ANALYSING THE ENVIRONMENT: PEST ANALYSIS It is useful to consider as a starting point, what environmental influences have been particularly

important in the past, and the extent to which there are changes occurring, which may make any of these more or less significant in the future, for the organisation and its competitors. Figure 1 can help with such an audit by providing a summary of some of the questions to ask about likely key forces at work in the wider environment. It is sometimes known as a PEST Analysis, indicating the importance of political, economic, social, and technological influences on organisations. There are four main ways in which this can contribute to strategic analysis : 1. The headings in Figure 1 can be used as a checklist when considering and analysing the different influences. However, although a great deal of information can be generated in this way, it will be of limited strategic value if it remains a listing of influences. It is, therefore, important that specific models be used which can 'make sense out of voluminous environmental information. 2. It may, however, be possible to identify a smaller number of key environmental influences. For example, the hospital services in western industrialised countries face short-term pressures in terms of patient care, but their ability to provide such care in the log term is critically dependent on how management reconcile themselves to the convergence of at least three crucial factors. The first is demographic, and concerns in particular the ageing population and therefore increasing demands on health care; the second is the rapid development of technology, at one and the same time prolonging life, improving the prospects of care, and yet demanding huge amounts of funding; and the third is the uncertain economic conditions within which they operate when linked to government policy on public funding. The point is that the strategy for an organisation must address these key influences. The danger is that managers, faced with pressing day-to-day problems -- as in the health service -- fail to address them; and strategy becomes short-term response rather than longterm development. 3. PEST analysis may also be helpful in identifying long-term drivers of change. For example, given the increasing globalisation of some markets, it is important to identify the forces leading to this development. These include rapid change in technology, leading to shorter life spans of such technology, and therefore to the need for greater scale economics in its use. The world-wide convergence of consumer tastes in markets such as radio, television, and entertainment leads to the possibility of major economies being gained through global marketing and manufacturing. The growth of multinational customers and competitors has also increased the shift towards global markets, as has the overall pressure on business for cost reduction and therefore the search for scale economics. A further force for global development is the world-wide search for raw materials, energy, and often skills to service global business networks. 4. PEST analysis may also help to examine the differential impact of external influences on

organisations either historically or in terms of likely future impact. This approach builds on the identification of key trends or influences, and asks to what extent such external influences will affect different organisations -- perhaps competitors -- differently. Figure 2 shows a simplified example of such an analysis, which builds on the trends towards globalisation of markets discussed above. Here, the shorter life span of technology, the convergence of customer requirements and the need to access supplies of skills internationally are the three key forces identified. The three competitors, A, B, and C have been assessed in terms of their differential ability to cope with these three key forces. The analysis shows that firm A is best placed to deal with technological change, given its track record and investment in R & D and its high market share, allowing the cost of R & D to be readily offset. Like C, it is also well placed, given its centralised product planning, to cope with the development of more convergent customer requirements. However, both A and C, are not as well placed as B when it comes to accessing supplies, and particularly technical skills world-wide, because A and particularly C, are such more centralised in procurement; and C, in particular, has a tradition of recruiting and promoting from within its own national boundaries. This is a simplified example of what might be a much more complex analysis, but is done to show how the identification of key trends or influences can be taken further to examine differential impact on organisations. FIGURE 1: A PEST analysis of environmental influences 1. What environmental factors are affecting the organisation? 2. Which of these are the most important at the present time? In the next few years? Political/Legal Monopolies legislation Environmental Business cycles GNP trends Protection laws Taxation policy Foreign trade regulations Employment law Government stability Socio-cultural Population demographics Income distribution Social mobility Lifestyle changes Attitudes to work and leisure Consumerism Levels of education FIGURE 2: Impact analysis Economic Interest rates Money supply Inflation Unemployment Disposable income Energy availability and cost

Technological Government spending on research Government and industry focus of technological effort New discoveries/developments Speed of technology transfer Rates of obsolescence

KEY EXTERNAL INFLUENCES

COMPETITORS B

Shorter technological ++ life span Track record in R & D and high volume share Convergence of customer requirements ++ Central product planning

-+ Lowest invstment in Track record in R & D R&D and lowest market and substantial share share -++ Diverse products from Central product many SBUs planning -Centralised procurement and staffing traditionally from one national SBU

Access to supplies and + skills internationally Centralised Widest networks of procurement policies operating units