Business has to deal with so many things in inside the business or outside the business every day. All this factors affects the business in different ways. The factor which affects the business is customers, suppliers, government, distributers etc. These all factors divided in to two parts macro environment and micro environment. Macro environment factors are those external factors which are beyond the firm's control. To understand this external factors PEST analysis is used. PEST analysis is a short form of the Political, Economical, Social, and Technological. PEST analysis is very useful to understand how these external factors influence the business, because of this so many business leaders and managers used it for to build their vision for future.
PEST analysis includes Political, Social, Economical, Technological factors are described below.
Political factors are those factors that business has to be more careful and influence the business more than other factors. Political factors means how and in which manner and in what degree a government interfere in business. Political factors includes government regulation and legal issue and both formal and informal rules under which business has to operate its work. Some examples of political factors:
- Stable political environment
- Tax and labour policy of government
- Government's economic policy
- Involvement of government in different trading agreement
- Environment protection law
- Trade restriction
- International pressure
- War and conflicts
Economical factors have major impact on how business operates and how it takes decisions. Economical factors affect the purchasing power of potential customers and the firm's cost of capital. Such examples of economic factors are as follow:
- Economic situation of country
- Economy trends
- Economic growth
- Interest rate
- Exchange rate of money
- Inflation rate
- Unemployment policy of government
- Stage of business cycle
- Import/ export ratio
Exchange rate affects the cost of exporting goods and the supply and price of imported in an economy.
Social factors are related with the society. How the society behaves and thinks about any things. Firm has to do its business than it must have to give more important or focus on social factors. Business cannot exist without society because it is a part of it. Social factors are very from country to country, it depends upon following region, thinking of people etc.Social factors includes
- Lifestyle of people
- Religious factors
- Population growth rate
- Consumer attitudes and opinions
- Law changes affecting social factors
- Company image
- Buying patterns of customer
Changes in social factors affect the demand and supply of the business. We can take example of ageing population means less work force, thus it decrease the labour and increase the labour cost of company. Further company can change its various management strategies to adopt social changes.
Technology means continues change. Company can use technological factors to take competitive advantage and driver of change. A technological factor is only the factors on which company can build strong position in competition and with the help of innovative technology firm can make barriers to entry in industry for new commerce. Technological factors are,
- Research and development activity
- Technology incentive
- Rate of technological change
- Innovative products and services
- Energy use and cost
- Government spending
- Global communication
- Technology access, licensing, patents
If any business wants to be survive in technology revolution period than it has to be react quickly, which business are slow in reacting they will be out of business or lose their position. We can take example of internet to understand. After the invention of internet it changes the way of doing business, now u can do your business in whole world without going there. Anyone can do business on internet, sell its products etc.
There are few more factors which affects business than PEST analysis factors. Few of them are as below:
Environmental factors itself suggest that it is related with nature. This is also important factors which influence firm's business. No one can predict that what will happen in future because future is unpredictable. This environmental factor affects specially industry such as tourism, farming, and insurance. Environmental factors involves,
- Change in weather
- Change in climate
This legal factor includes discrimination law, consumer law, antitrust law, employment law and health & safety law. These factors company must have to follow otherwise it has to be fine. It also influence how firm operates, its costs and demand of its products.
So this is brief introduction about the factors which affects the firm's business and it cannot be control by firm. We can understand this all factors in part 2 with the help of case study of different companies.
To understand the dynamics of competitors within an industry is very critical or difficult for several reasons. To understand these reasons PRTER's Five Force Model is very helpful. This porter's five force model helps to count or measure potential opportunities for firm venture, particularly important if you are entering in industry as a new player. It also helps to differentiate your business to other business who offers similar products and services. Porter's Five Forces gives the real idea of potential levels of profitability, opportunity and risk within industry. Firm can use this model to develop to get a strategic advantage than other firm in industry in competitive environment. Porter's Five Forces Model include five forces are as below,
- Threat of new entrants
- Bargaining power of suppliers
- Bargaining power of buyers
- Threat of substitute products
- Rivalry among existing competitors
Threat of new entrance:
It is not only profit making firm pose a threat of a new entrance. Entry of new firm affects the competition. When there is a easy entry-exist, profits always be low. Everyone wants to enter in high profit market not in low profit market. In competitive market any firm can enter and exist in industry but in monopoly market no firm can enter in industry. Entry barriers are vary from industry to industry. For example, enter in a manufacturing based industry is very difficult. The protection characteristics of every industry protect firm from additional rivals. These inhibitive characteristics are known as barriers to entry. They reduce the rate of entry of new firm and maintain the level of profits. Barriers to the new entrance are as follow:
- Economy of scale
- High initial investment and fixed cost
- Cost advantage of existing players due to experience curve effects of operation fully depreciated assets
- Brand loyalty of customer
- Protected intellectual property like patents, licenses etc
- Access of raw material controlled by existing players
- Distribution channel controlled by existing players
- Existing players have close customer relation, for example- long term service contracts
- High switching cost for customer
- Legislation and government action
Bargaining power of suppliers:
The term'suppliers' means all sources for input that are used in order to provide goods and services. A producing company requires raw material like labour, components and other supplies. This requirement leads the buyer- supplier relationships between the industry and the firm which provide the raw material to produce products and services. If suppliers are power full than it influence the producing industry, such as selling raw material at high price to capture the industry profit. More suppliers mean low control of firm on them. Suppliers bargaining power will be high when,
- The market is covered by a few large suppliers
- There is no substitutes for the particular inputs
- The switching cost from one suppliers to another is high
- The buying industry has a higher profitability than the supplying industry
- Forward integration provides economies of scale for the supplier
- The buying industry has low barriers to entry
- Brand is powerful e.g. Cadillac, Microsoft
- Customers are fragmented so that they have low bargaining power e.g. gas/ petrol station in remote places
Bargaining power of buyers:
Buyers are the people/ organisation who create the demand in an industry. Buyer power is one of the two horizontal forces that affect the appropriation of the value created by an industry. The most important determinants of buyer is the size and the concentration of customers. Customers bargaining power is to be high when,
- They buy large volumes, there is a concentration of buyers
- There is a high fixed costs
- Supplying industry has large number of small operators
- Products cannot be differentiated or there is a substitutes
- Switching from one alternative product at low cost
- buyers have low profit margin
- There is possibility of the buyers integrating backwards
Threat of substitute products:
A threat of substitute's products comes in existence because of the lower price of substitutes. A product's price elasticity is affected by substitute products as more it becomes available. A close substitute products constrains the ability of firm to raise price.e.g. The price of aluminium beverage can is constrained by the price of glass bottles, steel cans and plastic containers. These containers are substitute but not rivals for aluminium can industry. You find some factors which affect threats of new entrance in threat of substitute products as below,
- Brand loyalty of customer
- Switching cost for customers is low
- Price differentiation of substitute products
- Current trends
- More number of substitutes are available
- Substitution that related with that type of people can do without it. e.g. cigarettes, alcohol
Rivalry among existing competitors:
This is the most favourite situation of market where entry is very easy. So every buyers, substitutes, suppliers try to control the market. Because of this reason you see this factor in the central of Porter's Five Forces Model. Rivalry comes in existence because of some reason are as follow,
- A large number of firms operates in same market and for same customers
- Slow market growth because of the many rivals firm
- High fixed costs
- High storage costs or high perishable products
- Low switching costs for customer at that time it is very difficult to capture customer
- Low level of products differentiation
- High exist barriers
- A diversity of rivals
- All firm have similar plan and strategy
Which airlines do you prefer when your booking a flight a cheaper one with less routes or a expensive one with more facilities and comfort. It is depend upon you and you have more option available at the time of booking. Why this is happen? Because each airlines has different ways of archiving competitive advantage in competitive market. Company can achieve competitive advantage on the bases of differentiating its products & services from rivals and through low costs. For this firm can target or focusing only on a narrow target in the market (Lynch,2003). According to Porte, there are three generic strategies that a company can use to get competitive advantages are,
- Cost leadership
The companies who are successful to become low cost producer in an industry known as cost leader. This low cost company earn the high profit even in the highly competitive market between undifferentiated products and selling product at standard price. With the help of this strategy company cab reduce cost in every activity in value chain. It is not always possible that price of cost leader firm's products are low. In many cases company charges average price in low cost strategy to reinvest its profits in business (Lynch, 2003).e.g. there are some companies available in market who follows this strategy like, TESCO, ASDA, TOYOTA.
In following the cost leadership strategy there is a risk, sometimes company ignore others factors too become cost leader in market which is not beneficial to business.
Differentiation means different than others. Differentiated good and services satisfy the different need & test of the customer by getting competitive advantage. Some general example of differentiation like better service to customer, high quality & performance etc. According to Porter Company has to incurs extra cost who employing this strategy like high advertising cost to promote products, invention costs to make products unique. We can take example of McDonalds to known as its brand image of Big Mac and Roland McDonald.
This strategy has advantage for firm and disadvantage of making extra cost. To cover this cost firm has to charge minimum or high price. Sometimes what happen firm may attract competitors to enter in the market & it encourages copying the firm product.
The focus strategy is also known as 'niche' strategy. The names itself suggest that it is concentrating only on few segment of the market. A focus strategy is a combination of Cost leadership strategy and Differentiation strategy. In this strategy organisation focus its efforts and resources to narrow defined segment of market. Any company can use this strategy if it is big or small firm. Company has to choose in which segment it has to focus either in Cost leader or Products Differentiation. The main aim of cost focus firm is to become low cost producer in market while the aim of differentiation firm get competitive advantage by making different products than others. The company who employing focus strategy not be successful in long term. This strategy is not beneficial for those industries which are totally based on economy of scale. e.g. Telecommunication Company. Company uses this strategy to focus on the areas in a market facing low level of competition (Person, 1999).e.g. Ferrari and Rolls Royce are best example of niche market strategy.
Stuck in middle:
According to Porter companies who comes in stuck in the middle because of the failure in making decision to choose Cost or Differentiation strategy. There is no competitive advantage & decrease in financial performance of company who stuck in middle (Porte, 1980). There are some rare examples of companies who successfully use both this strategies like TOYOTA, BENTTON.Internal analysis is a part of SWOT analysis. Internal analysis includes Strength and Weakness.
Resource and capability of doing business are the strength of the company. There any factors that represent the strength of company are as bellow,
- End-user sales control and direction.
- Right products, quality and reliability.
- Superior product performance than competitors.
- Better product life and durability.
- Spare manufacturing capacity.
- Direct delivery capability.
- Product innovations.
- Management is committed and confident.
- Specialist marketing expertise.
- A new, innovative product or service.
- Location of your business.
- Quality processes and procedures.
- Any other aspect of your business that adds value to your product or service.
The absence of certain strengths may be viewed as a weakness of the firm. The factors which shows weakness of the business are as follow,
- Lack of marketing expertise.
- Undifferentiated products or services (i.e. in relation to your competitors).
- Location of your business.
- Poor quality goods or services.
- Damaged reputation.
- Lack of patent protection.
- A weak brand name.
- Poor reputation among customers.
- High cost structure.
- Lack of access to the best natural resources.
- Lack of to key distribution channels.
In this part we have use different 4 company's case study to understand how PEST- Political, Economical, Social and Technological factors affects the company's business.
Political factors means it is related with government decision. This political factor affects the business in vast size. This factor includes government policy, rules and regulation. Here we have taken TATA NANO case study. Tata Nano is world's cheapest car made by Tata motor. Tata motor is India's leading motor company. Tata motor has purchased 997 acres land to produce TATA NANO in Singur, west Bengal, India. Tata motor faces the difficulty to starting its dream project because of the Trinamool congress party (TMC) the opposite ruling party in west Bengal. This TCM party protested against the Tata about the land allocated to the Tata. They start protest on the bases of that the land which is allocated to Tata to produce Nano is for agrarian purpose and because of that many farmers lose their land. TCM party claimed that Tata that they have purchase these all land on its political power and in wrong way. They blocked all the ways to start singur Nano plant, because of this controversy problems are created to start in whole west Bengal. Tata tried so many times to solve this problem but TCM party refuse their proposal every time.
After not finding any single source to start Tata Nano singur plant, Tata sons chairman Ratan Tata officially announced that Tata motor is pulling out of singur. Than Tata decided to move its plant to sanand, Gujarat. This local opposite ruling party did not have any idea how Tata Nano project will help them to change geography of singur and west Bengal. They will get so many benefits, if they do not protest. Whole state suffers and loses gain of development because of the only one political party.
Here we see that thinking, rules of political party not only national but local how affects the business. Business has to handle all political factors because they influence the firm's business very bad. Sometimes these political factors destroy the business.
Company is existing only because of the society, if there is no society no company is to be longer. So social factors are very important to the business. Here we have taken case study of UNISON. UNISON is Britain and Europe's biggest public sector trade union. 13 million people who are working in public sector are the member of UNISON. UNISON provides the worker in public sector job like, Librarians, Human Resources, IT and finance workers, secretaries, cleaners, caretaker and school meal supervisor, social workers, nurses.
As UNISON is a trade union, it is its duty to aware and prevents its member from different law and their rights. Now a day they are running the Migrant workers participation projects to help the migrant workers in UK because so many workers are coming to UK for work. In many of them facing difficulty in communicating in English. Social factors affect UNISON because it is a trade union. Their members are from different countries and having different culture. To help these all member UNISON has adopt some changes which are as follow.
- They produce worker's right leaflets in different languages so their members can understand it very well.
- UNISON collaborates with different communication group like ONNS (Overseas Network of nurse in Scotland). This type of group provides information on welfare, tax. So worker can understand what they have to pay and what benefits they get.
- To help the migrant worker UNISON has developed a separate migrant worker's section on its website where they can find key information in different languages.
- They also running ESOL (English for speaker of other languages) courses to help the workers to improve their English.
- UNISON forces the employer to aware the workers about health and safety, provide information about local services & sources, pay for their English learning course and provide print material in different languages.
So, this is about the unison, how social factors affects its work. If u wan to be successful you have to take care of your employees, customers, suppliers because they all are the part of society.