The impact of the External Environment on the Organisation

Anupam Traders-Investment
One of the best models for Macro-Economic analysis is PESTEL.


POLITICAL

Any business, including an FMCG – Food Products Wholesaler, is directly impacted by the political environment it operates in. For e.g., Nepal was mired in a Maoist Insurgency for a decade from 1996-2006. Consequently, the country’s economic development was badly affected and the business community were afraid to invest more in the country. “GDP Annual Growth Rate in Nepal averaged 4.48% from 1993 until 2017, reaching a record low of 0.10% in 2001”. Source: TRADING ECONOMICS, 2019, https://tradingeconomics.com/nepal/gdp-growth-annual/.


ECONOMIC

The devastating earthquakes of April 2015 caused damages of around US$ 7 billion as per the estimates. GDP growth rate was just 0.6% in 2015. Moreover, Nepal’s private sector suffered losses around US$ 1.96 billion due to the blockade at the trade entry points with India amidst agitations in the Southern Tarai plains following the Country’s new constitution. This caused a severe shortage of essentials especially fuel, shooting inflation rates near 10% in 2016. Source1: Nepal: Inflation rate from 2012 to 2022, Statista, 2019. https://www.statista.com/statistics/422594/inflation-rate-in-nepal/. Source2: Hemant Ojha, The India-Nepal Crisis, THE DIPLOMAT, published on 27/11//2015, https://thediplomat.com/2015/11/the-india-nepal-crisis/.

Businesses were facing grave economic pressures due to the sharp decline in consumer spending including that from tourism and the shortage of fuel and raw materials due to the blockade. The Economic outlook improved in FY 2017 after normalization of trade with India, reconstruction efforts and good monsoon with GDP growth at 7.5% as per The World Bank. Tourism arrivals touched near a million providing a big relief to businesses.


SOCIAL

Nepal is a ‘young’ country with 51.93% at or under 24 years and 36.58% between 25-54 years with a Median age of 24.1 years. The population growth rate is 1.16% (2017 est.) with a life expectancy of 71 years indicating the trend towards an ‘Ageing’ society. Source: Nepal Demographics Profile 2018, Index Mundi, Updated on 01/20/2018, https://www.indexmundi.com/nepal/demographics_profile.html/.

Despite having a young population, the labour market in Nepal is facing shortages especially in labour-intensive sectors like agriculture, infrastructure and even FMCG – Food Products wholesaler companies due to the current trend of people seeking employment abroad. This also means new opportunities in ‘Old-Age Health Care’ and ‘Old –Age Homes’, for e.g. This is because our country lacks the government support programs as is the case in the developed economies.


TECHNOLOGICAL

Businesses all over the world are taking advantage of a rapidly growing e-commerce. In our country’s case as well, the mobile phone is currently used by about 85.8% of households in Nepal. However, with a handful of local e-commerce operators, online e-commerce is still quite negligible primarily due to the lack of secure Payment Gateway infrastructure and also a restriction on Forex transactions by our Central Bank. However, there is an opportunity in the future including for FMCG – Food Products Wholesaler companies with better internet penetration and consumer awareness.


ENVIRONMENTAL 

Businesses need to minimize their environmental impact for the sake of future generations. For e.g., by discouraging Plastic carry bags in stores and using renewable energy sources such as solar power where possible. Additionally, factories must control pollution and install pollution control technology in order to save the environment and also to ensure their own long-term survival and success since this would reflect positively in their brand image.


LEGAL 

There are positive as well as negative implications and challenges to businesses from various government laws and regulations. For example, the introduction of Goods and Services Tax (GST) in India, which accounted for 58% of all our country’s imports in 2017. This would increase the cost of imports due to the increase in transportation, insurance and other service charges while transiting from India for an FMCG – Food Products wholesaler company in Nepal for e.g.

The government and the private sector of Nepal continually lobbied for the removal of GST on these services arguing that these are the “Service Exports” of India. Finally, Ministry of Finance, India announced on 30th September 2017 removal of GST on the supply of services to Nepal and Bhutan against payments made in the Indian currency as was the practice earlier, and not only for the payments made in convertible foreign currency.

RECOMMENDATION

Businesses, including FMCG – Food Products wholesaler companies, must thus try to analyse the external environment and formulate strategies to take advantage of opportunities and try to mitigate potential risks to the extent possible.

Author – Anup Narsingh Amatya