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Business Fundamentals (BUS3702)
Lecture 3
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LECTURE 3

Lecture Title:

PEST Analysis

Lecture Intended Learning Outcomes
On completion of the lecture, students are expected to be able to: comprehend the importance of PEST analysis examine how firms can use PEST (political/legal, economic, social and technological influences) analysis as part of its business strategy
Lecture Content
A. PEST Analysis
The success of a business is generally dependent on the business environment. Managers must continually identify the environmental factors which will affect their business operation.
A useful approach is to undertake a PEST analysis, comprising political/legal, economic, social-cultural and technological factors – the main external influences on organisations.
B.

Political/legal Environment
Political and legal factors have a direct impact on the way in which businesses are allowed to operate and also the company policy decision.
These factors may include:
1. Legal system
2. Government regulation e.g. on environment, health and safety
3. Pro- or anti-business sentiment e.g. firms may find their activities being restricted during the period of antibusiness sentiment
4. Political stability

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Business Fundamentals (BUS3702)
Lecture 3
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C.

Economic Environment
Economic environment refers to the conditions of the economic system in which an organization operates. Some firms are more sensitive to economic conditions than others because the demand for their product is more sensitive to such conditions.
Some of the economic conditions such as levels of economic growth, inflation and interest rates may affect the operations and decisions of organizations. 1.

Economic Growth
One of the major conditions of economic environment is the economic growth. The common measurement of it may include aggregate expenditure, gross domestic product and unemployment level. a.

Aggregate Expenditure
The level of total production of products and services in the economy and the total amount of expenditures (i.e. aggregate expenditures) need to be considered. These two are closely related because a high level of consumer spending means a large demand for products and services. The total production level is dependent on the total demand for products and services.

b.

Gross Domestic Product (GDP)
Economic growth is commonly interpreted as the percentage of change in the GDP from one period to another.
Businesses can monitor the total production level by keeping track of the gross domestic product (GDP) which is the total market value of all goods and services produced within a given period by a country.

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Business Fundamentals (BUS3702)
Lecture 3
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c.

Unemployment
Another indicator of economic growth is the unemployment level.
Firms need to monitor various unemployment levels to check whether economic conditions are improving.
There are four types of unemployment:
Frictional unemployment (also called natural unemployment)
The unemployment status of the workers is temporary and they are able to find employment quickly. For example, a secretary might quit her job before finding a new one as she thinks she will find a job soon.
Seasonal unemployment
The workers are not needed during some seasons e.g. swimming instructors for winter.
Cyclical unemployment
This occurs when an economy is in recession. During recession, the demand for goods and services falls and the need for workers reduces. For example, a factory worker has been laid off due to the decrease of demand for the company’s product.
Structural unemployment
There is a mismatch between demand in the labor market and the skills of the workers seeking employment e.g. workers with limited education.
Cyclical unemployment level is normally the best indicator of economic conditions.

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Business Fundamentals (BUS3702)
Lecture 3
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2.

Inflation
Inflation can be defined as an increase in the average price level of goods and services over a specified period of time. It can affect a firm’s operating expenses e.g. cost of materials and wages.
Types of inflation
a.

Cost push inflation
When firms face higher costs of production, they need to raise their selling prices in order to maintain profit margins.
Cost-push inflation occurs.

b.

Demand pull inflation
When the demand for consumer rises, usually during an economic boom, producers and retailers are confident that their products can be sold at higher prices. By charging higher prices, they will earn higher profit margins.

3.

Interest Rates
Interest rates determine the cost of borrowing money and impact on a firm’s cost of capital or its profits.
If a firm borrows money from bank, an increase in interest rates will increase its interest expenses. Interest rates also have an impact on consumers. A rise in interest rate discourages consumers to purchase. D.

Social-cultural Environment
Trends in social factors, which may include demographics and consumer preferences, affect the demand for a company 's products.

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Business Fundamentals (BUS3702)
Lecture 3
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1.

Demographics
Changes in the number and age of the population will affect the demand for particular products and services.

2.

Consumer preferences
Changes in consumer preferences and tastes can affect the demand for the products produced e.g. color, style.

3.

Others
Factors like customs, morals and values may also affect the standards of business conduct and the value of the society.

E.

Technological Environment
The technology environment changes rapidly. Failure to introduce technologies for improving a firm’s internal or external performance will leave a firm less competitive and less efficient. Not adapting products and services to those provided by competitors using new technology may lead to business failure.
Many firms therefore need to focus on improving their products and services technologies as well as business process technologies.

References:
1.

Griffin R.W. & Ebert R.J. (2006), Business, 8th edition, Prentice Hall

2.

Jeff Madura (2010), Introduction to Business, 5th edition, Thomson

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References: 1. Griffin R.W. & Ebert R.J. (2006), Business, 8th edition, Prentice Hall 2. Jeff Madura (2010), Introduction to Business, 5th edition, Thomson --- End --- Page 5 of 5