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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 (Kotter and Schlesinger, 1991; Johnson and Scholes, 1993). The “radical and ongoing changes occurring
in society create an uncertain environment and have an impact on the function of the whole organization” (Tsiakkiros,
2002). 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 forces. 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 (Byars, 1991; Cooper, 2000).
Kotler (1998) 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. The use 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 (Porter, 1985). 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 (Thompson, 2002). If demand is buyout,
for example, and the cost of capital is 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 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 (Robinson and et al., 1978; Thompson, 2002).
Economic conditions are influenced by political and government policy, being
a major influence affecting government decisions. The issue of whether European countries join, or remain outside, the single
European currency is a case in point. At any one time either exported or imported goods can seem expensive or inexpensive,
dependent upon currency exchange rates. There are many other ways, however, in which government decisions will affect organizations
both directly and indirectly, as they provide both opportunities and threats.
While economic conditions and government policy are closely related, they both
influence a number of other environmental forces that can affect organizations. Capital markets determine the conditions for
alternative types of funding for organizations. They tend to be a subject to government controls, and they will be guided
by the prevailing economic conditions. The rate of interest charged for loans will be affected by inflation and by international
economics and, although the determining rate may be fixed by a central bank, as it is the case with the Bank of England, that
will also be influenced by stated government priorities. According to Thompson (2002), government spending can increase the
money supply and make capital markets more buoyant . The expectations of shareholders with regard to company performance,
their willingness to provide more equity funding or their willingness to sell their shares will also be affected.
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.
The sociocultural environment encapsulates demand and tastes, which vary with
fashion and disposable income, and general changes can again provide both opportunities and threats for particular companies
(Thompson, 2002; Pearce and Robinson, 2005). Over-time most products change from being a novelty to a situation of market
saturation, and as this happens pricing and promotion strategies have to change. Similarly, some products and services will
sell around the world with little variation, but these are relatively unusual. Organizations should be aware of demographics
changes as the structure of the population by ages, affluence, regions, numbers working and so on can have an important bearing
on demand as a whole and on demand for particular products and services. Threats to existing products might be increasing:
opportunities for differentiation and market segmentation might be emerging.
Technology is widely recognised by various literature on strategic management
(Capron and Glazer, 1987; Johnson and Scholes, 1993; Jan, 2002), as part of the organization and the industry part of the
model as it is used for the creation of competitive advantage. However, technology external to the industry can also be captures
and used, and this again can be influenced by government support and encouragement. Technological breakthroughs can create
new industries which might prove a threat to existing organizations whose products or services might be rendered redundant,
and those firms which might be affected in this way should be alert to the possibility. Equally, new technology could provide
a useful input, in both manufacturing and service industries, but in turn its purchase will require funding and possibly employee
training before it can be used.
Examples of excellent PEST analyses