SMEs Unsure about GE2015 – PESTLE Needed.

With a General Election on the immediate horizon, research shown in the Zurich SME Risk Index has found that two thirds of SMEs either believe that it will have no impact on their business, or they do not know what impact it will have. This is despite the fact that 57% of decision-makers stated that they will take the interests of their business into consideration when voting.

For the 27% who think it will have no impact: you’re almost certainly wrong. For the 40% who don’t know: why don’t you know, or at least have some idea?

It is important for organisations to monitor their macro environments and, perhaps, even more so for SMEs because they have less capacity to absorb damaging changes in this environment, and more flexibility to capitalise on opportunities that arise from it. A letter in a national newspaper last week, written by a small High St shop owner, provided the example of business rates: this person had seen a 50% rise in four years. The Federation of Small Businesses points out that business rates are the third biggest expense for small businesses, upon which it has a disproportionate burden as rates can be three to five times higher for them as a percentage of turnover when compared to large companies. 

PESTLE analysis provides a framework for exploring this external environment, looking at: Political, Economic, Social, Technological, Legal and Environmental factors. With a General Election approaching, the P & E factors should be foremost in the minds of businesses, and within these spheres one recent event springs to mind when thinking about how quickly election implications can manifest themselves.

In January 2015, in Greece, Syriza – the left-wing anti-austerity party that risks seeing Greece drop out of the Euro – won a snap general election. The next day the Euro weakened against the pound, with £1 worth €1.35 (it was €1.30 the week before), a seven-year high, before peaking at €1.42 in March. At the peak of its rise, it gained 6 cents in two weeks, and 17 cents in little more than three months.

The implications of this for SMEs with exposure to Eurozone countries can be considerable; consider the examples of exports and tourism. For exports, take the agri-food sector, of which Shropshire is at the heart, where seven of the UK’s top ten export destinations are members of the Euro. As sterling strengthens against the Euro, UK companies become less price-competitive in these markets, and this happened almost overnight when Syriza won the Greek election. Within the space of a few days, UK exports to Euro countries were 4% more expensive; and in the space of three months they were 13.6% more expensive. Within the space of a few months, a £50,000 deal with a Euro customer would have cost that customer an extra €8,500.

Tourism, likewise, is an industry directly affected by the strength of currencies. Data from Visit Britain shows that the top four visiting countries to the West Midlands – where Shropshire’s Ironbridge Gorge Museum is the second most popular paid attraction – are all in the Euro (Ireland, Germany, France, Netherlands) and that is the case for six of the top ten (adding Italy and Spain). For people from all of these countries, a €1,000 holiday in the UK in 2014, would have cost an additional €136 in March 2015.

In both examples, a weak Euro makes the UK less price competitive, and particularly so against competitors within the Eurozone. In such a case, it could be important for SMEs with exposure to the Eurozone to diversify their customer base somewhat

So what, from the UK, was a fairly innocuous event has actually had a direct, bottom-line impact on innumerable UK SMEs. But when could PESTLE analysis have helped them see this coming? Well, it could have been on the radar from April 2012, a time at which the Euro was €1.20 against sterling – meaning that at its peak it had gained 18.3% - and Syriza jumped from obscurity, taking their first poll lead soon after in September 2012. They started to establish a strong poll lead from the end of Q1 2014; and by November held a 10pt lead in the polls. (Chart below taken from here).

As the forthcoming UK General Election is the most uncertain in decades, perhaps using such polls for a scenario analysis exercise might have been useful. With a matrix such as that below, identify likely policies within each segment and makes assessments as to the likelihood and impact of each on your business. In this example, the positions of the bars on the matrix represent recent polls, suggesting that the most likely outcome is a tie between the Conservatives and Labour, and the requirement for a ‘rainbow’ coalition to form a government – the SNP would hold the next greatest number of seats, and are more likely to form a coalition with Labour.

The FinancialTimes recently described such an outcome as “businesses’ nightmare”, after 19/20 company bosses they interviewed said that they were worried about it. If a company has business interests in Scotland – in oil and gas for example – and particularly if it supplies components for Trident nuclear missiles, then it needs to have plans in place for what might happen under such a situation, almost unprecedented, whereby a nationalist party holds the balance of power.

In summary, this type of activity should be ongoing in businesses of all sizes due to its utility in not just identifying threats, but opportunities also. And this kind of foresight doesn’t need to be a massive exercise; it could be as straightforward as assigning a letter (PESTLE) to various members of your team, and discussing one or two factors at your next team meeting. As long as you have someone to coordinate this activity, it will help you to identify what is important and begin to make assessments about future impacts.