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Business Organisation & Environment

External Environment

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

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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

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Step 3

Summarize – the information in

the PEST analysis template to

further the development of

business strategy

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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

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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.

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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

PEST is Political, Economical, Socio-

cultural and Technological

In PEST analysis, the external factors

(environmental factors) in terms of

Opportunities and Threats are

considered and these information are

used to further the development of

business strategies in the organization.41

PEST Analysis