Download Lessons 1 5- BM1 - AIS-IB

Thought for the day:
To accomplish great things, we
must not only act, but also
dream, not only plan, but also
believe.
Anatole France – Nobel Prize for Literature
Get an A
A
Grade
Level 4
Evaluation
To what extent, Evaluate, discuss,
justify, advise, recommend.
Apply, Examine, Analyse,
Interpret, Formulate.
Level 3
Level 2
Level 1
Application & Analysis
Understand
Knowledge
Compare, Contrast,
distinguish, prepare,
construct, calculate,
explain, comment
Define, Identify,
Complete, Outline,
describe, Classify
1.5 Pre-read Chapter
Target
Learning Objective
Outcome

PEST (political, economic,
sociological, technological)
analysis (STEEPLE, PESTLE and
other variations)
Prepare a PEST analysis for a
given situation and use it to
analyse the impact of the
external environment on a
firm.
Analyse the impact that
external opportunities and
threats may have on business
objectives and strategy.
Explain how external
opportunities and threats can
impact on business decisionmaking and SWOT analysis.
Opportunities and threats·
Social/cultural· Technological·
Economic· Environmental·
Political· Legal· Ethical
Evaluate the impact on a
firm’s objectives and strategy
of a change in any of the PEST
factors


Who?
ALL
Level 1
MOST
Level 2
SOME
Level 3
&4
Keywords
• This PowerPoint is designed for independent
learning
PEST
• Political (legal): local, national and international political
developments – how will they affect the organisation and
in what way/s?
• Economic: what are the main economic issues – both
nationally and internationally – that might affect the
organisation?
• Social: what are the developing social trends that may
impact on how the organisation operates and what will
they mean for future planning?
• Technological: changing technology can impact on
competitive advantage very quickly!
Three steps needed to carry out a PEST analysis:
• http://www.youtube.com/watch?feature=player_embedded&v=B7drEvHo
7vA
• 1. Think of all of the external political, economical, social and technology
factors that could have an influence on business activity
• 2. Discuss the factors and their influence, in order to decide which ones
are most likely to have a significant impact on the running of the business
and its strategy3
• 3. Summarize the information in PEST analysis to develop and devise an
improved business strategy
PEST
• Political (legal): local, national and
international political developments –
how will they affect the organisation
and in what way/s?
Political opportunities and threats
• Government intervention can present opportunities and threats to
businesses.
Laissez-fair approach: Government doesn’t intervene significantly in
business activity. Leave business to manage themselves and grow freely
will stimulate healthy competition and efficiency
• Government intervention: Governments intervene with business activity
by using policies and legislation to influence the level of economic activity.
This might constrain business growth.
Political
• Government policies have two categories: Fiscal and monetary
•
•
•
•
•
•
Fiscal policy: Use of government taxation and government expenditure policies to
influence the economy. Classified into two groups Direct/Indirect & Progressive,
regressive and proportional
Direct/Indirect: Direct taxation is tax paid straight from income/profit of an
individual or business.. Indirect taxation is paid on the trade in goods and services.
Progressive, Regressive and ProportionalA progressive tax is one where the proportion of tax paid increases as the income,
wealth or profit of the tax payer rises.
Regressive tax is one where the proportion of tax paid falls as the income tax payer
rises
Proportional tax is when the percentage of tax paid always remains the same.
Governments spend tax revenue and other sources of government income on
social security, transport, infrastructure, health care, education etc.
Political
• Deflationary fiscal policy: Used when economy is
experiencing high rates of economic growth and inflation.
Government uses higher taxes and reduced government
expenditure policies to control economic growth.
•
Expansionary fiscal policy: Boost the economy by
combination of tax cuts and increased levels of public sector
spending.
This following video explains how the Fiscal Policy can help a
government control the economy:
http://www.youtube.com/watch?v=1qhJPqyJR
o8&feature=player_embedded
Political
• Monetary policy: Policies used to control the amount of spending and
investment in an economy through the alteration of interest rates to affect
money supply and exchange rates.
Governments will increase interest rates if the economy is over-growing
• High interest rates will reduce people’s discretionary income (disposable
income after all interest bearing loans have been paid for) Consumers will
need to cut back on their spending.High interest rates will reduce
consumption and investment expenditure in the economy.
Political
Business are charged varying levels of interest rates for four reasons: Risk, Time, Administration
costs and Expectations
• Risk: The greater the risk of businesses failing to repay a loan, the higher the interest rates
tend to be. Large multinational corporations can borrow large amounts of money with little
interest rates, because possibilities of them repaying are high.
• Time: The longer the period of a lone, the higher the interest rates tend to be. Higher interest
rates are charged to lenders to pay off the opportunity cost of money being lent out for long
time periods.
• Administration cost: Higher the administration cost involved in lending money in the
business, the higher the interest rate tends to be.
• Expectations: If the government expects the economy then interest rates are high to reduce
inflation.
•
There’s a positive correlation between a country’s interest rate and its exchange rate. Higher
interest rates in a country will increase demand for its currency, therefore exchange rates will
increase. Higher exchange rates raises the price of exports relative to imports. This will
reduce the demand for exports and thereby harm domestic businesses in the long run.
A Brief introduction to the Monetary policy:
http://www.youtube.com/watch?v=MfKejMGEuxg&feature=player_embedded
Legal opportunities and threats
• Governments use laws to protect the interest
of the general public from business activity.
Common legislation that affect business
include….
Legal
•
•
Consumer protection legislation: Laws exist that make it illegal for businesses to
provide false misleading descriptions of their products and services.
The products and services must achieve their purposes and meet certain quality
standards. If products or services have damaged or injured customer in any way,
the business is held responsible.
Legal
• Employee protection legislation: Laws have been passed to protect the
interest and safety of workers. For example, Anti-discrimination legislation
helps to ensure that businesses treat all their employees fairly and equally,
despite different age, gender, religion, ethnicity.
•
Competition legislation: laws that protect customers and smaller firms
from businesses with monopoly power and anti-competitive practices. The
government will fine businesses acting against public interest such as large
firms engaging in price fixing, charging extremely high prices or restricting
customer's choice. Competition legislation can restrict business activity
but it can also present opportunities for businesses. Such as Copyright
laws, gives business legal protection against others replicating their
products, therefore stimulating competition and innovation within the
industry
Legal
• Social and environmental protection legislation: Laws to
prevent or reduce the consumption of demerit goods.
Demerit goods such as cigarettes, illegal drugs and alcohol.
The social costs of consuming demerit goods outweigh the
private costs of consumption. This will present threats to
businesses that produce demerit goods.
E
P ST
• Economic: what are the main economic issues – both
nationally and internationally – that might affect the
organisation?
Economic opportunities and
threats
• The economic environment includes the large-scale economic factors that
affect the entire economy
• These include government policies, attitudes and actions of foreign
countries and business/consumer confidence in the economy.
Economic opportunities and
threats
Governments have four key macroeconomic objectives:
Controlled inflation
• Economic growth
• Reduced unemployment
• Acceptable international trade balance
Governments use macroeconomic policies to achieve these four objectives,
these objectives directly and indirectly affect businesses. This section explains
the four objects and how macroeconomic policies can be good/bad to a
business.
Controlled rate of inflation:
Inflation is the continual rise in the general level of prices of goods and services in the economy
over a period of time
Governments of wealthy nations desire low and sustainable inflation in order to achieve
economic prosperity
•
Causes of inflation:
Demand-pull inflation happens when aggregate demand outpaces aggregate supply in the
economy. Any factor that leads to a rise in consumption, investment, government spending
or international trade earnings causes an increase in the economy’s aggregate demand.
• Cost push inflation caused by high costs of production which leads to high prices of products
and services
Controlled rate of inflation:
Inflation is a threat to businesses:
Inflation can cause business planning and decision making to become complicated due to the
uncertainty that it causes in prices. E.g Contracts of employment must include flexible pay
structures that change as the general price level changes, so workers can support their families,
this is a threat to businesses because business might need to spend more money on the cost of
production
• Inflation also affects the international competitiveness of a country. Nations with high
inflation will be less price-competitive when trading overseas this will lead to falling export
earnings, low national output and eventually high unemployment.
•
Ways to control inflation:
Inflation can be controlled by limiting demand pull and cost-push factor.
• Limiting demand pull: For example, Governments may raise taxes to control amount of
consumption within the economy.
• Limiting cost push: Government could financially support production of local business to
reduce their cost of production, this will lead to lower market prices and more customers
This will provide opportunities for the businesses to fluorish.
• Supply-side policies: Investment in healthcare, education and training will increase the
productive capacity (quality and quantity of products) of the economy over time.
A High level of unemployment/Reducing
unemployment:
Unemployment is caused by the interaction of the levels of aggregate
demand and aggregate supply in the economy
If aggregate demand is high there will be less unemployment because
demand for labour will be high
If aggregate supply is high means more national output is produced therefore
employment rates will be higher
Social costs of high employment include personal issues (low self esteem),
family/friend issues (domestic violence), negative impact towards community
such as high crime issues.
Economic costs of unemployment refer to the opportunity costs of
unemployment, these include the loss of international competitive due to
lower levels of national output in the long run
Types of unemployment
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•
•
•
•
•
Frictional unemployment/Transitional unemployment refers to the a time lag between le
Seasonal unemployment is unemployment caused by seasonal changes in demand for a product. (e.g
farmers who grow only one type of seasonal food)
Technological unemployment is caused when labour-saving technologies is introduced into production
causing people to lose jobs (e.g introduction of machines to the process of production causing workers to
lose jobs)
Regional unemployment means the different unemployment rates that exist in different areas of a
country, (e.g poor parts of the country might have more unemployment)
Structural unemployment is caused when demand for products made in one particular industry
continually declines leading to unemployment (e.g negative public attitudes towards a certain product
might cause that particular industry to suffer)
Cyclical unemployment/Demand deficient unemployment is caused by the lack of aggregate demand
within an economy. It is the most severe type of unemployment because it negatively affects every
industry in the economy. (e.g An economic crisis might cause consumers to spend less money and demand
less products causing businesses to suffer)
Solutions to
unemployment:Demand
•
•
Demand side policies: policies targeted at increasing the level of aggregate demand in the economy, this
will reduce unemployment and aid business growth because demand for products/services have
increased.
Expansionary fiscal policy- reducing tax and increasing government spending, helps expand the level of
spending in the economy
Expansionary monetary policy- boost aggregate demand by reducing the level of interest rates to
encourage consumer/business borrowing and spending,
•
Protectionist measures- protect domestic business from international competition by taxing foreign goods,
giving domestic businesses a price advantage, therefore people will be more willing to buy products from
domestic businesses.
Supply-side policies: policies aim to increase the level of output in the economy, this will reduce
unemployment and aid business activity
•
lowering corporation tax and interest rates in order to stimulate business activity and investments
Government spending on education/training will increase productive capacity because the future
generation will become a skilled and flexible workforce
Economic Growth:
• Economic Growth is an increase in a country’s capacity to produce goods
and services to satisfy the wants and need of people over time.Economic
growth is measured by a change in the GDP (Gross domestic product).
Higher economic growth suggests the average person is earning more
income and the economy is more prosperous.Trade cycle/Business cycles
illustrate how economic activity rises and falls over time.
• This cycle include peak, recession, trough/slump and recovery/expansion.
The Business (Economic) Cycle
Business cycles
Stages Of The Trade Cycle:
• Peak/Boom: economic activity is at its highest level. Consumer
expenditure, investment, business confidence level and export earnings
are at the highest. Unemployment is minimal.
• Recession: Occurs when there’s a drop in the level of economic activity for
half a year/two consecutive occurs. Recession includes a decline in
investment, aggregate demand, export sales and higher unemployment.
• Trough/Slump- the bottom of a recession and the last period of decline in
the trade cycle. Characterized by high level of unemployment and low
levels of consumer spending, investment and export earnings.
• Recovery/Expansion occurs when GDP begins to rise again after the
economy has experienced a slump.
The Business Cycle
• Typical business cycle
Peak
Recession
Trough
Recovery
Figure 2
Typical Business Cycl e
Real GDP
–
–
–
–
Peak
Peak
Trend
Recovery
Recession
or
Downturn
Trough
Expansion
Contraction
Time
Recession:
Figure 2
Typical Business Cycl e
Demand falls
Output falls
Employment falls
Falling in investment
Many business making losses
Some business close down.
Real GDP
•
•
•
•
•
•
Peak
Peak
Trend
Recovery
Recession
or
Downturn
Trough
Expansion
Contraction
Time
Recovery:
Figure 2
Typical Business Cycl e
Real GDP
• Stock levels begin to fall
• Output increases
• Employment rises.
Peak
Peak
Trend
Recovery
Recession
or
Downturn
Trough
Expansion
Contraction
Time
Boom:
Full capacity in the economy
Prices increase
Investment increases
Business working flat out
Shortage of skilled labour
(wages rise).
Figure 2
Typical Business Cycl e
Real GDP
•
•
•
•
•
Peak
Peak
Trend
Recovery
Recession
or
Downturn
Trough
Expansion
Contraction
Time
Increasing Economic Growth:
• Growth improved by the quality of resources
• Better use of existing resources can improve
efficiency in the production process, which
eventually contributes to economic growth.
• Growth improved by quality of factors of
production requires an investment in capital
goods, education and training and health
technology
Increasing Economic Growth:
• Growth improved by the quantity of resources can occur in
many ways:
Changes in demography: higher birth rate will make a larger
workforce
• Changes in participation rates: measures the number of
people who are self-employed or employed as a percentage
of total labour force.
• Changes in net migration: difference between immigration
and emigration. If the migration figure is positive than the size
of the workforce has increased therefore increasing the
productive capacity of the economy.
Barriers to economic growth
•
exists in poor countries and regions, these include:
- Lack of infrastructure: Lack of road networks, housing, factories, offices,
communication network or schools.
- Lack of technical knowledge and skilled labour force, means production will
be less efficient
- Rapid population growth: Countries can only support a certain number of
people, if the population exceeds that amount this will hinder economic
development
- High foreign debt repayment: Highly indebted poor countries have to repay
interest-bearing loans, leaving little money for domestic investment and
economic growth.
An Improvement in the balance of
payments
• The balance of payments records the country's money inflows
and outflows per time period.
There are two parts:
• The current account and
• The capital account
An Improvement in the balance of
payments
The current account
contain the export earnings and import expenditure, split into
two parts.
The visible trade balance: International trade in tangible goods
such as metal and oil.
The Invisible trade balance: Foreign trade in intangible services
such as banking, and insurance
• Governments try to avoid a deficit on the current account.
Governments can correct a deficit by devaluing exchange
rates and encouraging higher capital account inflows
•
An Improvement in the balance of
payments
The capital account contains flows of money for government reserves, foreign currencies and
investment reasons
The exchange rate measures the value of one currency in terms of foreign currencies.
Appreciation of currency means higher exchange rates, means that export prices will be high
therefore the exporter will have less price competiveness.
•
Depreciation of the currency means lower exchange rate means the domestic firms that
import raw materials and components will suffer from having to pay relatively higher prices.
•
Large unpredictable changes in the exchange rate can make business planning difficult
because a business cannot predict its export earnings or costs of imported materials.
•
To prevent both high and low exchange rates, governments try to correct an imbalance on
the Balance of payments by adjusting the exchange rates
•
An Improvement in the balance of
payments
Governments can also set up international trade
barriers to correct any difference in the balance of
payment such as using protectionism.
Protectionism is any policy used by the government
to protect domestic businesses from foreign
competitors.
• Protectionist policies can become a threat to
businesses who are trying to establish presence in
overseas markets.
S
PE T
• Social: what are the developing social trends that may
impact on how the organisation operates and what will
they mean for future planning?
Social and Cultural opportunities
and threats
• Attitude of society towards issues such as business ethics,
social welfare, women, religion and animals influence what
products or services a business produces. e.g: the growing
awareness of environmental protection has changed business
behavior in an immense way such as reducing the amount of
pollution and waste a business produces and adopting other
'green' ways.
• This could be a threat to businesses because businesses need
to spend more money into the processing of wastes instead of
spending that money for investing.
Social and Cultural opportunities
and threats
• Examples of society's impact on business:
Changing attitudes towards women have impact on business
because now businesses are more willing to give women jobs
and promotions
• Large populations means bigger markets and more business
opportunities, many multi-national corporations seek to
expand into countries with bigger markets such as fast food
corporations like McDonald's and KFC expanding into China.
Social and Cultural opportunities
and threats
• Demographic changes in society also present opportunities
and threats to business.
• e.g demographic changes in more developed countries such
as a more educated/flexible workforce and aging population
will change recruitment practices, marketing strategies and
the products provided by businesses.
• e.g If a country has a growing old-age population this will give
retirement homes and medicine companies/hospitals more
business opportunities.
• e.g If a country has a decreasing number of christians, this will
be a threat to christian private schools because less people
will be willing to pay and go to those schools.
Social and Cultural opportunities
and threats
• The increased awareness and acceptance of multiculturalism
in modern societies had also led to many business
opportunities. Such as the most consumed take out food in
the United Kingdom is Indian curry, therefore Indian
restaurants/food businesses will have the opportunity to grow
in the UK
PES
T
• Technological: changing technology can impact on
competitive advantage very quickly!
Technological opportunities and
threats
• For a long time, technology has affected all aspects of
business functions.
• A typical example is the internet, which has affected human
resource management (recruitment process has become
online), marketing (such as e-commerce), Finance (annual
reports are now publicized online) and operations
management (such as access to benchmarking data).
The Technological environments also present constant threats
and opportunities for the business.
Technological opportunities and
threats
• Opportunities presented by technology:
•
New working practices: Many people choose to work from
home because of the available information/communication
technology.
• Increased productivity and efficiency gains e.g machines are
quicker and more precise than humans especially in mass
production over a long period of time (Business automation:
the use of automatic equipment in a system of manufacturing
or production process)
•
•
•
Technological opportunities and
threats
Quicker product development time: The use of CAD/CAM technology has
contributed to the mass production of products such as furniture at relatively low
costs
Newer products and new markets: Technology drives innovation and creates new
products in the market. Technology has become a prominent part of our lives
therefore technological gadgets such as phones and cameras have become
popular within the market and these products are constantly being improved and
made available in the consumer's market. Well-known firms such as Apple have
become successful by exploiting technology.
The creation of jobs: Advances in technology increases the demand for
maintenance and technical support therefore creating more job opportunities for
omputer programmers, software technicians graphic designers etc.
Technological opportunities and
threats
• Many large firms use technology to increase efficiency and accuracy. The
image shows a Toyota Car Production Line, production line is lined with
machines which specialize in putting the car components together.
Threats presented by technology
•
Insecurity and risk: e.g Business can lose important data and information
due to computer failure or hacked files.
• Costly: e.g Equipment and software will become outdated quickly,
therefore there's a need for constant upgrading or replacement, which
requires large sums of money.
• Shorter product life cycles: e.g Businesses need to devote more resources
to develop new product due to the fierce competition between businesses
in the electronics industry
• Job loss caused by automation such as oil extraction, commercial farming
and car manufacturing.
Threats presented by technology
•
Factors to consider when adopting technology in the work place:
Cost: expensive cost of purchase, installation, replacement and insurance
of new technology
• Benefits: gains in efficiency and profits by using technology in the
production process
• Human relations- impact of technology on staff morale, workforce
planning and resistance to change. Technology might threaten job security
and put people out of work.
• Recruitment and training- cost of training employees to use the
technology
Other external opportunities and
Threats
Ethical & Environment
Ethical Opportunities and threats
• Businesses ethics are moral principles that should be considered in
business decision-making. Ethical firms act socially responsible towards
their stakeholders, such as their customers, employees and local
communities. Businesses have to face a compliance cost if they choose to
act ethically. If compliance costs are too high business might be forced to
act in an unethical way.
If businesses choose not to act ethically and ignore concerns of their
stakeholders, this will present threats to the business:
Ruined image: Nobody will trust the business, or its products
• Cannot achieve long term profitability: Less people will buy the firm's
products as time progreses and the business still chooses to ignore
stakeholder interests
Ethical Opportunities and threats
• If businesses choose to act ethically, it will present the business with more
opportunities so they can benefit from several ways:
Attract and retain good quality workers: If a business acts ethical it will
have a good reputation and skilled workers want to work in businesses
with a good and recognized image.
• Attract new customers and retain old customers. If a business chooses to
act ethically they are more trustworthy, therefore customers will buy
products and services made by the business.
• Generates good publicity and public relations: ethical firms have a good
corporate image and will be more trusted by the public. Other firms will
seek to have working or trading relationships with the ethical firm.
Ethical Opportunities and threats
•
By acting ethically, business face a big threat:
Businesses cannot choose the cheapest and most profitable option due to compliance
costs.
Social audits:
Businesses have external social audits conducted to examine the ethical and social
stance of a business.
• Social audit examines external matters (pollution caused by the firm and
involvement with local community projects) and internal matters (efficiency of
workers and working environment). Businesses use social audits to work on areas
of improvement to increase business efficiency and reduce their negative impact
on the environment.
Environment opportunities and
threats
•
Citizens, organizations and governments are more concerned about the negative impacts of
businesses on the global environment Many businesses need to consider the external costs
of production.
External costs, also known as negative externalities are costs incurred by a third party
during business activity i.e Costs incurred by society and the natural environment. Businesses
must consider external costs during decision making, this will present threats and
opportunities to a business:
•
If businesses choose to ignore external costs due to high compliance costs, this will present
threats to the business such as ruined reputation
•
If a business chooses to take external costs into consideration while making decisions, this
will present opportunities for the business due to improved corporate image, customers are
likely to trust and buy the products, therefore there will be long term profit for the business
Environment opportunities and
threats
• Changes in the weather and seasons can also present opportunities and
threats to the business:
Businesses may be able to use changes in the season for their own growth
such as tour operators that focusing on seasonal vacations such as winter
skiing trips and summer beach resorts
• Businesses may be harmed by weather or seasonal changes.An example
includes theme parks, which tend to have less business when it rains or
floods. Natural disasters also threaten businesses because they can
destroy business operations.
• .
Environment opportunities and
threats
• Health scares and epidemics also present threats to
businesses
Bird Flu, SARS and H1N1 outbreaks in Asia caused many
businesses to close down due to a loss of business and
consumer confidence.
External environment and
business strategy
• PEST analysis gives managers an overview of the external business
environment, the factors that might affect business activity. It can be
useful in helping decision making.
Decision makers can use the PEST analysis to consider the following issues:
• The potential costs and benefits of a joint venture, merger and acquisition
• Marketing planning such as opportunities and threats of international
marketing
• Business propositions such as which markets to expand into.
• Investment opportunities and threats such as deciding on what kind of
business to invest in.
External environment and
business strategy
•
Governments use policies to achieve their macroeconomic objectives, some
present threats whilst others present opportunities for business. Social, cultural,
technological and environmental factors also affect business activity.
•
A thorough PEST analysis should take account that different businesses are
affected differently by external factors to a different extent.
•
•
•
•
•
•
External environment and
business strategy
This depends on the size of the business:
Size of the business: Smaller firms are less capable of dealing with external
management.
Ability of management: Experienced managers will be able to predict and react to
changes in the external environment.
The price elasticity of demand for the pro
The degree of diversification: Firms that have a wide diverse product range are
more able to handle changes in the external environment
The level of a firm's gearing: Gearing measures the extent to which a firm relies on
external borrowing. Those that are highly geared will be negatively affected if
interest rates rise.
External environment and
business strategy
• An example of businesses devising strategies based on external
environments:
• If a business uses a PEST analysis and discovers external factors such as
exchange rates against foreign currencies are affecting the international
competitiveness of a business, the businesses need to devise strategies
that improve their competitiveness such as using low prices or making
products of great quality.
.
Summary
• Careful planning through the use of the PEST framework can help
businesses identify the opportunities and threats in the external
environments.
• Planning can prepare businesses and give them a better strategy to deal
with the dynamic/fast-changing business environment.
Step by Step
Profit
PEST
Plenary
Level achieved_____
What do you now know as a
result of today’s lesson?
What are your areas for improvement?
What are you going to do about this?