‘PEST’ ANALYSIS AND FIVE FORCES ANALYSIS
Momtchil Krastev firstname.lastname@example.org
Profit Center Sofia London School of Economics
Information Paper The Firm and the Environment – A fictive amusement park in the UK PEST Analysis and Five Forces Analysis
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PEST analysis is concerned with the environmental influences on a business. The acronym stands for the Political, Economic, Social, and Technological issues that could affect the strategic development of a business. According to the Internet Centre for Management and Business Administration, Anon (2003), identifying PEST influences is a useful way of summarising the external environment in which a business operates. However, it must be followed up by consideration of how a business should respond to these influences. PEST analysis has the very important role to identify the opportunities and the threats from the macro environment of a business.
Political Analysis The PEST analysis of a business usually begins with examination of the political issues that may affect it. According to Doyle (1994), those issues may include: the environmental regulation and protection; corporate and consumer taxation; governmental influence on supply and demand; government legislation; and competition regulation. The political environment influences demand in several ways. Government legislation influences all that can and cannot be bought and in what circumstances. Also, government plays a role in determining the distribution of wealth and income in the country through taxation and the welfare system. On the other hand, there are three main ways in which government affects supply. Firstly, government can propose legislation on how firms should operate, what they can produce, how they can produce it, and what inputs they can use to do it. Secondly, government may specify how certain groups should move (safety standards). And finally, government can also affect firms’ costs trough taxes and subsidies. The political environment can have certain effects on the amusement park, such as governmental changes through laws defining the age limit for using the facilities. This may result in decreased numbers of visitors, especially young people. Through taxation and the welfare system, government will prevent more people from visiting the park; people will have to pay taxes on income and support the welfare system of the country. Also, by enforcing heavy taxes, government will indirectly lead to increases of the firm’s costs and respectively the final price of the product or service. Through health and safety regulations, the government may find some of the facilities unsafe and not permit their operation. This will lead to losses for the park from unrealized ticket sales. On the other hand, government may also give subsidies to the firm that will increase the supply, and this will lead to an increase of the firm’s profits. So, political influences can have both positive and negative effects on the park.
Economic Analysis The political analysis is followed by the assessment of the economic issues that may have effects on the business. As mentioned by Doyle (1994), those economic matters may in-
clude: economic growth, both overall and by industry sector; governmental monetary policy (interest rates); policy towards unemployment (minimum wage); taxation (corporate and personal); exchange rates (effects on demand by overseas customers). An increase in the interest rates by government would affect people’s ability to pay in a negative way. Such an increase may prevent many from visiting the park for entertainment since they will put more weight on other priorities. Many...