1 business organisation & environment external environment
TRANSCRIPT
PEST Analysis
The collection of uncontrollable forces and conditions facing a company/business.
Best described as PEST, i.e. Political, Economical, Socio-cultural and Technological
PEST analysis is used at the start of the a strategy review process2
Step 1
Brainstorm – all external factors
likely to affect the business and
gather these under the PEST
headings
3
Step 2
Discuss and research - including
gathering relevant information on
these factors that have a
significant impact on the
business by weighing the
importance of the different
factors
4
Step 3
Summarize – the information in
the PEST analysis template to
further the development of
business strategy
5
Note:
In PEST analysis, some of external
factors (environmental factors) in
terms of Opportunities and Threats
to consider in PEST are:
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Country adopting a laissez-faire
approach i.e. does not intervene
significantly in business activity or
heavy state intervention through
application of legislation of government
policies which can present barriers to
business growth? 7
P - Political
• Laissez-faire business
environment more likely to
attract foreign direct
investment.
• Government policies
intervention can be fiscal policy
and monetary policy
8
What is Fiscal Policy?
Refers to government taxation and
government expenditure policies.
Government taxes include income tax,
corporation tax, sales tax, capital gain
tax, inheritance tax, customs tax,
stamp duties, etc.
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Government expenditure include
transport & infrastructure, health
care, national defence, etc. The
fiscal policy can take two forms
namely deflationary or
expansionary fiscal policy.
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Deflationary Fiscal Policy
In deflationary fiscal policy where the
economy is experiencing high rates of
economic growth and inflation, the
government will intervene by slowing
down the economy i.e. increase taxes
and reduce government expenditure. 11
On the other hand with low rate of
economic growth, government
may used expansionary fiscal
policy to boost the economy in
order to get it out of a recession ie
tax cuts and increase levels of
public sector spending. 12
It refers to the control of amount of
spending (expenditure) and investment in
an economy by altering interest rates to
effect the money supply and exchange
rates. Interest rates refer to the price of
money in terms of the price of borrowing
money and the money saved in a bank
account. 13
Monetary Policy
In the case of high economic growth or
overheating ie growing too much and too fast
thereby causing high inflation, government
intervention will likely to increase interest
rates. Increasing interest rates means
borrowing becomes less attractive for
households and businesses because higher
costs of interest repayment on their loans.
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Also, higher interest rates will
automatically reduce people’s
discretionary income ie disposable
income after all interest-bearing loans
have been paid for.
Consumers may need to cut back on
their spending elsewhere (i.e. reducing
the spending ability and confidence
levels of individuals). 15
Overall, with increased interest rates
is likely to reduce consumption and
investment expenditure in the
economy.
Interest rates also have a direct
impact on the exchange rate e.g. if
Germany and France have relatively
higher interest rates compared to
Japan and Korea, then funds will move
from abroad from Asian banks to
banks in Europe, thereby increasing
the demand for Euro dollars.
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A rise in the exchange caused by
increasing interest rate means that the
price of exports will be relatively
higher than imports and therefore tend
to reduce the demand for exports.
Higher exchange rates tend to be
damaging for domestic business in the
long run. 17
Refers to the large-scale economical factors affecting the economy and therefore the businesses. Government used macroeconomic policies to achieve four main objectives namely:
1. controlled inflation,
2. economic growth,
3. reduced unemployment
4. an acceptable international trade balance.
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E - Economical
1. Controlled inflation – inflation can be
defined as the continued rise in the
general level of prices in the
economy. Most governments regard
low and sustainable inflation as an
absolute priority for economic
prosperity.
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E - Economical
• Demand Pull Inflation : caused by
excessive aggregate demand in the
economy eg if consumer and business
confidence levels are very high, this
will encourage people and firms to
spend more money and at a faster
rate, thereby fuelling inflation.
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E - Economical
• Cost Push Inflation : caused by higher
costs of production leading to a rise in
prices so that firms can maintain their
profit margins eg increased wages
caused by trade union action result in
increased manpower costs, soaring
raw material prices caused by an oil
crisis, higher rents by landlords, etc 21
E - Economical
2. Economic growth
Economic growth refers to an increased in a country’s economic activity over time ie measured by the change in total output of the economy per year and is known as the Gross Domestic Product (GDP).
Economic growth can be attributed to both enhanced quantity and quality of factors of production.
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E - Economical
• Growth via an increase in the
quantity of resources: new sources of
raw material will increase productive
capacity of an economy; changes in
the labour force such as changes in
birth rate and increased ageing
population; changes in the productive
capacity of the economy etc.
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E - Economical
• Growth via an increase in the quality of
factors of production: normally requires
an investment in key resources of the
economy such as capital goods like
infrastructure - roads, airports, etc;
better education and training of the
labour force; health technology ie
advances in health mean workers are
healthy and therefore more productive.24
E - Economical
3. Reduced unemployment
The rate of unemployment measures the
proportion of a country’s workforce not
in employment.
The unemployment rate at any point in
time is caused by the interaction of the
levels of aggregate demand and supply
in the economy.25
E - Economical
If the aggregate demand is high, it
means derived demand for labour is
high and therefore there will be low
unemployment.
If the aggregate supply is also high,
then that generally means more national
output is being produced and again
there will higher level of employment. 26
E - Economical
To address high unemployment rate,
governments can use a demand-side
policies by directly targeting the level
of aggregate demand (ie increasing
aggregate demand) in the economy
(like reducing taxes and increasing
government spending thereby expand
level of spending in the economy)27
E - Economical
4. An acceptable international trade balance
The balance of payments is a record of a
country’s money inflows and outflows
per period of time and it is made up of
two components namely the current
account (export earnings and import
expenditure) and capital account (flows
of money for government reserves,
foreign currencies or investment).
5.
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E - Economical
The current account comprise of the
‘visible’ trade balance (ie international
trade in tangible goods such as oil, steel,
cars, etc) and the ‘invisible’ trade balance
(ie foreign trade in intangible services such
as banking, distribution, insurance, etc).
Governments will strive to avoid a deficit
(ie import expenditure higher than export
earning) on the current account. 29
E - Economical
Government may attempt to correct a
deficit on the current account by
encouraging higher capital account
inflows and/or by a devaluing its
exchange rate (cheaper export
thereby increasing export earnings).
Governments may also set up
international trade barrier 30
E - Economical
Governments may also set up
international trade barrier to correct
any disparity in its balance of
payments or simply to protect their
domestic industries (basically to
encourage export and rely less on
import). 31
E - Economical
Protectionism refers to any policy used
by the government to safeguard
domestic businesses from foreign
competitors. Protectionism therefore
present a threat or barrier to trade
including foreign businesses trying to
establish themselves in overseas
markets.32
E - Economical
The social and cultural factors can
affect the activities of a business :
the attitude of society towards
issues such as business ethics, social
welfare, women, religion, animals,
environment, etc
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S – Social Cultural
demographic changes (statistical study of
life in human communities) ie is workforce
educated and flexible?, size of the ageing
population, etc.
awareness and acceptance of
multiculturalism in modern societies eg
the most consumed take-out food in the
UK is not fish & chips or American burger
but the Indian curry.
34
S – Social Cultural
Technology has affected all aspects of business
functions:
Internet presents opportunities for businesses in
terms of speed of access to information
(businesses & customers can gain instant access
to the most up to date information from
anywhere), reducing language and cultural
barriers (e-mails & and web pages can be easily
translated into different languages), reduced
costs of production (with e-commerce, no need for
physical retail outlets).
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T - Technological
Internet also present potential threats
such as price transparency (easy price
comparison), online crime (banking &
credit card fraud may slowed online
purchases), higher costs of production
(costs of online crime, maintenance &
training costs to ensure employees
arecompetent in the use of internet
technology)36
T - Technological
Other technologies include:
new working practices ie working from
home using information and
communications technology
increased productivity and efficiency
gains ie using robots and machines
which are much faster yet more
accurate than humans especially in
mass production of products over a
long time period.
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T - Technological
quicker product development time eg
using CAD/CAM technology allowed
businesses to produce prototypes
quickly and cost-efficiently
new products and new markets as
technology is a source of innovation and
brings about new products in the market
eg technological gadgets in consumer
markets eg iPod, MP3, etc38
T - Technological
creation of jobs ie advances in
technology bring about an increased
need for maintenance and technical
support such as computer
programmers, etc
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T - Technological
The collection of uncontrollable forces and
conditions facing a company/business.
PEST analysis is used at the start of the a
strategy review process.
And PEST is :
P for _________
E for _________
S for _________
T for _________
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PEST Analysis