1 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 process 2

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: 6

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. 9

Government expenditure include transport & infrastructure, health care, national defence, etc. The fiscal policy can take two forms namely deflationary or expansionary fiscal policy. 10

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. 14

Also, higher interest rates will automatically reduce peoples 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. 16

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. 18 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. 19 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. 20 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 countrys 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. 22 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. 23 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 countrys 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 countrys 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) 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 33 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 ( s & and web pages can be easily translated into different languages), reduced costs of production (with e-commerce, no need for physical retail outlets). 35 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. 37 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, etc 38 T - Technological

creation of jobs ie advances in technology bring about an increased need for maintenance and technical support such as computer programmers, etc 39 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 _________ 40 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