9 External environment p53

The four major external environmental influences can be represented by the acronym PEST: Political/legal, Economic, Social and Technological. Other headings sometimes used are Ecological, Ethical and Demographic.


(spot ‘influence explained + examples’)
1. Political. The political environment is not simply limited to legal factors. Government policy affects the whole economy, and governments are responsible for enforcing and creating a stable framework in which business can be done. The quality of government policy is important in providing three things: physical infrastructure (e.g. transport); social infrastructure (education, a welfare safety net, law enforcement, equal opportunities); market infrastructure (enforceable contracts, property rights).

Other political factors include government stability, taxation policy, foreign trade policies and social welfare policies.

2. Legal. The legal framework within which company operate is of great potential importance to them since it can have a material impact on their structure, their costs and their relationship with their employees and their customers. Legal factors include: the basic ways of doing business; ownership, rights and responsibilities; health and safety; employment issues including unfair dismissal and redundancy; data protection issues; environmental issues such as pollution control and waste disposal and specific laws relating to tax collection and payment and to cartels and price fixing. Some legal regulatory factors affect particular industries, if the public interest is served. This is for either of two reasons: the industries are, effectively, monopolies or large sums of public money are involved (eg in subsidies to rail companies). For example, eleecticity, gas, telecommunications, water and rail transport are subject to regulators

3. Economic. The economic environment is an important influence at national and local level. The overall increase or decline in gross domestic product will influence the demand for goods and services. Local economic trends will be important in determining the type of industry in an area, rent levels, labour rates and house prices. The level of inflation will inform business decisions and wage inflation will often compensate for price inflation. Interest rates will impact on corporate investment plans and on personal investment in property. The rates of corporation tax, income tax and VAT will also be important contributors to corporate and personal investment and spending decisions

4.Social. Demography is an increasingly important component of the social environment. Important demographic factors include: growth or decline in national populations; changes in the age distribution of the population; the concentration of population into certain geographical areas; ethnicity; household and family structure (e.g. the growth of single person households and lone parent families); employment patterns such as the move towards a more flexible workforce employing more casual workers and an increasing proportion of employees who work from home. The implications of demographic change include changes in patterns of demand, and example being the increased demand for health care services among the elderly as a result of aging population.

5. Technology. Technology is a key driver of both the type of products and services that are made and sold and the way in which they are made or provided. Examples include companies selling easily transportable goods, for instance book and CDs, which are enjoying considerable success over the Internet. Technology can also affect the way in which markets are identified; for example, database systems make it much easier to analyse the market place; and the way in which firms are managed, since IT encourages delayering of organisational hierarchies, homeworking and better communication.