Business environment appraisal methods successfully enable an organisation to understand their position in the commercial marketplace

Environment_PESTAnalysis.pdf

Home >Education homework help >Business environment appraisal methods successfully enable an organisation to understand their position in the commercial marketplace

International Journal of Modern Social Sciences, 2013, 2(1): 34-43

International Journal of Modern Social Sciences

Journal homepage: www.ModernScientificPress.com/Journals/IJMSS.aspx

ISSN: 2169-9917

Florida, USA

Article

Environment & PEST Analysis: An Approach to External

Business Environment

Abhishek Gupta

Administrative-cum-Accounts Officer & Head of Office, Sardar Swaran Singh National Institute of

Renewable Energy (Ministry of New & Renewable Energy, Govt. of India), Wadala Kalan,

Kapurthala-144601 (Punjab)

E-Mail: [email protected]; Ph. No. 01822-255090, Mo. 09592010278

Article history: Received 8 April 2013, Received in revised form 28 May, Accepted 29 May 2013,

Published 30 May 2013.

Abstract: Environmental management, a term encompassing environmental planning,

protection, monitoring, assessment, research, education, conservation and sustainable use

of resources, is now accepted as a major guiding factor for sustainable development at the

regional and national level. It is now being increasingly recognized that environmental

factors and ecological imperatives must be in built to the total planning process if the long-

term goal of making industrial development sustainable is to be achieved. Here we will try

to define and discuss the role of Environmental Analysis in the strategic management

process of organization. The present complex world require as far as is feasible, it consider

impact of important factors related to organizations in strategic planning. The strategic

planning of business includes all functional subdivisions and forwards them in a united

direction. One of these subsystems is human resource management. Strategic human

resource management comes after the strategic planning, and followed by strategic human

resource planning as a major activity in all the industries. In strategic planning, it can use

different analytical methods and techniques that one of them is PEST analysis. This paper

introduces how to apply it in a new manner.

Keywords: Environmental Management, Environmental Planning, Business Environment,

PEST Analysis.

mailto:[email protected]

Int. J. Modern Soc. Sci. 2013, 2(1): 34-43

1. The PEST Analysis: An Introduction

The PEST analysis is the most common approach for considering the external business

environment. PEST analysis stands for Political, Economic, Social, and Technological analysis and

describes a framework of macro-environmental factors used in the environmental scanning component

of strategic management but the word PEST is no more than a convenient mnemonic. The underlying

thinking of the PEST analysis is that the enterprise has to react to changes in its external environment.

This reflects the idea that strategy requires a fit between capabilities and the external environment and

so it is necessary for an enterprise to react to changes. Political changes might be expected to include,

for instance, general changes in the domestic political climate, the effects of European integration and

the after-effects of the break-up of the Soviet Union, government change, world power shifts, as well

as specific legislation and regulation. Economic changes is likely to include the effects of economic

cycles, patterns of world trade, currency conversion rate changes, commodity prices, changes in capital

markets, labour markets and rates, and economic effects on suppliers and particular groups of

customers. Social change includes the effects of demographic patterns, tastes and habits, and concerns

about the environment and sustainable development. Technological change covers the effects of

technological change on products, processes, and distribution channels. The PEST analysis is very

general in nature and this makes it difficult to give clear rules on how best to apply it in varying

circumstances. Global or geographically dispersed enterprises will have to conduct separate PEST

analysis for different regions as trends occur at different rates in different places. The value of the

PEST is likely to relate directly to the quality of the effort put into it. This time spent thinking about

how external change will affect the enterprise and its industry is likely to be well spent.

2. Industry Analysis: A Market Assessment Tool

An industry is a collection of firms offering goods or services that are close substitutes of each

other. Alternatively, an industry consists of firms that directly compete with each other. In other words

an industry is a group of firms producing a similar product or service, such as soft drinks or financial

services. An examination of the important stakeholder groups, such as suppliers and customers, in a

particular corporation’s task environment is a part of industry analysis. An authority on competitive

strategy contends that a corporation is most concerned with the intensity of competition within its

industry. There are five forces, which work together to determine the type and direction of pressures on

profitability that will be found in a given industry. When these forces of competition are favorable,

there will be less downward pressure on profitability, and the industry should have a higher average

level of profitability. When the structural factors are unfavorable, there will be more downward

Int. J. Modern Soc. Sci. 2013, 2(1): 34-43

pressure on profitability and a correspondingly lower average level of profitability. A company, which

is competing in an industry with an unfavorable structure, must find a, ways to gain an advantage over

its competitors, which will allow it to earn above average level of profitability. If no competitive

advantage can be developed, it may be possible to change the structure of the industry. If changing the

structure is not a viable alternative, the company should consider exiting the industry. A company,

which is operating in an industry with a favorable structure, should work to maintain the structure.

3. Industrial Rivalry

The force of competition reflects the interactions among competitors who produce products or

services that are close substitutes for each other. These competitors are collectively known as the

industry. An industry, which is characterized by firms trying to edge out each other for market share is

said to be experiencing rivalry. Rivalry is more intense than ordinary competition. Firms take actions,

which may damage their own profitability in the short run with the idea that it will hurt competitors

more, and in the long run, the initiating firm will gain some advantage over the others. Rivalry is

usually exhibited in price wars, advertising barrages and product proliferation. Rivalry is damaging to

industry profitability because it is costly. Businesses generally try to minimize rivalry within the

bounds of law; however, many factors can create or escalate rivalry in an industry and they should be

carefully monitored as part of the environmental analysis process. As rivalry increases, average

profitability is pushed down, all other things being equal. Rivalry is greater when there are many small

firms in an industry or when there is no clearly dominant firm to set and enforce standards for

competition.

Economies of scale exist for current competitors in the industry. New entrants must incur the

capita’ costs of large production facilities to keep their unit costs down and maintain competitive

prices, or they may forego the large employees to, management must consider other staffing

alternatives. Absolute cost advantages exist when current competitors have lower costs. This may be

due to patents, favorable long-term supply contracts, or experience in operations. Brand loyalty and

product differentiation are present in the industry. Users view the product/service as unique and are

fewer prices sensitive. This makes it difficult for new competitors to establish a market position.

Government regulations limit new competitors. Start-up costs are high. Current competitors move to

make it difficult for new entrants to establish themselves. This may be done by cutting prices in

markets where new products are being tested as long as such pricing is not predatory.

It should be rioted that entry barriers are most effective against start-ups. The only entry

barrier, which seems to be consistently effective against entry by acquisition, is the reaction of existing

competitors. Substitute products: Industry sales and profitability are limited by what the customer will

Int. J. Modern Soc. Sci. 2013, 2(1): 34-43

pay for a given level of quality or service when alternatives are available. Commercial banking

companies often switch from high-fructose corn sweeteners to sugar when the price of sugar decreases

and switch back when the price of sugar increases. As a result profits in the high-fructose corn syrup

industry are limited by the price of sugar. When there is a strong threat of substitution, average

profitability can suffer. The threat of substitution holds down industry profits by allowing buyers

options. The threat of substitution is greater when switching costs are not significant. Substitutes

provide about the same value for cost. Buyers are in the habit of substituting.

4. Industries: Global Competition

Over time most industries evolve through a series of stages form growth through maturity to

eventual decline. The strength of each of six forces mentioned earlier varies according to the stage of

the industry evolution. The industry life cycle is useful for explaining and predicting trends among the

six forces driving industry competition. For example, when an industry is new, people often buy the

product regardless of price because it fulfills a unique need. This is probably a fragmented industry no

firm has large market share and each firm serves only a small piece of the total market in competition

with others. As new competitors enter the industry, prices drop as a result of competition. Companies

use the experience curve and economies of scale to reduce costs faster than the competition.

Companies integrate to reduce costs even further by acquiring their suppliers and distributors.

Competitors try to differentiate their products from one another in order to avoid the fierce price

competition common to a maturing industry. By the time an industry enters maturity, products tend to

become more like commodities. This is now a consolidated industry dominated by a few large firms,

each of which struggles to differentiate its products from the competition. As buyers become more

sophisticated over time, purchasing decisions are based on better information. Price becomes a

dominant concern, given a minimum level of quality and features. As an industry moves through

maturity toward possible decline, its products growth rate of sales slows and may even begin to

decrease. To the extent that exit barriers are low, firms will begin converting their facilities to alternate

uses or will sell them to another firm. The industry tends to consolidate around fewer but larger

competitors.

Global industries, in contrast, operate worldwide, with MNCs making only small adjustments

for country specific circumstances. A global industry is one in which all MNC’s activities in one

country are significantly affected by its activities in other countries. MNC’s produce products or

services in various locations throughout the world and sell them, making only minor adjustments for

specific country requirements. Examples of global industries are commercial aircraft, television sets,

semiconductors, copiers; automobiles, watches and tires, the largest industrial corporations in the

Int. J. Modern Soc. Sci. 2013, 2(1): 34-43

worked in terms of dollar sales are, for the most part, multinational corporations operating in global

industries. The factors that tend to determine whether an industry will be primarily multi-domestic or

primarily global are pressure for coordination within the multinational corporations operating in that

industry, pressure for local responsiveness on the part of individual country markets.

5. Environment Analysis: Threats & Opportunities

Environment analysis is the study of the organizational environment to pinpoint environmental

factors that can significantly influence organizational operations. Environmental analysis is a critical

component of strategic management because it produces much of the information, which is, requires

to assess the outlook for the future. The environment is a significant source of change. Some

organizations become victims of change, while others use change to their advantage. Organizations are

more likely to be able to turn change to their advantage if they are forewarned. This is a major purpose

of the environmental analysis process.

In order to perform an environmental analysis efficiently and effectively, a manager must

thoroughly understand how organizational environments are structured. The environmental analysis

phase of the strategic management process seeks to uncover relevant information rather than extensive

information; it rewards the pursuit of quality rather than quantity. Furthermore, the process must be

future-oriented to provide for adequate response time, whether the desired response is to capitalize on

a trend or to influence its direction. Finally, the information must be translated into a form that

facilitates its use in strategic planning. From these requirements, environmental analysis can be

divided into three major steps determining the bounds and relevant sectors of the environment;

Scanning and forecasting and ensuring that information is available concerning the defined

environment, interpreting packaging information into forms that are useful for Planning. Every

organization is subject to general trends which are felt in many industries and which are not usually

amenable to influence by a single organization. These trends can be classified as technological,

economic, social, and political according to the sector of the environment from which they come. The

force of trends varies with the geographical scope of competition, so it is helpful to identify the scope

of the sector, which requires scanning.

6. The General Environment

The components normally considered part of the general environment are Economic,

Technological, Social and Political. The fluctuations of local, national, and world economies are

related in many ways, but it is still important to make separate assessments based on organizational

scope. Local conditions can moderate or deepen the effects of national economic trends. The

Int. J. Modern Soc. Sci. 2013, 2(1): 34-43

underdeveloped nations are characterized by rising populations, low standards of education, and lack

of a transportation and commercial base. In the developing nations, gross national product is rapidly

increasing, but wages are low and consumer goods scarce. Most critical is the unevenness of income

and wealth, the rapidity of change, and the political instability, which can threaten organizations

operating in such areas. Technology refers to the means chosen to do useful work. Technological

trends include not only the glamorous invention that revolutionizes our lives, but also the gradual

painstaking improvements in methods, materials, in design, in application, in diffusion into new

industries and in efficiency. It includes hardware, software and live ware. For centuries, the simple

process of handling business correspondence has involved dictation, transcription, and final review

and signature. Technological improvements, which made the process more efficient, include the

creation of a standardized shorthand writing system, the invention of the typewriter, the use of voice

recording machines for dictation, and the use of the microcomputer for transcription and editing. All

four represent technological change even though only the typing, recording, and word processing

activities involve machines.

The behavior patterns of individuals and groups reflect their attitudes, beliefs and values. The

social environment includes the attitudes and values of society as well as the behavior, which is

motivated, by those values. A community’ attitudes toward legalized gambling, the composition of

families and households, and the preference for fast food over home cooking are all manifestations of

the social environment. The impact of the social sector is felt in changing needs, tastes and preferences

of consumers, in relations with employees, and in the expectations of society about how the

organization should fulfill its citizenship role. The political sector of the environment presents actual

and potential restrictions on the way an organization operates. These restrictions can take the form of

laws which require or prohibit certain actions, regulations which interpret and detail laws, or avenues

for reporting relationships and oversight functions. The differences among local, national, and

international subsectors of the political environment are often quite dramatic.

7. Worldwide/Global Environment: An International Perspective to Global

Industry

Although industries can be characterized by the global multi-domestic distinction, few pure

cases of either exist. Thus, a multinational competing in a global industry must, to some degree, also

be responsive to local market condition. Similarly, the multinational firm, competing in a multi-

domestic industry cannot totally ignore opportunities to utilize intra-corporate resources in competitive

positioning. The question then becomes one of deciding, which corporate functional activities should

be performed where and what degree of coordination should exist between them.

Int. J. Modern Soc. Sci. 2013, 2(1): 34-43

A multinational corporation has a wide range of possible location options for each of these

activities and must decide which set of activities will be performed in how many and which locations.

The basic international strategies derive from considering the location and coordination

dimensions. If the firm is operating in a multi-domestic industry, choosing a country-centered strategy

implies low coordination of functional activities and geographical dispersion of organization activities.

This allows each subsidiary to closely monitor the local market condition it faces and the freedom to

respond competitively. A high coordination and geographical concentration of the multinational’s

activities results from choosing a pure global strategy. Although some activities, such as after-sales

service, may need to be located in each market, the activities need to be tightly controlled so that

standardized performance occurs worldwide.

Domestically, the public image is often shaped from a marketing viewpoint. The firm’s public

image is considered a marketing tool that is managed with the objective of customer acceptance of the

firm’s product in the market. Although this dimension remains a critical consideration in the

multinational environment, it must be properly balanced with concern for organizational claimants

other than the customer. The multinational firm is a major user of national resources and a major force

in the socialization processes of many countries. Thus, the MNC must manage its image with respect

to this larger context by clearly conveying its intentions to recognize the additional internal and

external claimants resulting from multi-nationalization.

8. Environmental Forecasting

Environmental scanning, monitoring, and competitive intelligence are important inputs for

analyzing the external environment. However, they are of little use unless they provide raw material

that is reliable enough to help managers make accurate forecasts. Environmental forecasting involves

the development of plausible projections about the direction, scope, speed, and intensity of

environmental change, its purpose is to predict change. No one can deny that economic, technological,

political, and social change is a part of organizational life. To say the least, forecasting is a most

difficult process. At this point it may be consoling to recall some humorous forecasting rules. Several

studies have examined the impact of environmental analysis and forecasting on organizational

performance. One study found that increased knowledge, through environmental analysis and

forecasting was positively correlated to profitability.

Brainstorming is a technique that is primarily used to produce creative ideas for solving

problems, but it can also-be-used in forecasting. Basically, brainstorming involves presenting a

particular subject to a group of people and allowing them to present their forecasts on the subject.

Brainstorming generally consists of three phases. In phase one, members of the group are asked to

Int. J. Modern Soc. Sci. 2013, 2(1): 34-43

present spontaneously their ideas on the future of the subject under study. The group is told that

producing a large quantity of their ideas is desired, and that they should not be concerned about the

quality of their ideas. Basic rules are observed in the first phase. No criticism of forecasts is allowed.

No praise of forecasts is allowed. No questions or discussion of forecasts is allowed. Combination and

improvements of forecasts that have been presented are encouraged. During the second phase, the

merits of each forecast are reviewed, which often leads to additional alternatives. Alternatives with

little merit are eliminated in this phase. In the third phase, one of the alternatives is selected, normally

through group consensus.

Trend-impact analysis is also used in environmental forecasting and is conducted along the

following general steps. Past history of a particular phenomenon is extrapolated with the help of a

computer. Panel of experts specifies a set of unique future events, which could have a bearing on the

phenomenon under study. Panel of experts indicates how the trend extrapolation would be affected by

the occurrence of each of these events. Computer then modifies the trend extrapolation using these

judgments. Panel of experts then reviews, the adjusted extrapolation, and modifies the inputs.

9. Environmental Uncertainty: A Threat to Strategic Manager

Environmental uncertainty is the degree of complexity plus the degree of change existing in an

organization’s external environment. Environmental uncertainty is a threat to strategic managers

because it hampers their ability to develop long-range plans and to make strategic decisions to keep the

corporation in equilibrium with its external environment. Most industries today are facing an ever

increasing level of environmental uncertainty. They are becoming more complex and more dynamic.

Industries that used to be multi-domestic are becoming global. New flexible, aggressive, innovative,

competitors are moving into established markets to rapidly erode the advantages of large previously

dominant firms. Distribution channels vary from country to country and are being altered daily through

the use of sophisticated information systems. Closer relationships with suppliers are being forged to

reduce costs, increase quality, and gain access to new technology. Companies learn to quickly imitate

the successful strategies of market leaders, and it becomes harder to sustain any competitive advantage

for very long. Consequently, the level of competitive intensity is increasing in most industries. In

hypercompetitive industries such as computer, competitive advantage comes from an up-to-date

knowledge of environmental trends and competitive activity coupled with a willingness to risk a

current advantage for a possible new advantage.

It is sometimes argued that it is so difficult to forecast the future that it is better not to attempt

forecasting at all. Scenario planning offers a fundamentally different approach that does not depend on

forecasting the future. Rather it postulates possible future scenarios without making any assessment of

Int. J. Modern Soc. Sci. 2013, 2(1): 34-43

the likelihood that any one scenario will occur. Scenario planning was pioneered in Shell. Scenario

planning involves the creation of a number typically two to four complete scenarios of the future, each

of which is self-consistent but significantly different form the others. Under scenario planning, the

purpose of the strategy process is to help managers to develop better mental models so that they can

deal with change as it occurs. It turns planning into learning exercises and places the emphasis on the

process of planning rather than the resulting plans. It is therefore reason of the Learning and Cognitive

schools. Scenario planning is being used to an increasing extent, but it does require considerable time

and effect to achieve the best results.

10. Conclusion

The PEST analysis is a useful tool for understanding market growth or decline, and as such the

position, potential and direction for a business. A PEST analysis is a business measurement tool. This

research dealt about the important PEST analysis which is very essential for strategic management.

Apart from this analysis the industry analysis, types of industries, the different kinds of strategies to be

adopted in the industries and the strategy alternatives are also discussed. After going through this

lesson we may understand the Environmental analysis, global environmental dimensions,

environmental forecasting, risk and uncertainty in business strategic management.

References

Frederic P Miller, Agnes F Vandome, John McBrewster, (2011). Pest Analysis, VDM Publishing.

Babette E. Bensoussan, Craig S. Fleisher, (2008). Analysis Without Paralysis:10 Tools to Make Better

Strategic Decisions, 1 st edition, FT Press.

Michel Robert, (2006). The New Strategic Thinking: Pure & Simple, McGraw-Hill.

Kenichi Ohmae, (2002). The Mind of the Strategist, Tata McGraw-Hill Education.

Kenichi Ohmae, Nicholas Brealey, (2000). The Invisible Continent: Four Strategic Imperatives of the

New Economy, 1 st edition, HarperBusiness.

Edmund B. Fitzgerald, (2000). Globalizing Customer Solutions: the Enlightened Confluence of

Technology, Innovation, Trade, and Investment, Greenwood Publishing Group.

Robert C. Megantz, (2002). Technology Management: Developing and Implementing Effective

Licensing Programs, 2 nd

Edition, Wiley.

W. Teignmouth Shore, (2010). The Pest, BiblioBazaar, USA.

Markus Slamanig, (2012). PEST Analysis Hungary: Country Evaluation and Selection of Hungary, 1 st

edition, GRIN Verlag.

http://www.google.co.in/search?tbo=p&tbm=bks&q=inauthor:%22Babette+E.+Bensoussan%22

http://www.google.co.in/search?tbo=p&tbm=bks&q=inauthor:%22Craig+S.+Fleisher%22

http://www.google.co.in/search?tbo=p&tbm=bks&q=inauthor:%22Michel+Robert%22

http://www.google.co.in/search?tbo=p&tbm=bks&q=inauthor:%22Ohmae%22

http://www.google.co.in/search?tbo=p&tbm=bks&q=inauthor:%22Kenichi+Ohmae%22

http://www.google.co.in/search?tbo=p&tbm=bks&q=inauthor:%22Edmund+B.+Fitzgerald%22

http://www.google.co.in/search?tbo=p&tbm=bks&q=inauthor:%22Robert+C.+Megantz%22

http://www.google.co.in/search?tbo=p&tbm=bks&q=inauthor:%22Markus+Slamanig%22

Int. J. Modern Soc. Sci. 2013, 2(1): 34-43

About Author:

Dr. Abhishek Gupta (B.Com, MBA, Ph.D) is the Administrative-cum-Accounts Officer & Head of

Office, Sardar Swaran Singh National Institute of Renewable Energy (Ministry of New & Renewable

Energy, Govt. of India), Kapurthala (Punjab), India. Dr. Gupta is working in Finance &

Administrative Department at management level since over twelve years.