External Environment

PEST analysis stands for ‘Political, Economic. Social and Technological Analysis’, developed by Johnson and scholes to indicate the external influences.

Steps in PEST Analysis - Five StepsStep 1 Understand a category’s relevant

trends: Research the important variables of the

organization’s strategy Step 2 Understand trend intedependencies:

PEST ANALYSIS

Step 3 Distill likely issues from the identified trends:

Validate trendsStep 4 Forecast the direction of issues: Fundamental drivers behind a critical trend.Step 5 Derive implications for the organization: Assess effect of critical environmental

changes

Political climate Political stability Law and order situation Political attitude towards business Political influence on trade unions Consumer protection laws

Political and Legal Environment

State of business cycle Distribution of income within the population Government’s monetary and fiscal policies Capacity utilization Unemployment Inflation Interest rates Foreign investments Trends in capital market Foreign exchange rates Government intervention in free market working Growth rate of economy

Economic Environment

Scio-cultural and Demographic Environment Technological Environment

Government as Aid to Business Providing education and training, relevant to business either

directly through the governments educational institutions or via grants to firms and local councils.

Protection of intellectual and physical property by enacting and enforcing appropriate laws

Economic planning in key industrial areas Acting as a consumer to the private sector Giving incentives to emerging business Creating entry barriers by restricting the activities of foreign

business in the country or by imposing import tariffs. Sustaining research and development Providing new business opportunities through privatization and

liberalization.

Environmental regulation requiring costly pollution control devices

Health and safety regulation Distortion of markets by the use of indirect taxation and

discretionary production licenses Enforcing price controls Defending consumer’s rights through consumer protection

laws Change of policies in response to political pressure leading

to uncertain and volatility in financial markets Imposition of restrictions like monopoly controls and equal

opportunity legislation Acting solely on behalf of sectional interests.

Government as Impediment

The threat of new entrants The threat of substitute products or services The bargaining power of customers The bargaining power of suppliers The rivalry amongst current competitors in the

industry.

PORTER’S FIVE COMPETITIVE FORCES

Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Government policy.

Threat of New Entrants

Those products which are providing a better performance/price standard than the industry standard.

Products produced by industries earning high profits.

Threat of Substitute Products or Services

Bargaining Power of Customers The concentrated purchase of large volumes

relative to seller sales. The products it purchases represent a significant

fraction of the buyer’s cost of purchases.

The products it purchases from the industry are standard or undifferentiated

It faces few switching costs. It earns low profits. The buyers will pose a credible threat of

backward integration. The industry’s product is unimportant to the

quality of the buyer’s product. The buyer has full information.

It is dominated by a few companies and is more concentrated than the industry to which it sells

It is not obliged to contend with other substitute products for sale to the industry.

The industry is not an important customer of the supplier group

The supplier’s products are differentiated or it has built-up switching costs.

The supplier poses a credible threat of forward integration

Bargaining Power of Suppliers

Numerous or equally balanced competitors Slow industry growth ]High fixed or storage

costs Lack of differentiation or switching costs Capacity augmented in large increments Diverse competitors High strategic stakes High exit barriers.

Rivalry among Existing Firms

EIC (Economy, Industry, Company) model EIC MODEL

Foreign exchange rates of different countries ] Inflation rates, interest rates and wage rates in different

countries Economic and trade agreements Double taxation relief agreements Double taxation relief agreements Double taxation relief agreements Entry barriers of different countries Globalization of economy and liberalization of trade Balance of trade and balance of payments of different countries Monetary and economic policies of different countries Personal and corporate tax rates of different countries Freedom of movement of capital, labour and technology Political situation of different countiries.

Global Environmental Factors

Efficiency –To increase the economic efficiency at the level of individual firm and results in better performance.

Decision making – To reduce government’s interference and increase the speed of decision making

Competition – To bring private sector culture by introducing competition. Bothe economic and technical efficiencies will be promoted by privatization.

Fiscal – To raise revenue for government activities. Distribution- To seek political advantage by means of

income redistribution. Risk spreading –To ensure proper allocation of risk across

members of the economy

PRIVATIZATION

Public offering of shares Sale of shares to a private buyer or group of buyers Restitution to former owners Buy-outs, buy-ins and other forms of bottome up or insider

privatization Lease and management contract Contracting out of services at the local government level with

competitive tendering system Franchising whereby ownership would be private but the

brand name and technical know-how would be provided by the public sector.

Contracting out a government service. Divestiture through equity shares.

Methods

Business IntelligenceBusiness Intelligence (BI) refers to skills, technologies, applications and practices used to help a business acquire a better understanding of its commercial text

Tactical insight to optimize business processes by identifying trends, anomalies and behaviours that require management action.

Strategic insight to align multiple business processes with key business objectives through integrated performance management and analysis.

BUSINESS AND COMPETITIVE INTELLIGENCE

Most of the organizations have been informally monitoring their competitors about their management, customers, markets, products, services, technologies, finance and other facilities.

Competitive Intelligence

Elements Competitive Intelligence Creating profiles of the competitor(s) and on

industries. Concentrate on competitors’ actions Every member of the organization will become

a source of intelligence.