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PEST Analysis: January 2015
PEST Analysis: January 2015
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PEST analysis
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geo-political forces are consolidating into major political interventions in the market are most
political blocks, a political analysis of the country likely to happen in branches that affect certain
in which a firm is operating provides, at best, aspects of the economy. A country’s infrastruc-
a myopic view. Business firms may need to ture is still provided by the government directly
expand their horizons and look beyond their or through public-private partnerships. While
shores to remain vigilant at what is happening a number of operators traditionally owned
at a supranational level. In the first instance, by governments have been privatized, they
business firms may join lobby groups to influ- continue to operate in highly regulated markets.
ence policy making to their advantage. Even Telecoms, utilities, and financial institutions are
if limited influence may be exerted, political good examples.
surveillance at a supranational level provides When the above political factors are consid-
the required business intelligence to develop ered, it becomes evident that firms would benefit
the right strategies for adapting to changes in from scrutinizing and evaluating the political
the political environment that are faced in the environment in which they are or will be oper-
foreseeable future. ating in the future. Constant monitoring of
Areas of national policy that may have a some or all of the above factors becomes vital in
significant impact on the strategy of a firm ensuring that a firm’s strategy is in tune with the
include fiscal policy, national incentives for policy environment. Major changes in the polit-
enterprise, planning and permitting, procedures ical climate may bring about major changes in the
for licensing and approval of new products, structure and operations of a market or industry.
processes and services, perceived level of corrup-
tion and transparency, government priorities Economic factors. Economic factors have the
for supporting defined sectors in the economy most obvious impact on the profitability and
amongst others (see Figure 2). overall attractiveness of a market or industry
Although most of the world economies have (see Figure 3).
embraced the free market model, significant The most popular indicator of economic
interventions are made by national governments performance for a national economy or a
in areas with market imperfections. Specific specific industry sector that is used is the Gross
PEST analysis 3
Government policies
Government term and change
Trading policies
Local legislation, current and future
International legislation
PEST Analysis Regulatory bodies and processes
Political Factors Funding, grants and initiatives
(examples) Lobbying and pressure groups
Fiscal policy
National incentives for enterprise
Planning, permits, licensing
Transparency and control of corruption
Government policy on supporting specific industries
Local economy
International economy
Economic trends, inflation
Corporate taxation
Product taxation and duties
PEST Analysis
Seasonality of economic cycles
Economic Factors
Market and trade cycles
(examples)
Channels of distributions and
access to markets
GDP, consumer purchasing power
Interest and exchange rates
Domestic Product (GDP) per capita. This various luxury items amongst others. In some
is frequently measured at Purchasing Power other industries, demand remains more resilient
Parity (PPP) to enable equitable comparisons to fluctuations in GDP. These would typically
amongst various countries. Typically, time series include staple foods, health services, and basic
and multilinear regression analysis techniques commodities.
Although being a useful indicator, GDP
are applied to project expected developments
per capita provides only a partial view of the
in performance over a defined period in the
economic factors that might have a bearing on
future. GDP per capita is a particularly useful a firm. Inflation not only erodes the purchasing
indicator especially for those industries, which power of consumer but it also has an adverse
are highly income elastic. Examples of such impact on the prices of raw materials and
industries would include jewelry, construction, other inputs that need to be used by a firm
entertainment, tourism, betting, cosmetics, and in providing products or services. Conversely,
4 PEST analysis
fluctuations in rates of exchange may translate shockwaves across the transport and logis-
into higher or lower prices for the purchase or tics sector. Problems in the financial services
sale of products and services. Higher taxes have sector are likely to have a ripple effect on most
a negative impact on the disposable income of industries and economies around the world.
consumers. A high unemployment rate from an The effects were evident in the recession,
investor’s perspective is a double-edged sword which culminated in 2008. The recession was
as on the one hand, it erodes disposable income intricately linked to the bursting of the US
of families but on the other hand, it provides housing bubble as housing prices plummeted
access to a cheaper labor market. Moreover, to unprecedented levels damaging financial
increases in bank interest rates have an impact institutions around the world.
on both consumers and investors alike. In the All these economic factors demonstrate the
former case, consumers are more likely to save importance of the need for continuous surveil-
part of their discretionary income than to spend lance of the key economic factors that have a
it on consumer goods when bank interest rates bearing on an industry. It is not an easy task to
increase. They are also likely to borrow less from walk through the economic maze and to make
banks and financial institutions to buy capital sense of how events are likely to unfold. In this
goods such as cars, immovable property, and context, firms may wish to restrict themselves
appliances. Investors are also likely to borrow to analyze only those factors, which have a
less and redirect part of their speculative income critical bearing on their operation rather than
into guilt-edged securities rather than in further the broader spectrum.
growth of their firm. This is mainly because of
an increase in their cost of capital. Social factors. Social trends dictate work
Changes in economic factors will affect patterns and attitudes, consumer tastes and
different industries in different ways. It is preferences, and the particular type, form, and
imperative for firms to discern a clear behav- volume of demand for a product or service.
ioral pattern between economic and industry The monitoring of social trends enables a firm
dynamics. In some cases, there are clear interde- to reposition its products or services to fit the
pendencies not only between industries but also changing expectations of customers. Figure 4
between the economic performances of different provides a list of examples of social factors, which
countries. In recent years, the European Union have an effect on a firm’s competitive position.
has faced a series of ailing economies queuing In the previous century, air travel was typically
up for bail outs, as a viral recession progressively associated with high-income consumers who
spread across all European shores with Cyprus, value comfort and premium service. Today, air
Greece, Ireland, Portugal, and Spain being travel has become a commodity openly acces-
the main victims. The domino effect has also sible to all social classes. Ryanair has challenged
left its marks on other countries. For instance, the traditional view and has repackaged air
following the news that Cyprus has become travel into a no frills offering, reflecting the basic
the fifth Eurozone country to seek assistance, need of customers to safely and conveniently
the London FTSE 100 index, French CAC, travel from one point to another. Meanwhile,
and German Dax lost 63, 64, and 112 points by monitoring changes in their customers’
respectively. In Milan and Madrid, the drop was tastes, Plasmon have modified their products
significantly steeper with the former losing 549 and produced a variant of the Plasmon Biscuits
points and the latter 252 points. targeting adults. Increased health consciousness
Some industries also exhibit positive corre- of customers across the developed world has
lations in performance between each other and created a market for healthy food.
would therefore need to be monitored concur- Higher levels of education have, on the one
rently. For example, a decline in the tourist hand, provided employers with a healthier
industry would typically have an immediate pipeline of potential employees; however,
impact on the entertainment industry and a they now also have a pool of more demanding
long-term impact on the construction industry. customers. Telecom and banking firms have real-
An ailing manufacturing sector would send ized that customer preferences and needs have
PEST analysis 5
Demographics
Psychographics and lifestyle
Consumer perception of brands, products
PEST Analysis
Consumer purchasing behavior
Social Factors Effect of advertising and public relations
(examples) Influencers, role models
Racial, ethnic, religious influences
become more diversified. Firms have restruc- advantage is short-lived. Technological break-
tured their business model from a product throughs can either spell the demise of some
orientation to a consumer orientation. Indeed, industries or create opportunities for new ones.
customer centricity is progressively diffusing Figure 5 provides a list of examples of techno-
across a range of industries. Market segmenta- logical factors, which have an effect on a firm’s
tion is progressively moving away from tradi- competitive position.
tional demographics to focus more on lifestyle. The proliferation of the Internet and e-
Insurance companies are developing seg- commerce has done away with many inter-
mented products for the busy professional, mediaries. This has been referred to as disin-
for the small business owner, and for families. termediation. In the travel industry, consumers
Banks have customized products for students, have become their own travel agents. They plan
employees, self-employed, and the high net and book their travel online, using business-to-
worth individuals. consumer platforms that had been previously
Changes in the demographic characteristics of restricted to business-to-business members of
a population can have an impact on many parts the supply chain. Moreover, many retailers have
of the economy. Most developed countries are found an increased intensity in competition as
facing the challenges of an ageing population as they are facing rivalry from online stores. On
baby boomers are now 60 years of age and over. the other hand, technology has given birth to
An ageing population creates additional demand new forms of intermediaries. This is referred
for medicines, healthcare, and support services to as re-intermediation. Examples of new forms
and lowers demand for products associated with of intermediaries include Amazon, eBay, and
the younger generation (such as education). The Expedia to name just a few. They have the
older generation, generally, has more leisure time advantage of being effectively integrated within
and is more financially stable thereby providing social networks, which provide new channels
the right mix for consumer spending. of marketing a product or service. Through
An evaluation of social factors enables a firm these channels, consumers are able to publish
to predict what pressures are likely to be made their unbiased opinions on defined products
by various stakeholders on policy decisions or services. The opinions provide added value
of government, which would in turn have an in the supply chain. They are highly valued by
impact on the firm. other potential customers and influence their
decision-making process.
Technological factors. The rapid pace of tech- In some cases, a new technology has
nological change is driven through innovation, completely replaced an old one, sending its
which is in turn created through entrepreneurs demand in free fall toward its demise. In other
who seek to push the boundaries of present cases, technologies wage wars against each other
limitations. As new frontiers are broken, tech- in an effort to become the recognized standard.
nology becomes obsolete and any competitive Microsoft is the standard for office software.
6 PEST analysis
Blu-ray is the benchmark quality standard used To thrive in a fast-paced technological change,
for modern audiovisual home entertainment, a firm must remain vigilant. It has to be
although iPad is the current standard for tablets constantly updated on any technological devel-
and currently under threat from Samsung. opments in the industry, and aware of how they
From a business perspective, technology are likely to influence its future attractiveness
can be used to exploit a competitive advan- and profitability.
tage through a variety of factors. These could
include cheaper production, improved access
PROCESS OF PEST ANALYSIS
to customers, improved branding, product The process involved in exploring a firm’s
quality, and higher levels of business intelligence external macro environment involves five main
amongst others. stages listed as under (see Figure 6):
Prioritise factors