pest analusis and macro environment

Macro-economics and PEST Analysis

Introduction

In analyzing the macro-environment, it is important to identify the factors that might in turn

affect a number of vital variables that are likely to influence the organization’s supply and

demand levels and its costs. The "radical and ongoing changes occurring in society create an

uncertain environment and have an impact on the function of the whole organization". A

number of checklists have been developed as ways of cataloguing the vast number of

possible issues that might affect an industry. A PEST analysis is one of them that is merely a

framework that categorizes environmental influences as political, economic, social and

technological factors. Sometimes two additional factors, environmental and legal, will be

added to make a PESTEL analysis, but these themes can easily be subsumed in the others.

The analysis examines the impact of each of these factors (and their interplay with each

other) on the business. The results can then be used to take advantage of opportunities and to

make contingency plans for threats when preparing business and strategic plans claims that

PEST analysis is a useful strategic tool for understanding market growth or decline, business

position, potential and direction for operations. The headings of PEST are a framework for

reviewing a situation, and can in addition to SWOT and Porter’s Five Forces models, be

applied by companies to review a strategic directions, including marketing proposition.

These of PEST analysis can be seen effective for business and strategic planning, marketing

planning, business and product development and research reports. PEST also ensures that

company’s performance is aligned positively with the powerful forces of change that are

affecting business environment. PEST is useful when a company decides to enter its business

operations into new markets and new countries. The use of PEST, in this case, helps to break

free of unconscious assumptions, and help to effectively adapt to the realities of the new

environment. Main Aspects of PEST Analysis Economic conditions affect how easy or how

difficult it is to be successful and profitable at any time because they affect both capital

availability and cost, and demand. If demand is buy out, for example, and the cost of

capitalist low, it will be attractive for firms to invest and grow with expectations of being

profitable. In opposite circumstances firms might find that profitability throughout the

industry is low. The timing and relative success of particular strategies can be influences by

economic conditions. When the economy, as a whole or certain sectors of the economy, are

growing, demand may exist for a product or service which would not be in demand in more

Wayamba University-MBA-2010 1


depressed circumstances. Similarity, the opportunity to exploit a particular strategy

successfully may depend on demand which exists in growth conditions and does not in

recession. Although a depressed economy will generally be a treat which results in a number

of organizations going out of business, it can provide opportunities for some economic

conditions are influenced by political and government policy, being a major influence

affecting government decisions.

The Difference between Macro and Microeconomics

These distinctions show that a gray area exists between micro and macroeconomics that

relates to aggregation at what point do the actions of a number of firms cease to be a

microeconomic issue and become a macroeconomic issue? To answer that question, let’s

think of another way of outlining the differences between microeconomics and


What will happen if taxes are raised?

What will the unemployment rate be?

Economics

Microeconomic issues

How much will a consumerspend on food?

How much leisure time will consumers enjoy? consumers enjoy?

How much outputs will a firm produce?

Macroeconomic issues

How much income will acountry saves?

What is the appropriate exchange rate between currencies?

How much research and development?


macroeconomics. In microeconomics the focus is on a small group of agents, say a group of

consumers or two firms battling over a particular market. In this case economists pay a great

deal of attention to the behavior of the agents the model is focusing on. They make

assumptions about what consumers want or how much they have to spend, or about whether

the two firms are competing over prices or market share, and whether one firm is playing an

aggressive strategy, and so on. The result is a detailed analysis of the way particular firms or

consumers should behave in a given situation. However, this microeconomic analysis does

not explain what is happening in the wider economic environment. Think about consumers’

choice of what goods to consume. In addition to consumers’ own income and the price of the

goods they wish to purchase, their decisions depend on an enormous amount of other

information. How high is unemployment? Is the government going to increase taxes? Is the

exchange rate about to collapse, requiring a sharp increase in interest rates? Or consider our

two firms competing, over a market.

If one firm is highly leveraged (i.e., has a lot of debt), it may not be able to adopt an

aggressive price stance if it fears that interest rates are about to rise sharply because then the

losses from a price war might bankrupt it. Similarly, if imported materials are important for

the firm’s production process, then a depreciating currency will lead to higher import costs,

reducing profit margins even before the firm engages in a price war. While none of these

background influences shifts in interest rates or movements in the exchange rate is under the

control of the firm or consumer, they still influence their decisions.3

How the Macro-environmental Factors affect to the Business Decision of a Firm



Political Environment

Political Environment is the laws, official regulations, rules and guidelines some of which are

designed to protect people, consumers and communities. Some are designed to make

contracts enforceable and to protect property rights. Many are designed to regulate the

behavior of the managers and their subordinates. There is relatively little that a manager can

do in any organization that is not in some way concerned with, and often specifically

controlled by, the existence, introduction or change in laws or regulations. In Sri Lanka., for

example, the differences between the major political parties could result in very different

business conditions.

Political

Ecological/Environmental issues

Current legislation home market

Future legislation

International legislation

Regulatory bodies and processes

Government policies

Government term and change

Trading policies

Funding, grants and initiatives

Home market lobbying/pressure groups

International pressure groups



The following examples are shown , how affect the Macro-economical environment under

political factors.

Interest rates

Monitory Board of Central Bank of Sri Lanka can control the interest rates, financial

services and banking and non banking activities of such institutions. It directly

influences the activities of Financial Institutions including banks and other financial

institutions such as insurance companies and etc.

Vehicles tax

The recent government policy to reduce vehicle import taxes in Sri Lanka exposed

new avenues to prospective buyers and sellers both. But the total market behaves

according to the customers that involved.

GSP Plus

The very recent example for international trade barriers which are also macro factors

among others can be seen as the GSP+ issue in relation to Sri Lankan exports. Due to

the decision taken by the International Rehabilitation & Development Bank (World

Bank) to eliminate the GSP+ concession, Sri Lanka definitely gets affected heavily at

the international market and would not be able to compete with other products in term

of ‘Price’

Economic Environment

Analysis of the economic environment is the concern of all organizations whether they

produce goods or services, or operate in other areas. In looking at any organized enterprise as

a system, we can see that it imports various things from the economic environment and

exports a product or service to it. There are a number of elements in the economic

environment which an organization must introduce as an input and other matters where the

output of an organization is affected by economic elements in the environment. The close



interactions of business with the economic environment are hardly surprising since the

mission of business is usually economic. However, all other kinds of enterprises must also

interact, to a considerable extent, with the economic environment.

A few examples include a government agency which takes resources, usually from taxpayers,

and provides services desired by the public. A temple or a church takes contributions from

members and serves their religious and social needs. A university takes resource inputs from

taxpayers, students, and contributors of various kinds and transforms these into educational

and research services.

Home economy situation

Home economy trends

Overseas economies and trends

General taxation issues

Taxation specific to

Product/services

Seasonality/weather issues

Market and trade cycles

Specific industry factors

Market routes and distribution

Trends

Customer/end-user drivers

Interest and exchange rates

The following few examples under economical factors can be shown

Inflation-

Governments all over the world try to reduce inflation rates in order to stabilize the

economy and make it easier for international trading. Inflation erodes the purchasing

power of money and causes other problems for marketers in areas such as pricing and the

accurate estimation of demand. The "rate of inflation" is often an indicator of how stable

the economy of a country is.



The labour market

The labour market reflects the availability of particular skills at national and regional

levels; this is affected by training, which is influenced by government and other regional

agencies. Labour costs will be influenced by inflation and by general trends in other

industries, and by the role ad power of trade unions.

Gas industry

As a result, the costs incurred by a new entrant will be higher than those of existing

competitors. As an example: Liquid Petroleum (LP) Gas industry needs large amount of

capital to start up a new plant and to exist in the market. Hence, it is unlikely to be able to

benefit immediately from economies of scale that existing competitors will have

established. This fact economic factor has to be considered in making such a decision for

a new start up.

Social Environment

It is extremely difficult to separate, even for discussion purposes, the social and political

environments. The social environment is made up of attitudes, desires, expectations, degrees

of intelligence and education, beliefs and customs of people in a given group or society. The

political environment is primarily that complex mix of laws, regulations and government

agencies and their actions, which affect all kinds of organizations, often to a varying degree.

The ethical environment - which could well be included as an element in the social

environment - includes sets of generally accepted standards of personal conduct. These

standards may or may not be codified by law, but for any group to which they are meant to

apply, they sometimes seem to have the force of law.

The interweaving and complexity of these environmental elements are such that their study

and comprehension are difficult. To forecast can anticipate and prepare for changes is even

more difficult. It must be added, however, that this factor should not be prepared as an

excuse for possible failure - the skill of a strategic manager is to manage his/her organization



successfully within the changing environment. Bad luck is a phrase that really means bad

strategic planning if we are to be really committed to the concept of pro-active management.

We are all social animals in one degree or other, so it will always be a mistake to consider

that any organization is an isolated ivory tower. The organization is a complex social

structure operating in a wider complex social structure. This must always be considered when

planning.

Lifestyle trends

Demographics

Consumer attitudes and opinions

Media views

Law changes affecting social factors

Brand, company, technology image

Consumer buying patterns

Fashion and role models

Major events and influences

Buying access and trends

Ethnic/religious factors

Advertising and publicity

Demographic

The concept of Demography is the study of population dynamics, which has wide

implications for both the nature of the workforce and the business market. Generally

populations of a country does not change rapidly, but, elements which have an interaction

with it can have fluctuations frequently, the bellow mention key demographic factors

have to be taken in to consideration in decision making process of an organization, those

are as follows,

Culture

Knowledge of a culture of a society is heavily important to organizations for several

reasons. For example, the acceptance of products or a working practices can be affected

by the way those products



Ethnic/religious factors

During the Ramazan period, the demand for the Salvers and other garments related to the

Islam culture are highly demand around the area that are included in higher Muslim

population density. Like-wise during the Sinhala/Tamil New year festival season most of

products are highly demand all over the island, as an example there is a high demand for

Indian sarees in Jaffna

In the macro environment, directly it effects for the organizational decision making

process because, under the social factor: ethnic and religious factor gives more influence

for marketing on such products aspects. As an example same business could not be done

in other areas. So this factor gives a considerable change for the decision making process.

s or working practices appear to 'fit' the culture of the existing society.

Technological

The changing pace of technology in all its forms has meant stable markets have been

turbulent and sections of industry and commerce have declined rapidly or ceased to exist.

Technological developments can have a strong impact on the operation and management of

any kind of organization.

Technology is an all-encompassing term denoting the sum total of the knowledge we have of

ways to do things. It includes inventions, techniques and the vast store of organized

knowledge that we have. But its main influence is on ways of doing things as we design,

produce, distribute or sell our goods and services.

Any business that wishes to survive in a changing world must keep abreast of the technology

applicable in its products and services and to its methods of operation. To do otherwise is to

risk destruction as competitors take advantage of new developments. There are few

organizations whose operations and effectiveness are not touched by technology and

technological developments.

Technological Environment



• The technological environment refers to new technologies, processes, materials,

which create new or better product and market opportunities.

• Technology has a tremendous effect on life-styles, consumption patterns, and the

economy.

• It is a driving force for changing every aspects of world and people at a fast pace

• But thankfully, it is a most manageable uncontrollable force faced by marketers.

• Once advancing, you can start new industries, destroy existing industries, and

stimulate entirely targeted markets.

So, organizations must quickly adapt in terms of product and process, then turn resources and

advances into opportunities and a competitive edge

Some Categories of Technological Change

• Increased ability to master time and distance for the movement of freight and passengers:

Railways, automobiles, trucks and aircraft (which also speeds up and improves

communications)

• Increased ability to generate. Store, transport and distribute energy: electricity, nuclear

power, fiber optics and the laser

• Increased ability to design new materials and change the properties of others so that they

better serve needs: steel alloys, synthetic fibers, plastics, new drugs

• Mechanization or automation of processes: robotics and the computer, which greatly

expand our ability to store manipulate, select and supply data

• Increased understanding of individual and group behavior and how to deal with it:

Psychological bases of motivation, group behavior patterns, improved managerial techniques

• Increased understanding of diseases and their treatment: inoculations for polio, kidney

transplants, antibiotic treatment of infections.

Within this technological area you may wish to consider the influence that buyers have, as

preferences and choices are made through technological differences.

Advantages of PEST Analysis



Simple framework.

Facilitates an understanding of the wider business environment.

Encourages the development of external and strategic thinking.

Can enable an organization to anticipate future business threats and take action to

avoid or minimize their impact.

Can enable an organization to spot business opportunities and exploit them fully.

Disadvantages of PEST analysis

Some users over simplify the amount of data used for decisions – it is easy to use

scant data.

To be effective this process needs to be undertaken on a regular basis.

The best reviews require different people being involved each having a different

perspective.

Access to quality external data sources, this can be time consuming and costly.

The pace of change makes it increasingly difficult to anticipate developments that

may affect an organization in the future.

The risk of capturing too much data is that it may make it difficult to see the wood

for the trees and lead to ‘paralysis by analyses.

The data used in the analysis may be based on assumptions that subsequently

prove to be unfounded (good and bad).

PEST analysis dos and don’ts

Do’s

Do get other people involved.

Do exploit any expertise and resources that are already available within the

organization.

Do use PEST analysis in conjunction with other techniques, such as SWOT

analysis, Porter's five forces competitor analysis or scenario planning etc.



Do incorporate your analysis within an ongoing process for monitoring changes in

the business environment.

Don’t

DON’T try to do this on your own.

DON’T jump to conclusions about the future based on the past or the present.

DON’T get bogged down in collecting vast amounts of detailed information

without analyzing your findings appropriately

What is SWOT analysis?

Developed as a tool for marketing in which internal and external environment are scanned as

an important part of the strategic planning process.

Internal factors can be classified as strengths (S) or weaknesses (W).

External factors can be classified as opportunities (O) or threats (T).

Why use SWOT tools ?

SWOT is a structured analytical framework, which can be used in conjunction with other

tools for audit and analysis e.g. PESTLE analysis, Port er's Five-Forces analysis. SWOT

helps to focus on areas of strength, recognise limitations and develop opportunities in the

most promising directions.

SWOT is used widely because it is quick and easy to learn. You can apply SWOT analysis to

competing techniques. This may produce some interesting insights!

Strengths

Resources and capabilities that can be used as a basis, for developing a competitive

advantage. And, characteristics that can be controlled.

Weaknesses

In some cases, a weakness may be the flip side of strength. Take the case of a state-of-the-art

digital technology that requires a large capital investment. While automated technology may

be considered a strength that other technologies do not share, it also may be a considered a



weakness if the large investment limits the financial resources available for training the

specialists required to use the equipment or distribute the data.

Opportunities

Developments in science and technology are known as opportunity that changes in markets

on both a national and international scale. Changes in government policy, e.g. removal of

international trade barriers, signing international agreements between countries, homeland

security and the fight against terrorism, changes in social patterns, population profiles,

lifestyle changes, etc.

Some other factors can be shown for examples.

– Mergers, joint ventures or strategic alliances based on geopolitical and public-private

partnerships.

– Non-investment or other reason leading to a market being vacated by a competitor

technology.

– An unfulfilled customer needs e.g. a specific data requirements or data required for a

particular geographical area.

– Opportunities to add value and increase profit margin e.g. new business models for

the knowledge economy and information society.

– A later stage in SWOT analysis is to look at the strengths and ask whether these open

up any opportunities. Alternatively, look at weaknesses and ask whether you could

open up opportunities by eliminating them.

Threats

Some examples of such threats include:

– Changing demand.

– Emergence of new technologies or innovative products and services.

– New regulations or increased trade barriers e.g. environmental lobby seeks a ban on

launching spacecraft.

– Government subsidies for competing technologies or disadvantageous taxation e.g.

gaseous emissions.

– Competing technologies that blend better with societal and technological trends.

– Changing specifications for products and services.



– Economic sustainability.

– Could a non-technical weaknesses seriously undermine the technology?

Example

A start-up small consultancy business might carry out the following SWOT analysis:

The points under four factors can be illustrated in point form as follows

Strengths:

– We are able to respond very quickly as we have no red tape, no need for higher

management approval, etc.

– We are able to give really good customer care, as the current small amount of work

means we have plenty of time to devote to customers

– Our lead consultant has strong reputation within the market

– We can change direction quickly if we find that our marketing is not working

– We have little overhead, so can offer good value to customers

Examples of strengths include:

– Patents

– Strong brand names

– Good reputation among customers

– Cost advantages from proprietary know-how

– Exclusive access to high grade natural resources

– Favourable access to distribution networks

– Specialist marketing expertise.

– A new, innovative product or service

– Location of business

– Quality processes and procedures

– Any other aspects that add value to the product or service e.g. Digital workflow and

data distribution.

Weaknesses:

– Our company has no market presence or reputation

– We have a small staff with a shallow skills base in many areas



– We are vulnerable to vital staff being sick, leaving, etc.

– Our cash flow will be unreliable in the early stages

For example, each of the following may be considered weaknesses:

– lack of patent protection

– a weak brand name

– poor reputation among customers

– high cost structure

– lack of access to the best natural resources

– lack of access to key distribution channels

– lack of marketing expertise

– undifferentiated products and service (i.e. in relation to your competitors)

– location of your business

– poor quality goods or services

– damaged reputation

Opportunities:

– Our business sector is expanding, with many future opportunities for success

– Our local council wants to encourage local businesses with work where possible

– Our competitors may be slow to adopt new technologies

Threats:

– Will developments in technology change this market beyond our ability to adapt?

– A small change in focus of a large competitor might wipe out any market position we

achieve

– The consultancy might therefore decide to specialize in rapid response, good value

services to local businesses. Marketing would be in selected local publications, to get

the greatest possible market presence for a set advertising budget. The consultancy

should keep up-to-date with changes in technology where possible.

Successful SWOT analysis



To be a success SWOT analysis, following limitations should be fulfilled.

– Be realistic about the strengths and weaknesses.

– Analysis of case studies should distinguish between state of the art of technology and

potential or unproven technologies.

– Be specific. Avoid grey areas.

– Highlight distinctive characteristics that differentiate between techniques.

– Keep your SWOT analysis short and simple. Avoid complexity and over analysis.

– Remember. SWOT is subjective.

–

The SWOT matrix

– A firm should not necessarily pursue the more lucrative opportunities. Rather, it may

have a better chance at developing a competitive advantage by identifying a fit

between the firm's strengths and upcoming opportunities. In some cases, the firm can

overcome a weakness in order to prepare itself to pursue a compelling opportunity.

– To develop strategies that take into account the SWOT profile, a matrix of these

factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is

shown below:

S-O strategies pursue opportunities that are a good fit to the companies’ strengths.

W-O strategies overcome weaknesses to pursue opportunities.

S-T strategies identify ways that the firm can use its strengths to reduce its

vulnerability to external threats.

W-T strategies establish a defensive plan to prevent the firm's weaknesses from

making it highly susceptible to external threats.

The business decision of a firm

• Describe different types of decisions and the decision-making process



• Evaluate the role of information systems in helping people working individually and

in a group make decisions more efficiently

• Demonstrate how executive support systems can help senior managers make better

decisions

• Assess how systems that support decision making can provide value for the firm

• Identify the challenges posed by decision-support systems, group decision-support

systems, and executive support systems and management solutions

The major factors to concern for the decision making

A PEST analysis is, therefore, a framework for a detailed study of internal and external

environment to help make decisions about the future.

Macroeconomics is the study of aggregates

Macroeconomics is concerned with the behavior of the economy as a whole – with

booms & recessions, economy’s total output of goods & services, the growth of

output, the rate of inflation & unemployment, the balance of payments, & exchange

rates

Macroeconomics deals with the long-run economic growth and with the short-run

fluctuations that constitute the business cycles

Macroeconomics is a policy-oriented part of economics. The subject matter of

Macroeconomics includes factors that determine both the level of these variables and how

the variables change over time.

Macroeconomics focuses on the economic behavior & policies that affect

–Consumption & investment

–Trade balance (exports – imports)

–Currency & exchange rates

–Determinants of changes in wages & prices

–Money, interest rates & Monetary policy

–Taxation, union budget, Govt. deficit, govt. debt & Fiscal policy, etc.

Three central issues addressed by Macroeconomics are:



How do we explain periods of high & persistent unemployment?

How do we explain periods of inflation?Another important issue: Should the govt. fix exchange rates or should exchange rates be market determined?

Policymakers & health-checkup Macroeconomic policymakers focus on improving the health of the economy

Crucial is the ‘thermometer’ readings of their key goals –

– High & sustainable rates of economic growth

– Low inflation

– Low unemployment

Common economic yardsticks to measure these goals are:

– Gross Domestic Product (GDP)

– Consumer Price Index (CPI) or Wholesale Price Index (WPI)

– Unemployment rate

Conclusion

PEST analysis looks at the external business environment and is an appropriate strategic tool

for understanding the "big picture" of the environment in which business operates, enabling

to take the advantage of the opportunities and minimize the threats faced by company’s

business activities. When strategic planning is done correctly, it provides a solid plan for the

company to grow into the future. With a PEST analysis, the company can see a longer

horizon of time, and be able to clarify strategic opportunities and threats that the company

faces. By looking to the outside environment to see the potential forces of change looming on

the horizon, firms can take the strategic planning process out of the arena of today and into

the horizon of tomorrow. PEST is not a set of rigid compartments into which ideas need to be

sorted. It is better thought of as a set of hooks that can be used to fish for important facts.

Once the factors have been "fished out", it does not matter which hook they were attached to.

When it comes to writing up the analysis, there is no need to mention the PEST labels at all.



Economics is the study of the allocation of scarce resources. Macroeconomics studies how

the economy as a whole allocates resources, for instance, how the overall level of saving in

an economy is determined; how the total level of investment is generated; how the level of

unemployment evolves; the pattern of overall imports and exports; what determines the level

of training of the workforce. Macroeconomics is therefore essentially about the backdrop of

economic activity against which firms, governments, and consumers make their decisions.

However, this backdrop of economic activity represents nothing other than the overall effect

of the thousands of decisions made by millions of different consumers and firms. Because

macroeconomic factors have a huge impact on financial markets and on the demand for

goods and services produced by companies, they are an important determinant of corporate

performance. Business people are increasingly expected to contribute to the policy debate,

and because the long-run trends in the business world are driven by macroeconomic factors,

a crucial part of a business education must be the study of macroeconomics.

- END -



Bibliography

Macro-economics Understanding the Wealth of Nation - David Mills and Andrew Scott

V.M.Patel Institute of Management - Sonam Zaveri

Indicators of Macro Environment -Dr.Mrutyunjay Dash

World Wide Web sites -Inter-net

Wayamba University- MBA lectures -by-senior lecturer Mr.Gamage


pest analusis and macro environment

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