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A tutorial on how and why a business should use PESTLE analysis

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Presentation Transcript

Slide 1:

PEST(LE)

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Introduction 90% of the time businesses can be successful by just focussing on themselves The other 10% can be critical Long term business success is achieved when the management is able to delegate short term issues to middle managers Senior managers can then think about external influences Easyjet started as a direct cost-focused rival to Ryanair Seeing growth in middle-market customers they repositioned themselves to an everyday airline

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Introduction Some business are naturally insulated from external difficulties Sainsbury can change their range For businesses like Land of Leather economic conditions are critical Every business is unique in its sensitivity to external factors

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Introduction A useful way to look at each firm’s sensitivity to external factors is to conduct a PEST analysis It is a way of assessing changes in the major external influences on a business in the present and the future P olitical E conomic S ocial T echnology Recently L and E have been added to this making is PESTLE L egal E nvironment

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What do we use it for? Assess current and future situation As well as SWOT planners need to assess external environment PEST is a good checklist of major factors (current and future) These are likely to fall into 2 categories Threats Opportunities S trengths W eaknesses O pportunities T hreats

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Political factors Government policies can affect businesses both directly and indirectly July 1 st 2007 smoking was banned in all public places This hit manufacturers, pubs and restaurants In 2008 the government found itself fighting the fire caused by the credit crunch Political factors in overseas markets can also have an impact on business strategy

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Economic factors Variations in the overall level of consumer demand in an economy affect some firms more than others Individual economic variables such as interest rates, inflation and exchange rates will have an impact on many firms These are difficult to forecast The hardest to forecast is the exchange rate The skill in strategic analysis comes in interpreting the likely effects on the business of possible scenarios This is called scenario planning In September 2007, after the Auguest start of the credit crunch, more than 25 leading economists gave the Treasury their economic forecasts for 2008. A year later they were asked to do the same In 2007 they forecast GDP growth at +2.2% and then a year later they forecast 1.2% In 2007 they forecast inflation at +2.8% and a year later +4.8% Even the economists can’t get it right so imagine how difficult it is for a business

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Social factors Changes in society can have a profound effect on a business Businesses as diverse as Nike, Danone and Innocent have surfed the wave of western fascination with healthy lifestyles Coca-cola, Mcdonalds and Cadbury have had to fight against the same forces to avoid being hit hard Current issues in the UK are Ageing population Increased power of the pink pound Childhood obesity Healthy lifestyles

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Technological (and environmental) factors The rate of technological change can represent a major external factor affecting business strategy It will have 2 major impacts on business Production methods and materials can be enhanced Products may become obsolete Increasingly technological change is becoming interwoven with environmental issues US car makers are desperate to be the first with the next great step forward to green motoring New types of TV – Glass makers in Wales whose major business was manufacturing traditional TV screens suffered heavily in 2005 as a result of failuring to adjust early enough to technological change

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Weaknesses There are weaknesses to this kind of formal analysis External environment is unpredictable PEST is a mixture of guesswork, experience and hunch There is a danger that a full and thorough annual PEST analysis may lead to complacency

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Issues for analysis Breaking down a firm’s external influences into the PEST categories can help to separate key from peripheral issues Another issue to consider is the timeframe of a PEST analysis – how far in the future is the analysis trying to examine?

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Evaluation Judgement may come in the form of deciding which issues are most likely to occur Successful interpretation of PEST analysis is more likely to be achieved by those with a gift for interpreting market data Effective management relies on an awareness of what is not foreseeable

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PESTLE analysis is used to identify the external influences on the business. These are divided into 6 areas PESTLE category Examples of issues in each category that might affect business Political Factors Extent of government intervention; Government economic policies; Membership of the EU Economic Factors The business cycle; economic growth; interest rates; exchange rates; level of inflation; level of unemployment; globalisation of markets; emerging markets Social Factors Demographic factors; ethical issues; impact of pressure groups; influence of different stakeholders; changing lifestyles Technological factors New products; new processes; impact of technological change; costs of technological change Legal factors Legislation related to Employment; consumer protection; environmental protection; health and safety Environmental factors Costs of environmentally friendly policies; impact of environmentally friendly policies

PEST Essay:

PEST Essay ‘In rapidly changing markets such as that for consumer electronics products, regular use of PEST analysis is an absolute necessity.’ To what extent is this this statement true?

Steps to a good essay:

Steps to a good essay Look at the question carefully Try to reword it – will a business like a consumer electronics firm (where the market is constantly and rapidly changing) be successful if it does not regularly do PEST analysis? Key words – ‘regular use’, ‘absolute necessity’ Start by explaining what a PEST analysis is (don’t go into the detail of what each letter stands for yet) Explain the advantages of using the framework but do not just spout the theory Apply the framework to a real consumer electronics firm do some research on a real CE business find out what factors affect it in the P, E, S and T categories (you could create a table with examples of each) Think about the advantages to the business of knowing ahead of time these factors (pick the most important ones to use as examples) and what they could do to ensure their success Think about why it would need to be used on a regular basis

Steps to a good essay:

Steps to a good essay Now look at the disadvantages/limitations/weaknesses of using this framework Make sure you state that it is a pre-set and limited framework and what this means Now you need to decide whether it is an ‘absolute necessity’ or not – will the business be a success if it doesn’t use it? You must directly answer the question in your final paragraph and back it up with your main reasons (evaluation)

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