Bm 1.5 External Environment

IB Business and ManagementIB Business and Management::

Unit 1.5 Unit 1.5 PEST AnalysisPEST AnalysisLesson 1Lesson 1

Pages 73-76 Pages 73-76

1. Focus Questions1. Focus Questions

1. What are the constraints and opportunities (internal factors) facing a business in the attempt to achieve its aims and objectives?

2. How can these factors facilitate effective decision-making? 3. What are the external factors which restrict or aid in the

performance of a business? 4. What is PEST and how can we use it to analyze the

external factors in more detail?

2. Overview2. Overview

We talked about how internal and external stakeholders can influence an organization.

Businesses also face other internal and external factors, which will affect their performance. These factors include:

Internal and External…Opportunities andThreats.

……

3. Internal Factors3. Internal Factors The constraints and opportunities:

These are within a firm’s own control. Tend to be dominated by the firms rules and culture of a business.

Some examples: Finance:

Lack sources of finance Can not afford certain kinds of advertising; TV ads.

People: Poor working relations Unhappy employees may hinder the performance of a business.

Marketing: Your marketing campaigns might be have…

inferior products, poor customer service and promotions. Production:

Firm may lack the resources and know-how to achieve better production techniques and stock control.

……

4a. External Factors4a. External Factors

These issues will restrict or aid the performance of a business. The company has no control of these external factors. So, why is it important to understand these factors? How can we understand these uncontrollable factors

better? By using…PEST What does PEST stand for?

Political, Economic, Social, and Technological opportunities and threats of the external environment.

These factors, affect all businesses in the economy and are uncontrollable.

……

5a. 5a. PEST

Why use PEST? First, to ensure that what you are doing is aligned positively with

the powerful forces of change that are affecting our world. Second, helps you avoid taking action that is doomed to failure

from the outset, for reasons beyond your control; and Third, it is useful when you start operating in a new country or

region. The use of PEST helps you break free of unconscious assumptions,

and helps you quickly adapt to the realities of the new environment. (Taken from http://www.mindtools.com/pages/article/newTMC_09.htm ) )

……

5b. 5b. PEST The issues that arise

from PEST might include:

Political: Gov’t legislation.

Economic: State of the

economy Social:

Social, cultural, and demographic changes.

Technological: Advances in

technology. Framework taken from Framework taken from

http://www.mindtools.com/pages/article/newTMC_09.htm

5c. 5c. PEST

What are the external factors that harm a business called? Threats (PEST Analysis).

Can you list some examples?

The other factors which do not harm a business, are? Opportunities (STEP Analysis).

There are other forms of PEST, such as: PESTLE Analysis…they include Legal and Environmental opportunities

and threats. STEEPLE Analysis, which includes Ethical opportunities and threats.

……

5d. 5d. PEST So, how do we carry out a PEST analysis?

Well, there are three basic steps needed to perform the analysis: 1. Brainstorm external factors that may affect your business.

Put these under the PEST headings. 2. Discuss each factor to decide which ones are most likely to have the

greatest impact on your business. 3. Summarize the information in a PEST analysis template to help in

developing a business strategy. See Box. 1.5a for an example, on pg. 76.

This analysis is useful when trying to consider the advantages and disadvantages of a decision. If the opportunities outweigh the threats, then a business is more likely to

pursue that option. One key advantage is that the PEST is simple to use.

It helps you, as managers, be thorough and logical in your analysis. It is also a useful brainstorming and discussion tool.

It promotes proactive and forward-thinking…much better than guessing. It helps you better prepare your business in dealing with external shocks.

And in devising appropriate organizational strategies. ……

5e. 5e. Activity Get into your business groups.

Read the handout carefully.Create a PEST analysis based on the

handout. ……

5f. 5f. Activity Answers:

Political Factors. Controls on immigration. A fairly new country formed in 1957 (Malaysia) and 1963 (Malay, Sabah, Sarawak, and

Singapore). Parliament and hereditary rulers.

Economic Factors. Recovering from a very severe recession. High government spending. Very low inflation and unemployment. Favorable prediction for growth in the economy. Lack of corporate reform (high corporate debt and competition)

Socio-cultural Factors. Mixture of Chinese, Indian, and Malaysian. Variety of religions. Low rates of literacy among women.

Technological. Good national and international lines. A variety of TV and radio stations. ISPs and airports available.

……

Political Factors.Controls on immigration.A fairly new country formed in 1957 (Malaysia) and 1963 (Malay, Sabah, Sarawak, and Singapore).Parliament and hereditary rulers.

Economic Factors.Recovering from a very severe recession.High government spending.Very low inflation and unemployment.Favorable prediction for growth in the economy.Lack of corporate reform (high corporate debt and competition)

Socio-cultural Factors.Mixture of Chinese, Indian, and Malaysian.Variety of religions.Low rates of literacy among women.

Technological.Good national and international lines.A variety of TV and radio stations.ISPs and airports available.

IB Business and IB Business and

ManagementManagement::

1.5 1.5 External Opportunities & External Opportunities & ThreatsThreats

Lesson 2Lesson 2Pages 76-90 Pages 76-90


What are the social, technological, What are the social, technological, economic, environmental, political, legal, economic, environmental, political, legal, and ethical external opportunities and and ethical external opportunities and threats?threats?

How do they affect decision making in a business?

……

2. Social & Cultural2. Social & Cultural The Social and Cultural Factors:

1. Attitude of society: Will have different issues to deal with, such as:

Business ethics, social welfare, women rights, religious or animal rights. 2. Demographic Changes:

Changes in a society can present some opportunities as well as threats to your business.

More educated and flexible workforce, an ageing population, and Changes of attitudes to the role of women.

3. Multiculturalism: What is the most consumed take out food?

Pizza? Hamburgers? Fish & Chips?... As countries become culturally diverse growth in sales of such goods and

services will rise. This results in globalization which creates unlimited opportunities both

locally and internationally. (see pg. 77, Box 1.5.1 for discussion) …

3a. Technological3a. Technological The internet:

Affects several departments: Human Resource Management (recruitment process) Marketing (e-commerce) Finance (reports published online) Operations Management (accessing data)

Why is the internet seen as an opportunity for business? Speed of access to information. Lowers language and cultural barriers. Lowers costs of production.

Are there any threats for a business using the internet? Price transparency (you can compare prices on line). Online crime (hackers, banking and credit card fraud). Higher costs of production (maintenance and training costs).

…

3b. Other Technological3b. Other Technological New working practices:

Working from home Video conferencing Marketing and advertising on the internet.

Increased productivity & efficiency gains: Use of robots and machines for mass production of goods. What are some benefits of using machines?

Can work very long hours. Can achieve zero defects. Can lower costs in the long run…economies of scale.

Quicker product development time: Use of CAD/CAM to produce proto-types faster.

New Products & New markets: Marketers tell us that technology improves our living standards and so we buy

products such as: Wireless internet, digital cameras, Apple products, plasma TVs…

3c. Other Technological3c. Other Technological Job creation:

Will be a need to maintain and support the technology. Who will be able to do these types of jobs?

Computer programmers, hardware and software technicians, graphic designers, and ICT teachers.

…

4a. The Economic Environment4a. The Economic Environment

Levels ofbusiness and

consumerconfidence

Attitudes ofForeign

Countries

Actions ofForeign

Countries

Gov’tPolicies

Large Scale

EconomicFactors

4b. Key Macroeconomics objectives4b. Key Macroeconomics objectives

4. AcceptableInternational

Tradebalance

3. Reducedunemployment

2. Economicgrowth

1.Controlledinflation

They strive toachieve

4c. Government Macroeconomic 4c. Government Macroeconomic PoliciesPolicies

These policies are used to achieve four primary goals which will effect your business activity:

1. Controlled rate of inflation:

What is inflation?The continual rise in price levels in the economy.

Why would you want low and sustainable inflation?How does it measure economic prosperity?

By controlling inflation, can we achieve the other three economic objectives in the long run?

…

4d. Causes of Inflation4d. Causes of Inflation What are two main causes of inflation?A. Demand Pull Inflation:

Caused by excessive aggregate demand (AD) in the economy?

So what is AD? It is the amount of goods and services

in the economy that will be purchased at all possible price levels.

Still confused??? Any increase in consumption,

investment, government spending or international trade earnings will lead to a rise in AD.

So, if there is more money being spent at a faster rate, then this will fuel inflation.

Economists will often say that demand-pull inflation is a result of too many dollars chasing too few goods.

diagram taken from: http://en.wikipedia.org/wiki/Aggregate_demand …

4e. Causes of Inflation4e. Causes of Inflation What are two main causes of inflation?

B. Cost Push Inflation: Caused by higher cost of production. This will lead to a rise in prices so that

firms can maintain their profit margins.

The rationale behind this increase is that, for companies to maintain (or increase) profit margins, they will need to raise the retail price paid by consumers, thereby causing inflation. Also increases in wages, raw material

prices and higher demands for rents can cause this type of inflation.

…

4f. The Effects of Inflation4f. The Effects of Inflation How can inflation effect a business?

It can make business planning and decision making more complicated. Pay structures need to take into account of the changing costs of living. Raw material costs Catalogs and menu prices

If we can not sustain inflation it creates an uncertainty and a threat to businesses.

Effects international competitiveness of a country. Nation ABC has a higher inflation rate than its rivals will be less price-

competitive when trading overseas. So what?

This will lead to a decline in export earnings. Lower national output and Higher unemployment.

…

4g. Can We Stop Inflation?4g. Can We Stop Inflation? Well…not really…but…

How can we control inflation? By limiting demand-pull and cost-push

factors. Gov’t might raise taxes to control

consumption. Or…it could subsidize production to lower

costs. The gov’t could also follow supply-side

policies that improve the productive capacity.

Investment in education Investment in health care Investment in training.

These programs will help increase the quality and productivity of the economy’s resources over time.

…

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5a. Employment5a. Employment What is meant by the rate of unemployment?

Measures the proportion of a country’s workforce not in employment.

Unemployment is caused by the interaction of aggregate demand and aggregate supply in the economy.

For example: If AD is high - - - > low unemployment.

Why? Increase in demand for labor.

If AS is high - - - > high employment. Why? Increase in national output / production.

…

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5b. Employment5b. Employment

What are some problems of unemployment that governments aim to deal with? Social costs of unemployment.

The costs to society. Economic costs of unemployment.

The opportunity costs of unemployment. …

Social Costs

TheUnemployed

Friends &

Family

Local Community

Stress Depression LowSelf-Esteem

Arguments Separation Divorce PovertyIncreased

Crime

EconomicCosts

HigherTaxes

Loss ofInternational

Competitiveness

IncreasedGov’t

Spending

UnemploymentBenefits

Lower LevelsOf

National Output

5c. Employment5c. Employment So how can we reduce unemployment?

What can governments do? Governments are able to use a combination of demand and supply side

policies.

Demand-side Policies: Governments target the aggregate demand in the economy.

1. May use expansionary fiscal policy to lower unemployment. You do this by reducing taxes and/or increase government spending.

2. May also use expansionary monetary policy. You do this by reducing the level of interest rates in the economy. This will encourage consumer and business borrowing and spending.

3. May use protectionist measures. Placing tariffs on international competition to protect domestic business. A tax on foreign products.

…

5d. Employment5d. Employment Supply-side Policies:

Governments target the aggregate supply in the economy. 1. Lowering the level of corporate tax or interest rates.

This should stimulate business activity and investments. 2. Government spending on education and training.

Making people more skilled and flexible.

In the end, supply-side policies have a more permanent effect on the economy than demand-side policies. What do you think are some reasons for this?

See pg. 81 Box 1.5b for types of unemployment. …

6a. Economic Growth6a. Economic Growth What is economic growth?

A country’s increased economic activity.How can this be measured?

Measured by the change in total output of the economy per year.A.K.A: GDP = Gross Domestic ProductA high GDP would indicate or suggest that the average

person is earning more income and that the economy is more prosperous.

See pg. 82, Fig 1.5a The Trade Cycle

…

The Trade / Business CycleThe Trade / Business Cycle

Peak or boom: consumer expenditure, investment and export earnings will be high. Recession: caused by declining AD, lower investment, falling export sales, and rising

unemployment. Slump / trough: high level of unemployment, very low levels of consumer spending,

investment and export earnings. Recovery / expansion: when GDP begins to rise.

How is it possible to cope with a recession? Lets look on pg. 83 Box 1.5c

http://www.culturaleconomics.atfreeweb.com/111%20114%20MBB%20Macro%20Graphics/Macro/Fig%206.1%20Business%20Cycle.jpg

6b. Economic Growth6b. Economic Growth So we learned how to measure economic growth.

Is there anything that can contribute to economic growth?

1. Improved efficiency in the production process. What does that mean or entail?

Better use of existing resources.

2. Enhanced quantity and quality of factors of production. How do you obtain growth in the quality of factors of production?

$$$ INVESTMENT $$$ Three key resources of the economy which to invest in:

1. Capital goods (developing infrastructure) 2. Education and training (trained workforce) 3. Health technology (workforce, healthy and productive)

…

6c. Economic Growth6c. Economic Growth How do you obtain growth in the quantity of factors of production?

Well…there are many, many, ways Discovering new sources of raw materials Changes in the labour force.

Three key resources of the economy which to invest in: Changes in demography (fall in birth rate; size of workforce) Changes in participation rates (self-employed or employed) Changes in net migration (immigration minus emigration)

Not all countries are able to achieve economic growth; in some cases there are barriers to economic growth. Lack of infrastructure (lacks basic electricity, road networks, schools etc). Lack of technological knowledge. Rapid population growth (too many mouths to feed). High foreign debt repayments (no money to invest in the domestic economy).

…

7a. Balance of Payments7a. Balance of Payments What are balance of payments?

A country’s money inflows and outflows. They are made up of two components:

1. the current account (export earnings and import expenditure) 2. the capital account (flows of money for gov’t reserves, foreign currencies or

for investment) The Current account also consists of two parts:

A. the visible trade (oil, steel and cars). B. the invisible trade (banking, distribution, and insurance).

Why is it better to avoid a deficit on the Current Account in the long run? Well, can you spend more than you earn in the long run?

You may be able to if you use credit…but it is not wise to do so. Governments will try to avoid running a deficit in the long run.

They do this by: Increasing Capital Account inflows or Devaluating its exchange rate. …

7b. Balance of Payments7b. Balance of Payments Exchange Rate (FX):

What are they and how are they important? It measures the value of one currency in terms of others.

Eg. US $1 = 1500 KRW (Korean Won) Higher exchange rate (an appreciation): = export prices will be higher.

This reduces the exporter’s price competitiveness. Gov’t will try to devalue the exchange rate to give domestic firms a price

advantage. Lower exchange rate (a depreciation): = import prices will be higher.

This will raise the production costs Gov’t will try to correct this imbalance.

International trade deals may be postponed until business can benefit from the movement in the exchange rates.

Also governments might set up trade barriers to correct the balance of payments. See pg. 85, Box 1.5d. What is protectionism?

Any policy used by gov’t to safeguard domestic business from foreign competition. …

8a. Environmental Ops and Threats8a. Environmental Ops and Threats Is government intervention necessary for business activity?

What if businesses do not consider the external costs of production? Who is going to deal with this?

So, what are the external costs of production? A.K.A. negative externalities

Are costs incurred by a third party in a business transaction. Costs borne by society or environment, rather than by the buyer and seller.

Such as air pollution, waste, global warming, etc.

Overall threats and opportunities:1. Global warming (increased natural disasters).

2. Public / Social attitudes (CSR, compliance costs).

3. Changes in weather (flooding, drought).

4. Health scares / epidemics (SARS, AIDS, Mad cow disease).

9a. 9a. PoliticalPolitical / Legal / Ethical / Legal / Ethical What does laissez-faire mean in a business context?

Where the government does not intervene in business activity.

Is this always a good idea? Why or why not? What is the argument for this approach?

That leaving businesses to their own devices should create healthy competition and efficiency.

If gov’t intervenes, their policies could present barriers to business growth. A laissez-faire business environment may attract foreign direct investment.

What is the reason for this? Will be easier to conduct business.

The reality is… The majority of governments adopt an interventionist approach to managing

the economy. These policies that control business activity are…

Fiscal policy and monetary policy.

9b. 9b. PoliticalPolitical / Legal / Ethical / Legal / Ethical Fiscal Policy:

Refers to:1. Government use of taxation: (see pg. 87, Box 1.5e)

a. Direct: paid from income, wealth or profit and Indirect: tax paid on trade goods and services.

b. Progressive, Regressive, and Proportional: a. Progressive tax: income tax; tax paid increase as the income etc.b. Regressive tax: tax decreases as income of tax payer rises.c. Proportional tax: gov’t sales tax; % of tax paid remains the same

regardless of income, wealth, or profit levels.2. Government expenditure:

a. Social security, transport, health care, education, national defense and law and order. Spending on these sectors will also improve the economy.

Two forms of fiscal policy: Deflationary: higher tax to slow down high rate of growth. Expansionary: to boost the economy by cutting taxes. …

9c. 9c. PoliticalPolitical / Legal / Ethical / Legal / Ethical Monetary Policy:

Used to control the amount of spending and investment in an economy. How can governments do this?

By changing interest rates to affect money supply and exchange rates. What are interests rates?

The price of money. The price of borrowing and the return for saving money.

If the economy is overheating (growing too fast); this will cause inflation to be too high, then gov’t will increase interest rates.

If you increase interest rates, what do you think will happen? Will it be more attractive to borrow money?

NO! Why not? Higher costs of interests repayments on loans.

Higher interests rates will lower your discretionary income. Discretionary income = disposable income – all interests bearing loans paid

This may lead to a cut back in spending. Will also reduce consumption and investment. …

9d. 9d. PoliticalPolitical / Legal / Ethical / Legal / Ethical Why do you think businesses are charged different levels of interests? (4 reasons)

1. Risk: the greater the risk, the greater the chance of failure to repay loan. 2. Time: the longer the time period, the higher the interest rate. 3. Administration costs: the higher the cost in lending money, the higher the

interest. 4. Expectations: if gov’t expect the economy to do well, then will announce a

higher interest rate. Also, interest rates have a direct impact on exchange rates:

An increase in interest rates = increase demand for that country’s currency. An increase in exchange rates = increased prices of exports, will result in a

decrease for demand in exports. Note: Higher exchange rates will hurt the domestic economy. Why? So, is gov’t intervention, to control business activity, counterproductive? Why?

Laws may restrict business activity. Higher taxes or interest rates may limit profit maximization, R & D, and

innovation. Regulations will increase administration costs on businesses; example: CSR.

9e. Political / 9e. Political / LegalLegal / Ethical / Ethical Is gov’t intervention a good thing? Why?

Yes, it can protect the public from the negative aspects of business activity.

How can gov’t intervention protect the general public? Consumer protection legislation: stop false and misleading product

descriptions. Employee protection legislation: safety issues, anti-discrimination. Competition legislation: anti-competitive practices are stopped;

monopolies. Social and environmental protection legislation: consumption of

demerit goods (tobacco, alcohol, and illegal drugs) would be higher; laws limit the use.

9f. Political / Legal / 9f. Political / Legal / EthicalEthical Is there such a thing as Business Ethics?

Should business decisions be made based on moral and ethical principles? Why or why not?

So…what would you consider as an ethical firm? Firms which are socially responsible towards their…

Stakeholders? Customers? Employees? Local community?

Can you give examples of how a firm can be ethical? What are the compliance costs in acting ethically? Can they benefit by being

socially responsible? If so, how? They attract and retain good quality workers. They attract new customers and keep existing ones. They create good publicity and public relations.

…

IB Business and IB Business and

ManagementManagement::

1.5 1.5 PEST vs. SWOTPEST vs. SWOTLesson 3Lesson 3

Pages 91-93 Pages 91-93


1. What is SWOT?2. How does PEST and SWOT differ and

when do you use them?3. How can PEST assess the external

environment and how can this information be used in a business strategy?

2. SWOT2. SWOT The SWOT Analysis:

Used as a decision making tool.

SWOT means… - - - - - - - - - - - - - ->

Do you see any differences between PEST and SWOT?

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3. Differences Between PEST & SWOT3. Differences Between PEST & SWOT

SWOT: Has a narrow focus when

examining all factors in the external business.

Is used after a PEST analysis is conducted.

Used in dealing with very specific issues.

Considers the internal factors; the strengths and weaknesses of the issue.

…

PEST: Has a broader focus when

assessing a business proposition. Used to produce a SWOT…helps to

identify the threats and opportunities within a SWOT.

Useful when dealing with larger and more complex issues.

Does not directly consider the internal factors of an issue.

…

4a. External Environment & Business Strategy

So, how can PEST give managers an overview of the external business environment? What are these factors that might affect business activity? What are some issues that should be addressed in any business

strategy? How can a PEST analysis be used to analyze decisions?

Potential costs and benefits of doing business.Marketing planning…threats and opportunities.Business propositions…setting up operations overseas.Investment opportunities…deciding on the location of a

business.

4b. External Environment & Business Strategy

Can you list a range of policies that governments use to achieve their macroeconomic objectives? How will these policies present threats and opportunities for

businesses? How will the social, cultural, technological, and environmental

factors affect business activity? Remember: Different business are affect by different external factors

and this depends on factors such as: Size of the business: smaller vs larger firms Ability of management: experienced and skilled managers Price elasticity of demand: products with price inelastic demand have

few substitutes…demand will not be affected by external factors…brand loyalty.

Degree of diversification: more products you have, the more you are able to handle any changes.

Level of gearing: how much a firm relies on external borrowing.

4c. External Environment & Business Strategy

From what we have learned thus far, how will the external factors affect a firm’s international competitiveness? Exchange rate and etc…

Remember: internal factors also affect on a firm’s ability to compete overseas. How so?

The price, brand awareness, loyalty, product design and quality.

…