Many external environmental factors can affect a business, including political factors.
The essence of this article is an offshoot of the PESTLE analysis used for evaluating external factors that affect the business environment. PESTLE is an acronym that stands for Political, Economic, Social, Technological, Legal, and Environmental.
SWOT analysis is another tool to identify threats and weaknesses of an organization and improve businesses’ competitiveness.
Politics deals with issues surrounding the State, constitution, election, executives, bureaucracy, governance, authority, and power. It includes everything that makes up the governance of a people and the environment where the business exists.
Political Factors Affecting the Business
Political factors deal with the government of territories. Political factors are the key factors that can affect the socio-cultural and change the opinions of the general masses. For example, negative political relations with a country can negatively impact the sale of goods from that country.
Countries have different political systems, and they can be local or international. Nongovernmental sources could make or mar businesses, such as strikes, civil wars, social unrest, revolution, a coup de tat, etc. Doing business in a politically volatile environment is risky, so investors are careful to put money in such environments even when profit seems promising.
For example, a newly installed government in Nigeria began mass demolishing structures. This led to a major loss of businesses and underperformance of businesses.
Business executives and decision-makers must establish contacts with attorneys and politicians to manage, influence, and mitigate the impact of such risks. A country’s political situation determines the index of economic freedom.
There may be sanctions, political tensions, and international diplomacy. These all affect businesses. Sanctions in Russia due to the war in Ukraine have impacted global supply chains resulting in higher commodity prices and a downward trend in the economy.
The big concern around the political environment is that they are outside the control of business owners. They are external events that can shock the business.
Government is expected to be a continuum, and so are the policies sustained from one administration to another. This is known as “political stability.” Political instability occurs when erratic changes in government result in policy changes, which can disrupt even the most well-thought-out policies.
A lack of political stability within a system or jurisdiction is counterproductive, putting businesses at risk and discouraging investors.
Strikes and mass action coordinated by trade unions affect the operation. Employees under no-work-no-pay conditions lose income and productivity during strikes or when disruptive industrial actions are held for prolonged periods. With less income, these employees, as consumers, will have low purchasing power, affecting the market conditions.
Activities of pressure groups to influence government decisions can also be noted.
Examples of Political Factors That Affect Businesses
Some key political factors affecting business are as follows:
Bureaucratic Delays
Bureaucracy is an administration characterized by officialism and hierarchical bottlenecks. This impact businesses, especially when multiple approvals are sought. The bureaucracy slows business processes, resulting in time, money, and opportunity loss.
For example, in Nigeria, a bill regulating oil and gas businesses was processed for over twenty years, resulting in many lost opportunities; events had also overtaken some provisions around the bill.
Some governments have deployed measures such as administrative simplification to cut red tape.
Red tape involves filling out unnecessary paperwork and complying with excessive administrative procedures laden with redundancy and processing delays. This is burdensome when seeking approval to start a business or obtaining licenses and permits.
Other forms of administrative simplification include adopting a standard cost model, which connotes a well-defined mode of billing and payment for government services, thus improving efficiency and transparency.
Logistics
Businesses involved in international trade can be impacted by political unrest and tensions along trade routes.
For example, the Strait of Hormuz and the Suez Canal are key shipping routes for crude oil and refined fuels, and these areas are occasionally subject to political or armed conflicts. This causes adverse effects on the economic environment, as well as the financial position and operational performance of businesses.
In the Suez Canal, Sudan deals a blow to trade flows due to the civil war; the trade route between Europe and Asia is hampered, a barrier to international trade.
Political restrictions impact the inflow and outflow of goods and services. Russia, for instance, has such restrictions which impact trading business.
Government-Sponsored Projects
Political risks can also manifest when the government directs to businesses (especially state-owned corporations). Here, the government leverages its know-how, capital base, etc., to undertake a project as an assistant to the government even when such may not be aligned with the company’s core commercial objectives for profit maximization.
In return, the government may give tax offsets or other incentives for such gestures.
Terrorist attacks can disorder society, increases costs, and damage businesses. 9/11 is a typical example. Political developments in volatile regions could spark civil unrest, riots, and looting, disrupting business activities.
Geopolitical events, such as when OPEC or non-OPEC nations with large production capacity, may increase the supply level that generally affects product prices, such as crude oil, hydrocarbon products, etc.
Corruption and embezzlement can also mar political/administrative processes causing business underperformance. Where bribes and other impunity exist, businesses unwilling to commit to such may be denied certain advantages.
When politics suppress the freedom of the press, business organizations in the media industry are affected. Also, economic development processes could be stiffened where high corruption levels cannot be freely reported.
Taxes
A change in the tax is an example of a political element. The government can increase taxes for some businesses and lower them for others. The decision has a direct impact on businesses.
Administrative Simplification
Administrative simplification eases the process of getting approval and licensure, which in turn lowers the cost of conducting business.
Standard Cost Model
The Standard Cost Model (SCM) is a method for determining the administrative burdens imposed by regulations. It is a quantitative methodology that can be applied in all countries and at all different levels.
Effective Diplomacy
Diplomacy is the art and practice of building and maintaining relationships and conducting negotiations with people using tact and mutual respect. Stakeholder management fall in this category.
Interagency Cooperation
Working collaboratively breaks silos and allows government agencies to keep up with the latest technology or more efficient work processes. This could result in service improvement, innovation, and acceptance of new technologies, eventually reducing bureaucracy.
Other Examples
Other examples of political factors are:
- Trade Control
- Anti-Trust Laws
- Education Laws
- Corruption
- Employment Laws
- Import Restrictions
- Environmental Laws
- Discrimination Laws
- Data-Protection Laws
- Freedom of the Press
- Competition Regulation
- Health and Safety Laws
- Intellectual Property Law
- Regulation and Deregulation
- Consumer Protection and eCommerce
- Environmental Pollution Regulations
- Government Involvement in Trade Unions
- Government Stability and Related Changes
The four key impacts of these political factors on business organizations are:
- Economic Impact
- Regulation Changes
- Risk Mitigation
- Political Stability
Real-World Example: How Political Factors Affected Adidas
Here are some examples of political factors that have affected Adidas:
- In 2018, the Trump administration imposed tariffs on Chinese goods, which led to higher prices for Adidas products in the United States. This hurt Adidas’ sales in the United States.
- In 2019, the ongoing Syrian conflict led to Adidas suspending its operations in Syria. This was a significant loss for Adidas, as Syria was a key market.
- In 2020, the COVID-19 pandemic led to widespread lockdowns and travel restrictions, which disrupted Adidas’ supply chain and operations. This harmed the company’s sales and profits.
Conclusion
Political factors affecting business cannot be overemphasized. They are seen in bureaucracy, sanctions, strikes, social unrest, etc., at local and international levels, affecting small, medium, and large enterprises.
These factors are out of our control but can be managed through effective diplomacy, standard practices, and collaboration. Managers can position themselves to make better decisions and mitigate the impact of these factors by using strategic business planning.