1.5 external environment

PEST

1.5 External environment Wednesday, October 16, 201312:12 AM

IB Business And Management

Pest is an external element and uncontrollable•

Strength Weaknesses Internal

Opportunities Threats External

Favorable Unfavorable

SWOT: a decision making tool that examines the internal and external facts at are favorable and unfavorable

PEST and SWOT Analysis Monday, October 21, 20139:20 AM


IB Business and Management:•

Unit 1.5 PEST Analysis•

Lesson 1•

Pages 73-76 •

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?•

1. Focus Questions•

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

Opportunities and□

Threats. □

Internal and External…

These factors include: ○

Businesses also face other internal and external factors, which will affect their performance.•

…•

2. Overview•

These are within a firm’s own control.○

Tend to be dominated by the firms rules and culture of a business.○

The constraints and opportunities:•

Lack sources of finance

Can not afford certain kinds of advertising; TV ads.

Finance:○

Poor working relations

Unhappy employees may hinder the performance of a business.

People:○

inferior products, poor customer service and promotions.□

Your marketing campaigns might be have…

Marketing:○

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

Production:○

Some examples:•

3. Internal Factors•

Slide notes (lesson 1)Wednesday, October 16, 201312:16 AM


and stock control.

…○

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?•

By using…PEST○

Political,

Economic,

Social, and

Technological opportunities and threats of the external environment.

What does PEST stand for?○

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

…○

How can we understand these uncontrollable factors better?•

4a. External Factors•

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. ○

Why use PEST?•

(Taken from http://www.mindtools.com/pages/article/newTMC_09.htm )○

…○

The use of PEST helps you break free of unconscious assumptions, and helps you quickly adapt to the realities of the new environment.

•

5a. PEST•

Gov’t legislation.

Political:○

State of the economy

Economic:○

Social, cultural, and demographic changes.

Social:○

Advances in technology.

Framework taken from http://www.mindtools.com/pages/article/newTMC_09.htm

Technological:○

The issues that arise from PEST might include:•5b. PEST•


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


Framework taken from http://www.mindtools.com/pages/article/newTMC_09.htm

Can you list some examples?

Threats (PEST Analysis).○

What are the external factors that harm a business called?•

Opportunities (STEP Analysis).○

The other factors which do not harm a business, are?•

PESTLE Analysis…they include Legal and Environmental opportunities and threats.○

STEEPLE Analysis, which includes Ethical opportunities and threats.○

…○

There are other forms of PEST, such as:•

5c. PEST•

Put these under the PEST headings.□

1. Brainstorm external factors that may affect your business.

2. Discuss each factor to decide which ones are most likely to have the greatest impact on your business.

See Box. 1.5a for an example, on pg. 76.□

3. Summarize the information in a PEST analysis template to help in developing a business strategy.

Well, there are three basic steps needed to perform the analysis:○

So, how do we carry out a PEST analysis?•

This analysis is useful when trying to consider the advantages and disadvantages of a decision.•

5d. PEST•



If the opportunities outweigh the threats, then a business is more likely to pursue that option.

○

This analysis is useful when trying to consider the advantages and disadvantages of a decision.•

It helps you, as managers, be thorough and logical in your analysis.○

It promotes proactive and forward-thinking…much better than guessing.

It is also a useful brainstorming and discussion tool.○

And in devising appropriate organizational strategies.

It helps you better prepare your business in dealing with external shocks.○

One key advantage is that the PEST is simple to use.•

…•

Read the handout carefully.○

Create a PEST analysis based on the handout.○

Get into your business groups.•

…•

5e. Activity•

Controls on immigration.

A fairly new country formed in 1957 (Malaysia) and 1963 (Malay, Sabah, Sarawak, and Singapore).

Parliament and hereditary rulers.

Political 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)

Economic Factors.○

Mixture of Chinese, Indian, and Malaysian.

Variety of religions.

Low rates of literacy among women.

Socio-cultural Factors.○

Good national and international lines.

A variety of TV and radio stations.

ISPs and airports available.

Technological.○

Answers:•

…•

5f. Activity•

lControls on immigration.

Political Factors.

lRecovering from a very severe

Economic Factors.


lControls on immigration.

lA fairly new country formed in 1957 (Malaysia) and 1963 (Malay, Sabah, Sarawak, and Singapore).

lParliament and hereditary rulers.

lRecovering from a very severe recession.

lHigh government spending.

lVery low inflation and unemployment.

lFavorable prediction for growth in the economy.

lLack of corporate reform (high corporate debt and competition)

lMixture of Chinese, Indian, and Malaysian.

lVariety of religions.

lLow rates of literacy among women.

Socio-cultural Factors.

lGood national and international lines.

lA variety of TV and radio stations.

lISPs and airports available.

Technological.


IB Business and Management:•

1.5 External Opportunities & Threats•

Lesson 2•

Pages 76-90 •

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

•

How do they affect decision making in a business?•

…•


Business ethics, social welfare, women rights, religious or animal rights.□

Will have different issues to deal with, such as:

1. Attitude of society:○

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.

2. Demographic Changes:○

Pizza? Hamburgers? Fish & Chips?...□

This results in globalization which creates unlimited opportunities both locally and internationally. (see pg. 77, Box 1.5.1 for discussion)

As countries become culturally diverse growth in sales of such goods and services will rise.

□

What is the most consumed take out food?

3. Multiculturalism:○

…○

The Social and Cultural Factors:•

2. Social & Cultural•

Human Resource Management (recruitment process)

Marketing (e-commerce)

Finance (reports published online)

Operations Management (accessing data)

Affects several departments:○

Why is the internet seen as an opportunity for business?

The internet:•

3a. Technological•



Speed of access to information.

Lowers language and cultural barriers.

Lowers costs of production.

Why is the internet seen as an opportunity for business?○

Price transparency (you can compare prices on line).

Online crime (hackers, banking and credit card fraud).

Higher costs of production (maintenance and training costs).

Are there any threats for a business using the internet?○

…○

Working from home○

Video conferencing○

Marketing and advertising on the internet.○

New working practices:•

Use of robots and machines for mass production of goods.○

Can work very long hours.

Can achieve zero defects.

Can lower costs in the long run…economies of scale.

What are some benefits of using machines?○

Increased productivity & efficiency gains:•

Use of CAD/CAM to produce proto-types faster.○

Quicker product development time:•

Wireless internet, digital cameras, Apple products, plasma TVs…

Marketers tell us that technology improves our living standards and so we buy products such as:

○

New Products & New markets:•

3b. Other Technological•

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

□

Who will be able to do these types of jobs?

Will be a need to maintain and support the technology.○

Job creation:•

…•

3c. Other Technological•

Govt policies○

Levels of business and consumer confidence ○

Attitude of foreign countries ○

Actions of foreign countries ○

Large scale economic factors•4a. The Economic Environment•

They strive to achieve •4b. Key Macroeconomics objectives•


Controlled inflation 1.Economic growth2.Reduced unemployment 3.Acceptable international trade balance4.

They strive to achieve •

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

The continual rise in price levels in the economy.

What is inflation?○

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

□

How does it measure economic prosperity?

Why would you want low and sustainable inflation?○

1. Controlled rate of inflation:

…•

4c. Government Macroeconomic Policies•

What are two main causes of inflation?•

It is the amount of goods and services in the economy that will be purchased at all possible price levels.

□

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.

Still confused???□

So what is AD?

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

A. Demand Pull Inflation:

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

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

•

…•

4d. Causes of Inflation•

4e. Causes of Inflation•


http://en.wikipedia.org/wiki/Aggregate_demand

What are two main causes of inflation?•

Caused by higher cost of production.○

This will lead to a rise in prices so that firms can maintain their profit margins.○

B. Cost Push Inflation:

Also increases in wages, raw material prices and higher demands for rents can cause this type of inflation.

○

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.

•

…•

Pay structures need to take into account of the changing costs of living.

Raw material costs

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

□

Catalogs and menu prices

It can make business planning and decision making more complicated.○

This will lead to a decline in export earnings.

Lower national output and

Higher unemployment.

So what?□

Nation ABC has a higher inflation rate than its rivals will be less price-competitive when trading overseas.

Effects international competitiveness of a country.○

How can inflation effect a business?•

…•

4f. The Effects of Inflation•


…•

Gov’t might raise taxes to control consumption.□

Or…it could subsidize production to lower costs.□

By limiting demand-pull and cost-push factors.

Investment in education□

Investment in health care□

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

Investment in training.□

The gov’t could also follow supply-side policies that improve the productive capacity.

How can we control inflation?○

Well…not really…but…•

…•

4g. Can We Stop Inflation?•

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

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

What is meant by the rate of unemployment?•

Increase in demand for labor.

If AD is high - - - > low unemployment. Why?○

Increase in national output / production.

If AS is high - - - > high employment. Why?○

For example:•

…•

5a. Employment•

The costs to society.

Social costs of unemployment.○

The opportunity costs of unemployment.

Economic costs of unemployment.○

What are some problems of unemployment that governments aim to deal with?•

…•

5b. Employment•


Stress○

Dression ○

Low self esteem ○

The unemployed •

Arguments ○

Separation ○

Divorce○

Friends and family •

Poverty ○

Increased crime ○

Local community •

Social cost •

Increases govt spending ○

Unemployment benefits ○

Higher tax•

Lower level of national output ○

Loss of international competitiveness •

Economic cost •

Governments are able to use a combination of demand and supply side policies.

What can governments do?○

So how can we reduce unemployment?•

You do this by reducing taxes and/or increase government spending.□

1. May use expansionary fiscal policy to lower unemployment.

You do this by reducing the level of interest rates in the economy.□

This will encourage consumer and business borrowing and spending.□

2. May also use expansionary monetary policy.

Placing tariffs on international competition to protect domestic business.

A tax on foreign products.

3. May use protectionist measures.

Governments target the aggregate demand in the economy.○

Demand-side Policies:•

…•

5c. Employment•

This should stimulate business activity and investments.□

1. Lowering the level of corporate tax or interest rates.

Making people more skilled and flexible.□

2. Government spending on education and training.

Governments target the aggregate supply in the economy.○

Supply-side Policies:•

What do you think are some reasons for this?

In the end, supply-side policies have a more permanent effect on the economy than demand-side policies.

•

5d. Employment•


What do you think are some reasons for this?○

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

…•

A.K.A: GDP = Gross Domestic Product

A high GDP would indicate or suggest that the average person is earning more income and that the economy is more prosperous.

Measured by the change in total output of the economy per year.□

How can this be measured?

A country’s increased economic activity.○

What is economic growth?•

See pg. 82, Fig 1.5a The Trade 6•

…•

6a. Economic Growth•

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.

•

Lets look on pg. 83 Box 1.5c

How is it possible to cope with a recession? ○

Recovery / expansion: when GDP begins to rise. •

The Trade / Business Cycle•

Better use of existing resources.

What does that mean or entail?□

1. Improved efficiency in the production process.

2. Enhanced quantity and quality of factors of production.

Is there anything that can contribute to economic growth?○

So we learned how to measure economic growth.•

Three key resources of the economy which to invest in:

$$$ INVESTMENT $$$○

How do you obtain growth in the quality of factors of production?•

6b. Economic Growth•


1. Capital goods (developing infrastructure)□

2. Education and training (trained workforce)□

3. Health technology (workforce, healthy and productive)□

…•

Discovering new sources of raw materials

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)

Three key resources of the economy which to invest in:□

Changes in the labour force.

Well…there are many, many, waysJ○

How do you obtain growth in the quantity of factors of production?•

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).○

Not all countries are able to achieve economic growth; in some cases there are barriers to economic growth.

•

…•

6c. Economic Growth•

A country’s money inflows and outflows.○

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)

They are made up of two components:○

What are balance of payments?•

A. the visible trade (oil, steel and cars).○

B. the invisible trade (banking, distribution, and insurance).○

The Current account also consists of two parts:•

You may be able to if you use credit…but it is not wise to do so.

Increasing Capital Account inflows or

Devaluating its exchange rate. …

They do this by:□

Governments will try to avoid running a deficit in the long run.

Well, can you spend more than you earn in the long run?○

Why is it better to avoid a deficit on the Current Account in the long run?•

7a. Balance of Payments•

What are they and how are they important?

Exchange Rate (FX):•

7b. Balance of Payments•


Eg. US $1 = 1500 KRW (Korean Won)□

It measures the value of one currency in terms of others.

What are they and how are they important?○

This reduces the exporter’s price competitiveness.

Gov’t will try to devalue the exchange rate to give domestic firms a price advantage.

Higher exchange rate (an appreciation): = export prices will be higher.○

This will raise the production costs

Gov’t will try to correct this imbalance.

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

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

•

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

See pg. 85, Box 1.5d. What is protectionism?○

Also governments might set up trade barriers to correct the balance of payments.•

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

○

Is government intervention necessary for business activity?•

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

Costs borne by society or environment, rather than by the buyer and seller.□

Are costs incurred by a third party in a business transaction.

A.K.A. negative externalities○

So, what are the external costs of production?•

Global warming (increased natural disasters).a.

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

Changes in weather (flooding, drought).c.

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

Overall threats and opportunities:•

8a. Environmental Ops and Threats•

Where the government does not intervene in business activity.○

What does laissez-faire mean in a business context?•

Is this always a good idea? Why or why not?•

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.○

Will be easier to conduct business.□

What is the reason for this?

A laissez-faire business environment may attract foreign direct investment.○

What is the argument for this approach?•

The reality is…•

9a. Political / Legal / Ethical•


The majority of governments adopt an interventionist approach to managing the economy.○

Fiscal policy and monetary policy.

These policies that control business activity are…○

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

1)

Progressive tax: income tax; tax paid increase as the income etc.a)

Regressive tax: tax decreases as income of tax payer rises.b)

Proportional tax: gov’t sales tax; % of tax paid remains the same regardless of income, wealth, or profit levels.

c)

Progressive, Regressive, and Proportional: 2)

Government use of taxation: (see pg. 87, Box 1.5e)i.

Spending on these sectors will also improve the economy.

Social security, transport, health care, education, national defense and law and order.

1)

Government expenditure:ii.

Refers to:○

Fiscal Policy:•

Deflationary: higher tax to slow down high rate of growth.○

Expansionary: to boost the economy by cutting taxes. …○

Two forms of fiscal policy:•

9b. Political / Legal / Ethical•

By changing interest rates to affect money supply and exchange rates.□

How can governments do this?

Used to control the amount of spending and investment in an economy.○

ary Policy:•

The price of money.○

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

What are interests rates?•

Higher costs of interests repayments on loans.

NO! Why not?□

Will it be more attractive to borrow money?

If you increase interest rates, what do you think will happen?○

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

•

This may lead to a cut back in spending.

Discretionary income = disposable income – all interests bearing loans paid○

Will also reduce consumption and investment. …○

Higher interests rates will lower your discretionary income.•

9c. Political / Legal / Ethical•

Why do you think businesses are charged different levels of interests? (4 reasons)•

9d. Political / Legal / Ethical•


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.

○

Why do you think businesses are charged different levels of interests? (4 reasons)•

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.

○

Also, interest rates have a direct impact on exchange rates:•

Note: Higher exchange rates will hurt the domestic economy. 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.○

So, is gov’t intervention, to control business activity, counterproductive? Why?•

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

Is gov’t intervention a good thing? Why?•

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.

○

How can gov’t intervention protect the general public?•

9e. Political / Legal / Ethical•

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

Is there such a thing as Business Ethics?•

Stakeholders?

Customers?

Employees?

Local community?

Firms which are socially responsible towards their…○

Can you give examples of how a firm can be ethical?○

So…what would you consider as an ethical firm?•

They attract and retain good quality workers.○

They attract new customers and keep existing ones.○

They create good publicity and public relations.○

What are the compliance costs in acting ethically? Can they benefit by being socially responsible? If so, how?

•

…•

9f. Political / Legal / Ethical•


IB Business and Management:

1.5 PEST vs. SWOT

Lesson 3

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?

•


Used as a decision making tool.○

- - - - - - - - - - - - - ->

SWOT means…○

The SWOT Analysis:•

Do you see any differences between PEST and SWOT?•

2. SWOT•

Has a narrow focus when examining all factors in the external business.○

Is used after a PEST analysis is conducted.

SWOT:•

3. Differences Between PEST & SWOT•



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.○

…○

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.○

…○

PEST:•

What are these factors that might affect business activity?○

What are some issues that should be addressed in any business strategy?○

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.

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

So, how can PEST give managers an overview of the external business environment?•

4a. External Environment & Business Strategy•

How will these policies present threats and opportunities for businesses?○

How will the social, cultural, technological, and environmental factors affect business activity? ○

Can you list a range of policies that governments use to achieve their macroeconomic objectives?•

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. ○

Remember: Different business are affect by different external factors and this depends on factors such as:

•

4b. External Environment & Business Strategy•

Exchange rate and etc…○

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

•

The price,

brand awareness,

loyalty,

product design and

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

4c. External Environment & Business Strategy•


product design and

quality.

…•


1.5 external environment

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