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EXTERNAL ENVIRONMET

ANALYSING THE ENVIRONMENT

How environments affects the organization in term of policies, structure and operations. How organizations responds to changes in environment. Ranges of services available to businesses in its environment

Organization has to be aware of what is changing? Does it affect what we are doing now? Might it affect our business in future? The world beyond the boundary of our organization. Things in the outside world, that actually affects the organization. Before making any decisions about the future, an organization needs to understand the environment in which it operates.

What is a PESTEL analysis?


PESTEL analysis is a method that can be used to look at the environment within which all firms operate. The initials stand for Political, Economic, Social, Technological, Ecological and Legal. Each of these areas has an effect on a business in one way or another. A business must recognize this and adapt its strategy accordingly. For example, increasing social concern over pollution has forced many manufacturers to stop using certain raw materials and to adopt cleaner production systems. Firms that ignore external factors will lose sales to competitors that recognize them.

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Technique used to identify, assess and evaluate external factors affecting the performance of an organization Undertaken to help an organization gain an understanding of the wider business environment and may be carried out as part of an ongoing process of environmental analysis or scanning

AIM
The aim is to provide information to assist those responsible for strategy development and decision making. PEST analysis may be used in the context of overall organizational strategy or more specifically to evaluate the feasibility of a new product or service, or expansion into a new market.

Advantages of PEST analysis


* provides an understanding of the wider business environment * may raise awareness of threats to an organization's ongoing profitability * can help an organization to anticipate future difficulties and take action to avoid or minimize their effect * can help an organization to spot business opportunities and exploit them successfully.

Disadvantages of PEST analysis


* The rapid pace of change in society makes it increasingly difficult to anticipate developments that may affect an organization in the future. * Collecting large amounts of information may make it difficult to see the wood for the trees (unable to understand what is important in a situation because they are giving too much attention to details) and lead to "paralysis by analysis." (Over analyzing) * Could be costly

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POLITICAL
This may impact the organization at a number of levels:
Globally Nationally Locally

The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses. You must consider issues such as:

Government type and stability. Privatization vs. nationalization Labor vs. Conservatism Government spending Pressure groups Freedom of press, rule of law and levels of bureaucracy and corruption. Regulation and de-regulation trends. Likely changes in the political environment . Overall political stability of the country

How stable is the political environment? Will government policy influence laws that regulate or tax your business? What is the government's policy on the economy? Does the government have a view on culture and religion? Is the government involved in trading agreements such as EU, NAFTA, ASEAN, or others? Existence of pressure groups to influence the government and politics which would have a major impact on businesses.

How does Political factors influence business?


Government impose regulations that businesses has to adhere Increase the cost, might create new opportunities Governments also influence business through the subsidies and tax system Other influences include items such as decisions of government spending, incentives for location or the promotion of exports.

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Influence of government
Laws and regulations Taxation Economic policies Incentives Trade policies Infrastructure Education, training and development

ECONOMICAL
Economic conditions will affect both the cost of factors of production, and the future plans. Marketers need to consider the state of a trading economy in the short and long-terms. This is especially true when planning for international marketing. You need to look at:
Inflation Stimulating growth and unemployment Redistribution of Income Interest rates

Stage of business cycle. Labor costs. Impact of globalization. Likely impact of technological or other change on the economy. Likely changes in the economic environment.

How does Economic factors influence business?


The business cycle and overall demand Growing unemployment will reduce demand Rising interest rates will increase business costs Amount of competition and competitors behavior

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Interest rates
Interest rate is cost of borrowing money and the reward for saving it. Increase in interest rates increase the cost of borrowing. Difficult to raise the funds for expansion. Increase the overall cost of the business and hence making it difficult to compete. Overall the higher cost of borrowing will increase the risk involved in expanding production. Increase in interest rate will reduce the disposable income of consumers and there by reducing the demand for goods and services

The impact on a business of higher interest rates People may borrow less because it costs more money to pay back the loan

It costs the business more money to pay back any loans

So people buy fewer consumer goods

So the business needs to find more money to pay back its loans

The business decides not to invest in new equipment

So businesses sell fewer products

The business becomes less competitive

The business may make less profit

The impact on a business of lower interest rates People may borrow more because it costs less money to pay back the loan

Exchange rate
The exchange rate is the price of one currency expressed in terms of another. If the UK exchange rate increases it means the pound sterling is stronger and other currencies are weaker Any imported raw material will be cheaper but any exports will appear dearer in foreign markets The firm will have a difficult decision to make if its product has high foreign demand.

It costs the business less money to pay back any loans

So people buy more consumer goods

So the business needs to find less money to pay back its loans

The business decides to invest in new equipment

So businesses sell more products

The business becomes more competitive

The business may make more profit

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Keeping its sterling price the same will make the product appear expensive abroad and possibly lead to a fall in sales Or they can reduce its prices and accept a lower profit margin. Depend on whether the company believes the increase in the exchange rate is temporary or long term.

Inflation
Increase in the general price level of an economy over a given period of time. Cost Push inflation: causes due to increase in the prices of factors of production. Demand pull inflation: caused where there is excess demand for the available goods and services in the economy and firms are unable to satisfy the current level of demand. May lead to wage-price spiral, negative impact on business profits, creates uncertainly, and disincentive to save, e.g. Buy today, or it will be expensive tomorrow

Unemployment
The amount of joblessness in the economy.
A person is generally unemployed if they are willing and able to work, but cannot find employment.

Categories include:
Frictional: caused by workers moving between jobs Structural: : caused by structural change in the economy, leading often to a change in skills required. Cyclical: caused by the fall in aggregate demand.

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Unemployment
Consequences include:
Adverse social effects social blight Greater divisions within society Higher governmental costs Loss of potential for maintaining or increasing national output and income Loss of work skills and experience More difficult for business to maintain their planned level of sales and can have a negative affect on profits and cash flow

Corporate Tax
An increase in corporation tax will reduce net profit after tax and leave the company with fewer funds with which to fund the expansion. This could increase borrowing It will also mean that future profits from the proposed expansion will not now seem as attractive as the government will take a larger slice in taxation.

Economic growth
An increase in domestic growth should result in higher demand for its products and less need to target foreign markets However, growing demand may also affect the price of raw materials and labor resulting in higher costs Normally this is viewed as an opportunity

Business Cycle

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Recession
Recession is a period when economic growth is negative. The demand for the products will fall, reduction in out put, more redundancies, few jobs, cut back on investments, reduction in profits, and increase in business failure. The business could adopt any of the following:
Reduce prices to retain current sales levels and market share. This will result in lower profit margins unless accompanied by cost cutting measures.

Review the marketing strategy to target new and less affected markets, possibly in other countries. Reduce spending on product development and research and development. This will reduce cash outflow in the short run but might damage sales when the economy recovers. Downsize the business by shedding surplus or peripheral labor and closing less profitable branches. This might involve redundancy payments and lead to a deterioration in workforce relations and motivation.

Recovery
Overall demand begins to increase. Firms could adopt the following:
Increasing output using the same labor force but working longer hours Slowly increasing the labor force with the recruitment of part-time or casual labor in order to move towards full capacity The gradual replacement of old machinery with new investment in order to increase capacity while at the same time reducing unit costs

Boom
Households will have higher incomes due to higher salaries, higher share of profits and higher dividends. Business confidence will rise, and provides the stimulus for business investments, higher sales, more jobs. High economic growth may lead to excess demand which could result in inflation and fall in real wage.

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Competition
If the competition increase, consumers will have more choice of products Firm will have to work harder to retain existing customers and to attract new ones Business can adopt one or more of the following strategies:
Review the marketing strategy to target new and less affected markets, possibly in other countries.

Reduce prices to retain current sales levels and market share. This will result in lower profit margins unless accompanied by costcutting measures. The danger with this strategy is that it might start a price war. Increase spending on product development and research and development in order to develop new and more attractive products at the cutting edge of technology. This will increase costs in the short-run but might secure sales in the long-run.

Increase spending on marketing and promotion in order to differentiate their own products from rival ones. Make small changes to existing products (styling, color, packaging, features etc) in order to give it a new appearance. In the short run, this will decrease the profit, but it could boost sales in long run if the strategy is successful

Government economic policy


Fiscal policy: changes in tax and government policy Monetary policy: changes in interest rate and exchange rate Regional development Support for declining industries Support for R&D

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SOCIO CULTURAL
Factors that might affect demand and workforce. E.g. McDonald The social and cultural influences on business vary from country to country. It is very important that such factors are considered. Factors include:
Religion Attitude to globalization Language Work/life balance Distribution of wealth Population distribution Health

What is the dominant religion? What are attitudes to foreign products and services? How much time do consumers have for leisure? Work-lifestyle balances, including 24/7 lifestyles Professional careers for women balanced with family commitments What are the roles of men and women within society? E.g.: Who take finally the last decision about buy a new car? The promotion tools can't ignore this fact

Demography and demographics


Demography is the study of the human population, its structure and change. Ageing population Immigration could result in competition for jobs Age and sex distribution Life expectancy Population growth rate

Increase in number of women in workforce


More part time jobs Rising male unemployment as many industries which employed men have declined The growth of the service sector Many women are choosing to pursue careers first before having children, so the average age of a mother of the birth of their first child has risen in many countries. Such older mothers are often wealthier and more demanding of the baby products they buy resulting an increase in demand for better quality clothing, prams etc.

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Social attitudes
An increasing concern about green house gases and the ozone layer, testing of products of on animals and greater social awareness could result a disaster for firms who are willing to embrace this cultural shift.

How does Social factors influence business?


A business must be aware of changes in society Changes will affect demand in different sectors Changes in public attitudes can also affect a business

Technological
Technology can influence many aspects of the organization
Production methods Marketing and distribution Structure Communication Product development Purchasing.

Technology has led to an increase in the following:


Downsizing Delayering Outsourcing.

Technology has changed the way we live:


Homeworking On-line shopping On-line banking Distance learning Home entertainment.

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Impact of emerging technologies. Impact of Internet, reduction in communications costs and increased remote working. Research & Development activity. Impact of technology transfer. Technology enhances quality

How does Technological factors influence business?


Impact of new technology on:
Products Production process The overall quality

If not careful, may lose the market share Innovation will help the businesses to gain competitive edge by reducing cost and be efficient

The use of computers in business has had a major impact on the recording, storing, analysis and retrieving of information. ICT has been useful is with the use of bar codes. Bar codes enable stock to be recorded quickly, efficiently and accurately. At sales tills, items can be scanned by laser readers, making the servicing of customers quicker and more accurate. At the same time, stock details are automatically updated. CADCAM e.g. Software helps to design products and to automatically control machinery

Mobile phone technology is another area that has had a significant impact on businesses. The use of mobile phones has allowed key employees to be contactable even in remote areas. E-mails and faxes can be downloaded to a laptop computer through a mobile phone via a satellite link. Information is now available instantly and queries can be sorted with less delay.

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Advantages of IT in business
One major advance in Information Technology has been the increased use of robotics in highspeed, fully automated flow production systems, e.g. in car assembly plants. This has resulted in higher productivity, increased quality and lower unit costs. These advantages have lead to lower consumer prices. The use of laser scanners in supermarkets has increased the speed and accuracy of the checkout operation as well as allowing immediate updates of stock levels and re-ordering.

Disadvantages of IT in business
Technology has replaced the need for a lot of unskilled and semiskilled labor. Those affected have suffered long-term unemployment unless they were fortunate enough to retrain Advances in science can cause some products to be made redundant. For example, the development of computers for office work has replaced the need for typewriters. IT changes so quickly that employees can expect to retrain several times in a career. If they do not do so the workers skills will soon be out of date and employment becomes more difficult.

Ecological/Environmental
Considers ways in which the organization can produce its goods or services with the minimum environmental damage Measures to reduce global warming Taxes on fuels and other negative externalities Recycling Consumer boycotts and pressure groups If handled carefully, could lead to reduction in cost and pleased customers

Effects of Environmental Awareness


A company must acknowledge the opinions of its customers or risk losing their support. Business must ensure that its practices are not contrary to current public opinion. Issuing written environmental policy to address issues involving the firm
E.g. paper manufacturer might advertise its tree planting program or its use of recycled paper in its products. Other firms such as cosmetic manufacturers could advertise the fact that they have stopped certain practices such as experiments involving animals or the use of toxic chemicals

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Firm could use its environmentally friendly approach to win new customers by advertising the positive points. Highlight the lack of damage to the planet in its production process, its products and in its exploitation of resources. Furniture manufacturers might stress the use of entirely renewable resources in its range of products.

A business producing in a developing country might emphasize its contribution to the local economy, its training of the work force or the building of social infrastructure such as schools and hospitals. Rather than damage limitation this is a positive approach to convince the market about the firms attitude to the environment. the firm could seize the opportunity to create new environmentally friendly products for the market. E.g. Body Shop

Protect Our Planet


Business Designed With our Beautiful Planet in Mind. The Body Shop was one of the first beauty companies to recognize sustainability and to commit itself to fair trade and these ideas drive the business with passion. Believing every woman has the right to feel fabulous, The Body Shop products are made with love of life and respect for the world we live in, in a spirit of individuality. Being a green retailer is in our DNA at The Body Shop. It always has and always will be. From day one, our policy has been 'Reduce. Reuse. Recycle.' We avoid excess packaging whenever possible. In fact, we're currently introducing bottles made from 100% post consumer recycled plastics. Whether seeking out renewable resources, sustainable raw ingredients, or finding better ways of protecting the rainforests, our commitment to protect our planet drives us to do more and be better corporate citizens.

Legal environment
Are the things business have to do, to make sure they are not breaking the law Organization needs to consider:
Legislation (changes in the law) Regulation (Rules) e.g. data protection

Employment and redundancy law Laws against discrimination Health and safety at work Regulation of monopolies and unethical behavior

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Employment law
Usually covers the following areas:
contracts of employment basic remuneration working hours, working environment and conditions, holiday entitlement, maternity and sickness leave termination of employment, including unfair dismissal, constructive dismissal and redundancy equal opportunities and discrimination on the basis of gender, race, religion or age part-time and full time employment trade unions appeals procedures and tribunals

Protecting employees health and safety at work


Many countries (including the UK) have legislation in place to protect individuals at work. Employers must provide:
Safe entrance and exit to and from workplaces A safe working environment Safe processes Safe equipment Appropriate training Appropriate investigation of accidents/injuries at work.

Health and Safety is a legal issue which employers must take seriously.

There are other reasons to take Health and Safety seriously:


Motivation Reputation Financial issues e.g. damages Loss of business.

ETHICS
The science of right and wrong. That branch of philosophy dealing with values relating to human conduct, with respect to the rightness and wrongness of certain actions and to the goodness and badness of the motives and ends of such actions.

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Why ethics is important


As ethical issues become more important to society in general, and an organizations customers in particular; organizations need to recognize the value of ethics. An organization failing to appreciate the importance of ethical issues will be out synch with its customers.

Ethical code of conduct


Duty of managers to act in the interest of all the stakeholders Safety issues Avoid bribery, corruption, excessive gifts Confidentiality of customers, suppliers, and employees Should not misuse the authority for personal gain

Ethical trading (or ethical consumerism)


The production and purchasing of items that are made ethically. Generally, this means without harm to, or exploitation of, humans, animals or the natural environment. From a consumers perspective this can take on the following forms:
Positive buying - favoring ethical products, and businesses that operate on principles based primarily on benefit for the greater good rather than self-interest. This would include only buying from firms that paid fair wages, used recycled materials and kept pollution to a minimum. Moral boycott - this is negative purchasing, i.e. not buying from certain companies because they have a poor environmental or ethical reputation.

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