BUSINESS ENVIRONMENT

DEFINITION:

Environment refers to all external

forces which have a bearing on the
functioning of business. According to
Barry M. Richman “Environment
factors and constraints are largely
external and beyond the control of
individual, industrial, enterprises and
their managements. These are the
‘givers’ within which firms and their
managements must operate in a
specific country and they vary from
country to country.”

The business environment poses threats to a firm or offers immense

opportunities for potential market exploitation. According to William F.
Glueck and Lawerence R. Jauch, “the environment includes factors
outside the firm which can lead to opportunities for or threats to the firm.
Although there are many factors, the most important of the sectors are
political, economic, social, technological, legal and environmental.”

1
 FACTORS AFFECTING BUSINESS
ENVIRONMENT

The Model's Factors

• Political environment refers to the

influence exerted by the three political
institutions i.e. Legislature, executive and
the judiciary in shaping, directing,
developing and controlling business
activities. The legislature decides on a
particular course of action; the executive
also called the government, implements
whatever was decided by the Parliament
and the judiciary functions as the
watchdog in order to ensure that both the
legislature and the executive function in public interest and within the
boundaries of constitution. A stable and dynamic political
environment is indispensable for business growth.

Political factors or how and to what degree a government intervenes

in the economy. Specifically, political factors include areas such as tax
policy, labor law, environmental law, trade restrictions, tariffs, and
political stability. Political factors may also include goods and
services which the government wants to provide or be provided (merit
goods) and those that the government does not want to be provided
(demerit good or merit bad). Furthermore, governments have great
influence on the health, education, and infrastructure of a nation.

• Economic environment refers to all forces which have an

economic impact on business.
Industrial production, agricultural,
planning, basic economic philosophy,
infrastructure, national income, per
capita income, money supply, price
level, population, savings, stages in the
economic development and trade
cycles are major factors which make
up the total economic environment.

2
There is close relationship between business and its economic
environment.

Economic factors include economic growth, interest rates, exchange

rates and the inflation rate. These factors have major impacts on how
businesses operate and make decisions. For example, interest rates
affect a firm's cost of capital and therefore to what extent a business
grows and expands. Exchange rates affect the costs of exporting goods
and the supply and price of imported goods in an economy.

• Social environment refers to

the influence exercised by certain
factors which are beyond the
company’s gate. Social
environment is highly relevant for
a business unit as the variety of
goods it produces.

Social factors include the cultural

aspects, people’s aspect attitude to
work and wealth; role of family,
marriage, religion and education; ethical issues and social
responsiveness of business; health consciousness, population growth
rate, age distribution, career attitudes and emphasis on safety. Trends
in social factors affect the demand for a company's products and how
that company operates. For example, an ageing population may imply
a smaller and less-willing workforce (thus increasing the cost of
labor). Furthermore, companies may change various management
strategies to adapt to these social trends (such as recruiting older
workers).

• Technological environment exercises considerable influence on

business. Technology is understood as the systematic application of
scientific or other organized knowledge to practical tasks. It is through
business that technology reaches people. Technology changes fast and
to keep pace with it, businessman should be ever alert to adopt
changed technology in their businesses.

Technological factors include ecological and environmental aspects,

such as R&D activity, automation, technology incentives and the rate
of technological change. They can determine barriers to entry,
3
minimum efficient production level and influence outsourcing
decisions. Furthermore, technological shifts can affect costs, quality,
and lead to innovation.

• Legal factors include discrimination law, consumer law, antitrust

law, employment law, and health and safety law. These factors can
affect how a company operates, its costs, and the demand for its
products.

• Environmental factors include weather, climate, and climate

change, which may especially affect industries such as tourism,
farming, and insurance. Furthermore, growing awareness to climate
change is affecting how companies operate and the products they
offer--it is both creating new markets and diminishing or destroying
existing ones.

4
 PEST ANALYSIS

Fig 1

Introduction

PEST stands for - Political, Economic, Social, and Technological. PEST

analysis is in effect an audit of an organization’s environmental
influences with the purpose of using this information to guide strategic
decision-making. The assumption is that if the organization is able to
audit its current environment and assess potential changes, it will be
better placed than its competitors to respond to changes.

The Concept

To help make decisions and to plan for future events, organizations need
to understand the wider ‘micro-economic’ and ‘macro-economic’
environments in which they operate. (The micro-economic environment
is the one in which we operate and have limited influence or impact, the
macro-environment includes all factors that influence an organization but
are out of its direct control). An organization on its own cannot affect
these factors, nor can these factors directly affect the profitability of an
organization. But by understanding these environments, it is possible to
take the advantage to maximize the opportunities and minimize the
threats to the organization. Conducting a strategic analysis entails
scanning these economic environments to detect and understand the
broad, long term trends.

5
A PEST analysis is a useful tool for understanding the ‘big picture’ of the
environment in which an organization is operating. Specifically a PEST
analysis is a useful tool for understanding risks associated with market
(the need for a product or service) growth or decline, and as such the
position, potential and direction for an individual business or
organization.

A PEST analysis is often used as a generic 'orientation' tool, finding out

where an organization or product is in the context of what is happening
outside that will at some point affect what is happening inside an
organization. The six elements form a framework for reviewing a
situation, and can also be used to review a strategy or position, direction
of a company, a marketing proposition, or idea. Completing a PEST
analysis can be a simple or complex process. It all depends how thorough
you need to be. It is a good subject for workshop sessions, as undertaking
this activity with only one perspective (that is, from just one person’s
view) can be time consuming and miss many critical factors. We all see
things differently and harnessing the knowledge of several people will
ensure the process is robust and meaningful.

History

The term PESTLE has been used regularly in the last 10 years and its true
history is difficult to establish. The earliest know reference to tools and
techniques for ‘scanning the business environment’ is by Francis J.
Aguilar1 who discusses ‘ETPS’ - a mnemonic for the four sectors of his
taxonomy of the environment: Economic, Technical, Political, and
Social. Shortly after its publication, Arnold Brown for the Institute of
Life Insurance (in the US) reorganized it as ‘STEP’ (Strategic Trend
Evaluation Process) as a way to organize the results of his environmental
scanning. Thereafter, this ‘macro external environment analysis’, or
‘environmental scanning for change’, was modified yet again to become a
so-called STEPE analysis (the Social, Technical, Economic, Political).

In the 1980s, several other authors including Fahey, Narayanan,

Morrison, Renfro, Boucher, Mecca and Porter included variations of the
taxonomy classifications in a variety of orders: PEST, PESTLE,
STEEPLE etc. Why the slightly negative connotations of PEST have
proven to be more popular than STEP is not known. Some purists claim
that STEP or PEST still contain headings which are appropriate for all
situations, other claim that the additional breakdown of some factors to
help individuals and teams undertaking an environmental scan.
6
Quite who and when added what elements to the mnemonic is a mystery,
but what we do know is that the actual order and words contained are
common to certain parts of the world and streams of academic study. The
term PESTLE is particularly popular on HR and introductory marketing
courses in the UK. Others favor PEST, STEP or STEEPLE.

The PEST model

The PEST model provides users with a series of headings under which
users can brainstorm or research key factors:
• Political: what is happening politically in the environment in
which you operate, including areas such as tax policy, employment
laws, environmental regulations, trade restrictions and reform, tariffs
and political stability?

• Economic: what is happening within the economy, for example;

economic growth/ decline, interest rates, exchange rates and inflation
rate, wage rates, minimum wage, working hours, unemployment (local
and national), credit availability, cost of living, etc.

• Sociological: what is occurring socially in the markets in which

you operate or expect to operate, cultural norms and expectations,
health consciousness, population growth rate, age distribution, career
attitudes, emphasis on safety, global warming.

• Technological: what is happening technology-wise which can

impact what you do, technology is leaping every two years, how will
this impact your products or services, things that were not possible
five years ago are now mainstream, for example mobile phone
technology, web 2.0, blogs, social networking websites. New
technologies are continually being developed and the rate of change
itself is increasing. There are also changes to barriers to entry in given
markets, and changes to financial decisions like outsourcing and in-
sourcing.

The PEST process

• Decide how the information is to be collected and by whom (often

a team approach is much more powerful than one person’s view).
• Identify appropriate sources of information.
• Gather the information - it is useful to use a template as the basis
for exploring the factors and recording the information. An example of
7
 such a practical and ready-to-use template created to accompany this
fact sheet can be found on the Rapid BI website.
• Analyze the findings.
• Identify the most important issues.
• Identify strategic options.
• Write a report.
• Disseminate the findings.
• Decide which trends should be monitored on an ongoing basis.

Applications and when to use it

PEST analysis can be used for business and strategic planning, marketing
planning, organizational change, business and product development and
research reports. It can also be used from a departmental or individual
perspective to look at what you deliver to whom and how you do it.

To be effective a PEST needs to be undertaken on a regular basis.

Organizations that do analyses regularly and systematically often spot
trends before others thus providing competitive advantage.

Business planning

A PEST analysis is a useful document to have available at the start of a

business planning process. It can provide the management team with
background and context information about targets towards growth, new
product development and brand positioning. The opportunities and threats
identified can be fed into a SWOT (Strengths, Weaknesses,
Opportunities, Threats) process and strategies identified to avoid or
minimize the impact of the threats, and equally strategies employed to
build on the opportunities presented.

Product development

It is often said that there are few ‘bad products’ but lots of wrong time
and wrong places. As a PEST analysis provides a view of what is
occurring in the external world, this will help when making the decision
to enter or leave an area of product development. For example, portable
tape recorders are excellent devices, but a PEST analysis might show that
that, socially and technologically, MP3 technology is more acceptable.
Equally from an environmental point of view the manufacture of tapes
requires the use of heavy chemicals and would be increasingly taxed and
rejected by society.
8
Organizational change

When looking at changing one function or department a PEST analysis

can be a powerful tool for understanding the context in which the change
is occurring and the potential areas of focus. Best used in association with
a SWOT analysis, a PEST will provide information about potential
opportunities and threats around labor changes, for example skills
shortages.

Using the PEST to look at factors outside of the function but still inside
the organization can highlight factors such as:
• Political: Who is in what position, their power, vision, goals and
directions etc?
• Economic: financial implications, productivity etc.
• Socially: what is and is not acceptable within the culture.
• Technological: new computer systems or other new technology.
In this situation, a PEST analysis can be thought of more an as audit.
It is best used at the data capture phase as part of a pre-planning
process of any strategic intervention.

While using the tool internally can add some value, it will focus on
factors which can be changed, that is they are in the control of the
organization, if not the function concerned. So while it may be a useful
framework, it should be used with caution in this context.

Research reports

A PEST analysis can also be used as a framework for looking outside the
organization to hypothesize what may or may not happen. It is a useful
framework to use to ensure that some of the basic factors are not
overlooked or ignored. Used in a similar way to that of business planning
– but the application of the data is different.

9
 ADVANTAGES & DISADVANTAGES OF USINF
PEST ANALYSIS
Advantages of using a 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 using a 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 analysis’.
• The data used in the analysis may be based on assumptions that
subsequently prove to be unfounded (good and bad).

10
 CASE STUDY

A PESTLE analysis can be carried at different levels depending on the

context. A case study is offered below to illustrate what a PESTLE
analysis might look like in a particular situation: a more detailed level,
using a soft drinks manufacturer as an example.

Case study: A detailed PESTLE analysis

What follows is a summary of the findings, not the data collection phase,
of a PESTLE analysis using a soft drink manufacturer called Soft Drink
Co.

Political

The government plays a role within the operation of manufacturing these

products in terms of regulations. There are potential fines set by the
government on companies if they do not meet a standard of laws. The
following are some of the factors that could cause Soft Drink Co's actual
results to differ materially from the expected results described in their
underlying company's forward statement:
• Changes in laws and regulations, including changes in accounting
standards, taxation requirements, (including tax rate changes, new tax
laws and revised tax law interpretations) and environmental laws in
domestic or foreign regulations.
• Changes in the non-alcoholic business environment. These include,
without limitation, competitive product and pricing pressures and their
ability to gain or maintain share of sales in the global market as a
result of action by competitors.
• Their ability to penetrate developing and emerging markets, which
also depends on economic and political conditions, and how well they
are able to acquire or form strategic business alliances with local
packaging firms and make necessary infrastructure enhancements to
production facilities, distribution networks, sales equipment and
technology.

Economic

Last year the economy was strong and nearly every part of it was growing
and doing well. However, things changed. Most economists loosely
define a recession as two consecutive quarters of contraction, or negative
GDP growth.
11
 Due to low interest rates it can use the borrowing on research of
new products or technology. As researching for new products
would cost less the Soft Drink Co will sell its products for less
and the people will spend as they would get cheap products from
Soft Drink Co.

Before the terror attacks on 7 July, the UK was starting to see the
economy recover slightly and it is only just recently that they
achieved the economic levels. Consumers are now resuming their
normal habits, going to the high streets, car shopping, and eating
out at restaurants. However, many are still handling their money
cautiously. They believe that with lower inflation still to come,
consumers will recover their confidence over the next year.

Sociological

Many people are practicing healthier lifestyles. This has affected the non-
alcoholic drink industry in that many are switching to bottled water and
diet colas instead of beer and other alcoholic drinks. The need for bottled
water and other more convenient and healthy products are important in
the average person’s day-to-day life.

Consumers from the ages of 37 to 55 are also increasingly concerned

with nutrition. Since many are reaching an older age in life they are
becoming more concerned with increasing their longevity. This will
continue to affect the non-alcoholic drink industry by increasing the
demand overall and in the healthier drinks.

Technological

The effectiveness of company's advertising, marketing and promotional

programs and the new technology of internet and television which use
special effects for advertising through media make some products look
attractive.

Introduction of cans and plastic bottles have increased sales for Soft
Drink Co as these are easier to carry and you can bin them once they are
used.

As the technology is getting advanced there has been introduction of new

machineries all the time. Due to introduction of this machineries the
production has increased tremendously then it was few years ago.
12
Soft Drink Co has several factories which use state of the-art technology
to ensure top product quality.

13
 CONCLUSION
It helps to get other people involved. It exploits the expertise and
resources that are already available within the organization. Using PEST
Analysis in conjunction with other techniques will help in knowing about
competitors and the existing scenario.

14
 BIBLIOGRAPHY

1. Business Environment – BMS Series publication Vipul

Prakashan

2. Wikipedia - http://en.wikipedia.org/wiki/PEST_analysis

15