PEST Analysis

Shahid Islam

PEST Analysis

Pest Analysis is a way looking at how external factors will affect the business. ‘PEST’ stands for Political, Economical, Social and Technological issues. Political issues involve how different laws affect a business, for instance Trades Description Act. Economic Issues involve how the state of the economy affects businesses, e.g. interest rates. Social issues look at how social factors affect businesses, e.g. concerns about obesity. Technological issues look at factors on how technology assists businesses, for instance the growth of the Internet in recent years.

Political Issues

All businesses have to abide by laws and rules in this country. The government enforces these laws for the good of the business and themselves. There are few political issues which affect the business and these mainly are:

Direct Tax and Indirect Tax
Local Authorities
Consumer and the law
Employment and the law
Environment and the law

‘Direct Tax’ and ‘Indirect Tax’ both come under the heading of Fiscal Policy. This is when the government attempts to influence demand in the economy through its spending and taxation policy. For instance, if the government increases taxes, people will have less money to spend on goods and services, i.e. disposable income. Therefore, the demand will be reduced and businesses won’t make as much profit or turnover. If this scenario happens, businesses will have to win customers back, and one way they could do this is by reducing the prices of their products, but this will affect their revenue. But if that were in my business I will reduce the price of the products temporarily to attract customers and demand and then increase the price back again if successful.

If the government reduces taxes it will have the opposite effect. There are a number of ways the government can increase of decrease taxes. These can be either ‘direct’ that is taken directly from income or ‘indirect’ that is placed on goods and services like cigarettes. There are three types of taxes that come under ‘direct’. National insurance that is paid by both employer and employee, which contributes towards the social security system. Corporation tax that is paid by companies on their profits and finally Income tax that is paid by private individuals on the amount they earn.

There are also three types of taxes that come under ‘indirect’. Excise duties are additional taxes on top of VAT placed on certain goods such as cigarettes and alcohol. Value added tax (VAT) is payable at each stage of production on the value added by the business and the VAT value is usually 17.5%. Customs duties are additional taxes on imported goods.

Problems occur with Direct and Indirect tax because it either is bad news for the consumer or the business that then affects both parties. For instance, if the government were to increase indirect taxes, this will make goods and services more expensive and may put off customers, which will lead to fall in sales. If the government were to increase direct taxes, businesses and consumers will have less money to spend and this will lead to a fall in demand of goods and services. For my business, direct taxes will be a problem because if the government increases it, my shop wouldn’t have sufficient funds to expand. Therefore, the lower the taxes are, the better. Indirect taxes won’t affect my business because my goods, for instance consoles do not have value added on top of them. This is an advantage because customers won’t be put off.

Local authorities are layers of government such as county or district councils. Local authorities influence businesses in a number of ways: They offer grants and loans to businesses to locate in the area. They have a responsibility for the up keeping of the infrastructure of the area, i.e. police and fire services. But probably the biggest influence local authorities have over businesses is the granting or denying of planning permission. Planning permission is submitted when a business wants to expand the size of the block or shop. This also applies the same for other businesses who want to change the use of a building, e.g. game shop to a restaurant. However, individuals object to planning permission, as they believe that it’s local government interference and that they know what is best for their business. But another advantage of this law is that planning permission encourages economic growth while at the same time protecting the environment. Local authorities are not likely to have a negative affect on my business because they are there to assist businesses as much as possible due to businesses creating jobs and bringing revenue into an area which the local authority can use to improve the social welfare of the local population. Also, as my shop is new, the authorities can give me grants to improve my business.

The government enforces laws to protect customers from receiving misleading information or selling faulty goods or services. There are several laws related to Consumer and the law. ‘Trade Description Act’ law makes it a criminal offence to describe goods and services incorrectly. For instance, if a console is said to be low energy consumer and DVD playable, then that is exactly what it’s must be. ‘Sales of Good Act’ is when the seller must make sure that the goods sold are of a satisfactory and merchantable quality. This therefore means that they must be able to do what they are supposed to do, not damaged or broken. ‘Consumer Protection Act’ is when businesses are responsible for any damage that their goods might cause. This act ensures that the product or goods are safe to use and not likely to harm the user. The ‘Consumer Credit Act’ means that any business giving credit must be licensed. Therefore, consumers must know how much extra they are paying in interest. The ‘Fair Trading Act’ set up the Office of Fair Trading whose main aims are to inform consumers of their rights, prosecute businesses which break the law and recommend to the Monopolies and Mergers Commission any business that need to be investigated. By introducing all these laws, the government is forcing businesses to accept their responsibilities to consumers. The way these laws can affect my business is that there will be an increase of costs to follow the laws but an advantage could be that it will ensure my business will gain consumer satisfaction.

Employment and the Law ensures fair treatment of workers and responsible behaviour by employers and employees in the workplace. The government has introduced a number of laws: ‘Health and Safety at Work Act’ requires employers to be responsible for the safety, health and welfare of the employees by making sure that equipment is safe and how to handle them, emergency procedures and correctly trained. The ‘Sex Discriminate Act’ states that it’s illegal to discriminate against anyone due to his or her sex or marital statues. The ‘Race Relations Act’ states that it’s illegal to discriminate against someone on ...

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‘Minimum Wage Legislation’ is when any employees over the age of 18 should be paid £5.52 per hour. The wages are likely to be increased depending on the employees jobs, for instance if he/she is a doctor, they are expected to be paid a lot more than a cleaner and if inflation increases which will be talked about in-depth later. These laws will affect my business because I will have to employ staff to run my shop. Therefore I will need to make sure that health & safety is reassessed and employees working in a good environment in their workplace.

Employing a big number of staff could be a disadvantage to a business, especially to those smaller ones. Employers work to get paid, so their earnings come directly from their businesses revenue. Having a big wage bill will reduce profit coming into a business and this won’t help in financing promotion and raw materials. Reducing the number of staff can help, but quality control won’t be as good as before, therefore risking dissatisfying customers. For my business, I would reduce the number of staff, but that would mean that I would have to work longer in order to maintain a good quality control. Maximising profits won’t help, as I need to attract customers to the business with products at suitable price.

Nowadays, the environment is becoming a really big issue with the concern of global warming, ozone layer, pollution and other problems. Many of these problems are partially due to businesses providing consumers with their wants and needs. To help protect the environment, the government has introduced acts to try and adopt more eco-friendly practices. ‘The Environmental Protection Act’ states that businesses have to ensure that they are not harming the environment by reducing levels of air, land and water pollution. Failure to do this will result in a fine. This won’t affect my business too greatly because reducing pollution doesn’t take up much costs.

Economic Issues

As well as Political issues influencing businesses, economical reasons can have a big affect. In the UK, the state of the economy is measured by adding the total value of goods and services it has produced. This is also known as the ‘Gross Domestic Product’ (GDP). The UK’s GDP is increasing but still has ‘recessions periods’ which mean that economic growth is slow and demands for goods and services is low according to BBC News. The affects of recession are that sales will decrease so there is increased competition for consumers, which also affect a business’ profit. If there isn’t enough sales, profit will decrease. Yet, the UK’s GDP goes through a process called ‘boom’, this is when the economic growth is high and demands for goods and services are high. The affect of a boom is that there will be an increase in sales and therefore profit. The UK’s GDP can affect my business, which is out of my hands; therefore, it all depends on how well the UK’s economy is doing. If the economy is going through a recession, there will be less demand on goods and services and my business will lose profits. However, my business is a game shop, which will mean that games and consoles are on a high demand all year due to the products being updated often. Therefore, my business isn’t likely to be affected too much by the UK’s GDP. If it was another type of business and it was affected by recession periods, reducing costs on promotion would be a method I would use to cover losses, however less promotion would mean less customers know about my business so I would need to think about a cheaper alternative option like local newspapers.

Inflation happens when there is a general increase in the price of goods and services. For instance, if pay increased by 5% last year but inflation was 2%, the pay increase would be: 5% - 2% = 3% 'in real terms’. The causes of inflation are usually because too many people are trying to buy too few products resulting in price increases. Also, employees asking for pay rises can lead to companies and businesses rising prices for their goods to cover wages. Finally, inflation is also caused when the government is spending more than it’s received from taxes resulting in printing more money to increase the money supply. This is known as ‘Monetary Policy’. However, inflation affects businesses in a number of ways:

Wage bill will increase as workers may demand higher pay increases to keep with inflation
Price of goods and services which are exported will increase, therefore businesses that sell overseas will see a loss of profit
Prices of raw materials will increase, which means costs will increase and a reduction in profits.
Businesses might become cautious over the inflation rate and might not want to invest too much because they might be unsure of what happens to their profit and sales.

For my business, I will have to be wary of the inflation rates because my shops imports and exports goods from abroad. Therefore, the might be an increase on costs of importing and exporting and I might not have sufficient money to fund as well as handling other costs. To overcome this problem, I may need to reduce on the number of importing and exporting I do to reduce costs and think of another way of making extra profit, perhaps increasing pricing of games and consoles. Also, my business will needs to employ workers and with the rate of inflation, they might demand a pay rise which will be a problem due to the shop being new. Therefore, employing less staff will save costs but then again will raise an issue of quality service decreasing. This may mean that I will need to work harder in order to maintain a good quality service.

The current London unemployment population is around 398,000, which is relatively small. Unemployment happens when people who want jobs cannot find them. If there is a high unemployment in an area, then people without jobs will not have much money to spend. A high rate of unemployment is a positive factor for businesses as it gives them a wider range of choices and the wage might not be too high because the employee will be looking for some sort of work. Also, for current employees, they might be worried of losing their jobs because of new arrivals and may not ask for higher wages or improves working conditions. As the rate is small, it will have the opposite affect. As my business will be based in North London, it will have a low rate of unemployment because it is based in the capital city. Therefore, it would be difficult for me to have a wide choice of applicants too choose from as well as the recruitment costs will increase. This could also lead current employees asking for higher salaries. However, to overcome this problem, I may need to employ people who have migrated from other countries in the EU. Due to a high number of migrants arriving in the UK every year it will give me a good choice depending on their ability for the job. Furthermore, the wages will be low despite them earning a lot more than they would in their own country.

The price of one currency in terms of another is known as the ‘exchange rate’. If a business is selling goods and services abroad, it will want to be paid in their own currency. With most goods and services, the price of currencies depends on demand and supply. A country’s currency will be high if they have sold a large number of exports and if tourist or holidaymakers are going there. A country’s currency will be low if it has the opposite affect.

If the exchange rates fall, imports will become more expensive and encourage UK consumers to buy more of UK products. However, for businesses this is a disadvantage because the cost of raw materials will increase. For my business, this could be a problem because the products my business sells are from abroad. Therefore, if the exchange rates are low, it will increase the price of raw materials and exporting therefore reducing my profits. One way I could recover some of the costs is my increasing the prices of my products that may not attract customers. Another possibility is by reducing staff which will reduce the wage bill and that could be used to purchase raw materials and cover the costs of exporting. However, by doing this, the quality service will not be maintained and customers might not be satisfied with my products. Therefore, raising prices of products will help me to fund for a new employee.

The official bank rate is at 5.5% interest. Therefore, any amount of money you borrow from the bank, you will have to pay it back with 5.5% of the amount on top of that. At the moment, the interest rate isn’t too high but yet it’s still a figure that can be hard to pay back. If the interest rate is really high, a business or company will find difficult repaying it’s loan or mortgage because they first have to recover the original money and yet pay extra, which will reduce their costs. To ensure a business can pay the money back it needs to sell its goods or services and make a profit. If the business fails to do this, it will be in real danger of closing down. As my business is new, it will need to borrow a loan from the back in order to compete straight away against other competitors. However, there could also be another problem, if the interest rates have increased when you’re meant to pay back the loan, you will have to pay that particular interest, so you are going to pay more. If the interest rates have gone down, the opposite affect will apply. One problem that would affect my business if interest rates increase, people’s disposable income will be reduced and therefore demand for my shop will reduce and that would affect my revenue. So to combat this problem, I might need to reduce the prices of the products so the demand will increase back again, yet, my business could suffer with products being sold at a lesser price. However, an advantage is that my competitors will be affected too and demand for their shop will be reduced so my business can profit in the long-term if the consumers buy my products.

Social Issues

Social issues can also influence a business. Businesses can influence people and their lives, but people and their lifestyle can influence businesses. Two headings come under social influences:

Demographic
Social

Demography is the study of a country’s population. Any change in the country’s population will have an effect on businesses. Increase in population will increase in demand of goods and services. It will also increase the amount of labour available. Finally, it will lead to businesses investing more due to the increase in demand. However, a fall in population will lead to a decrease in demands of goods and services and a decrease in the amount of labour available. There is a positive and negative effect for businesses either if population increases or decreases. If the population increases, businesses will see sales due to the high demand of goods and services but yet may need to invest to and employ more staff to meet those needs. If the population decreases, businesses won’t have many sales due to less demand on goods and services. Therefore, they may not need to invest more money and employ extra workers to meet those needs. For my business, having a larger population will be ideal because my products will meet a lot of people’s wants and needs. Due to consoles and games being popular, my products will be high on demand and therefore more profit and revenue would be made. Also, I could cover the costs of the overheads by using some of my profit.

A population pyramid shows a structure of a country. The structure of a population has a big affect on businesses and it shows what percentage of people is in each age group and gender. Businesses will be interested in structures because they can determine what market will meet their products and the demand of goods and services they should be offering. For example, gaming markets are for teenagers up to the age of 25. Therefore, if there were a high population in that age category it would be good for gaming businesses as well as mine.

Lifestyles influence businesses in a big way. People’s taste, values, attitudes are always changing and therefore businesses need to keep up with the changes in order to keep attracting customers. For instance, as my business will be a gaming shop, I will have to keep with changes very often because of new games coming up and consoles being released. If I do not update my products the shop will go out of business due to attracting low number of customers and not making profit. However, there is a problem and especially is linked with the type of business I am running. People buying games/DVDs are likely to stay indoors than rather going out. Especially with games, people might get addicted to them and ignore other activities such as exercise. This is a problem because the UK already has an obesity problem and not taking part in exercise isn’t going to stop this. However, there is a solution that will go along with gaming and exercise. The recent and successful launch of the Nintendo Wii will provide people with entertainment and exercise. As my business is a gaming shop, it will sell the Nintendo Wii, with people buying it for health and entertainment reasons.

Technological Issues

Nowadays technologies have advanced so much that businesses have seen rapid growth. Two technological developments that influence businesses are new products like mobile phones and new processes such as EPOS. However, new products create new demands so it will cost more for the businesses. But, because the demand is high for new products, if your business can sell them in a large quantity they will make a relatively large profit. On the other hand, businesses have gone out of sales because of new technology, for example shops that used to sell typewriters. This shows that it’s important for businesses to research into new products so they could compete against others. New production techniques such as EPOS, CAD and robots have benefited businesses in a number of ways:

Robots and machines have replaced workers so the wage bill is reduced. Also machinery wouldn’t get tired and go on continuously. However installing them is expensive.
Reduction in storage space and costs as materials are available at the right place and the right time.
Increased quality as robots produce products of a high standard of time continuously.
Increased output as new technology and techniques allow businesses to increase production.

Also, nowadays big businesses have opened up an Internet website were people can buy products from and then have it delivered in their doorstep. This is a great way off beating off your competitors if they do not have their own website. Not only is this a way of promoting your business but it could lead to customer loyalty and repeat sales. Other benefits include that if small businesses produce specialist goods, they can sell them anywhere in the world, thus increasing their market. Cost can be reduced because the Internet user and not the provider pay for the cost of downloading information, so items such as brochures are not needed. Also, sales staff is no longer needed, as the information is online.

As my business is new to the market, I wouldn’t have too much money to spend on the latest technology so my business might suffer. However, my first priority will be to sell the products in store and maximize my profits. Thereon, I would then open up an Internet website to promote and order my products. But another problem will occur as my competitors will have an advantage and will attract more customers. Although there might be a solution by promoting my business in different ways to attract customers.