those countries, American Express should ensure work environment safety. Proper mechanisms must be placed to discourage any sort of direct and indirect discrimination. Effective compliance with the employment laws can help American Express in strengthening its employer brand image, which is important for attracting and retaining the top talent from the market amid the ongoing war for talent.
2.6.3 Intellectual property laws
Strict compliance with the intellectual property laws makes the business environment safer for firms like American Express , as their patents are protected from imitation, leading towards sustainable competitive advantage.
2.6.4 Consumer protection laws
In many countries, a variety of federal and state-level laws are in place to protect consumers from potential exploitation by businesses. In the information technology age, the laws have even become stricter to ensure consumers’ privacy. In the case of online transactions, American Express must strictly comply with the data protection regulations to avoid lawsuits. While entering different countries, American Express management needs to study the laws related to refund, discount, credit terms, quality, misleading advertisement, and maximum pricing (particularly in the case of basic essential goods).
The article ends with some concluding remarks about the overall effectiveness of the PESTEL framework as a strategic planning tool for modern business organizations.
PESTEL is a powerful strategic planning tool that can provide valuable guidance to the American Express in making successful business strategies. An in-depth understanding of external environmental dynamics enables American Express to make the right international business expansion decisions. American Express can stay ahead of the competition by timely identifying the opportunities and threats imposed by external business environment, and adapting business strategies accordingly.
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