The political environment of a company refers to the institutional context that exists in the society in which a certain company operates. This context influences the operation and viability of companies. It is an external element to the company; therefore, you cannot control it.
However, depending on the size of the company or its sector of activity, it can influence its political environment. This produces an interrelation between the political environment and the company. The analysis of the political environment is essential when preparing the strategic plan of any business project.
The political environment of a certain society can vary and companies must be prepared to face the possible effects that this may cause in the development of their activity.
This environment can be analyzed from two axes: political stability and expressions of power that end up being translated into laws, resolutions, decrees, ordinances, etc. That is why, given the importance of current legislation in this environment, most authors refer to it as the political-legal environment.
The main actors in this environment are government agencies, political parties and pressure groups. Depending on their performance, it can be said that they encourage or limit the business sector.
The political environment, together with the economic, socio-demographic and technological (PEST), make up the macro environment or general environment of a company. Among these macrovariables, some authors also include the environmental setting.
Variables of the political environment of a company
The variables of the political environment that affect the existence and profitability of a company act from the different levels of governmental organization (international, state, federal or regional and local). These include the following items:
Political stability
Political stability is fundamental to a country's economy. In countries with political instability or immersed in war situations, investment slows down, both foreign and domestic. On the other hand, social disturbances associated with this type of situation paralyze or slow down the consumption of a country.
Institutional organization
Institutional organization directly affects the ability of companies to influence their political environment. In highly decentralized societies, companies have greater access to actors in the political environment.
Dominant political ideology
The ideology of the political party that holds power determines the legal environment in which the company will have to develop.
In general, in societies governed by liberal parties, the current legislation favors the free operation of companies, while in societies governed by socialist parties there is a greater tendency to protect workers and consumers and, therefore, the legislation is more restrictive.
International context
The creation of supranational organizations can affect the legislation of a country in terms of trade, social policies, etc., which will end up having an impact on the operation of the company.
This element especially affects companies that act internationally, since the emergence of world powers or international agreements between countries can limit their competitiveness in the market.
Business legislation
This element includes the specific legal norms that regulate the operation of companies.
These determine the way in which the company relates to its internal elements, such as human beings (labor legislation) and its own capital (fiscal and commercial regulations).
Examples
Some examples of elements of the political environment and how they affect the company are:
War
The civil war in Sri Lanka began in 1983 and ended in 2009. Such a prolonged war had dire consequences for the country's business fabric, impacting both domestic consumption and exports.
Social disturbances
Often times, social disruptions caused by demonstrations in favor of certain rights are accompanied by violent disturbances and looting that destabilize the economy and paralyze consumption. Egypt and Syria are two examples of this type of situation.
Political orientation of the parties
The case of the United States is very illustrative in this regard. The United States is governed by Republicans and Democrats, with great differences in the political orientation of both parties.
The political orientation of the ruling party has strong implications for the operation of companies in terms of taxes, public spending, etc.
Fiscal territorial policy
A very obvious example of the importance of studying the political environment of the company to design a strategic plan is that of companies located in free zones.
The tax applied to companies in free zones is around 15%, while this tax for almost any other company is usually around 35%.
The difference is so considerable that a company could survive in a free zone subject to 15% tax, but it would not be viable or profitable in a scenario where it had to bear a tax burden of 35%.
Policies that affect consumption patterns
Another example is the case of Law 100 applied in Colombia. Under this law a group of entities that provide health services to the Colombian population is brought together in order to guarantee the quality of life.
With the approval of Law 100, numerous companies dedicated to providing health services emerged (optical, clinical laboratories, dental clinics, etc.). Although they obtained a low price for their service, the demand was constant and voluminous because it was accessible to the entire population.
This policy radically changed the business environment of health companies, which went from low demand that paid high prices, to high demand at low prices.
Company specific legality
Some examples of rules that specifically affect the company are:
- Tax regulations. The obligation to pass on indirect taxes to customers.
- Commercial regulations. Publish the annual accounts, in the case of companies.
- Labor standards. Pay Social Security contributions for each worker in the company.
