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PEST analysis is an analysis of the political, economic, social & technological factors in the external environment of an organization, which can affect its activities & performance. PEST analysis (Political, Economic, Social & Technological analysis) describes a framework of macro-environmental factors used in the environmental scanning component of international business management. It is a part of the external environmental analysis, & gives an overview of the different macroenvironmental factors that the company has to take into consideration. It is a useful strategic tool for understanding the market growth or decline, business position, potential & direction for operations.
PEST Analysis is useful for four main reasons:
Gathering information is the first important step in doing PEST analysis. Once it is done, the information has to be evaluated. There are many factors changing in the external environment but not all of them are affecting or might affect the organization. Therefore, it is essential to identify which PEST factors represent the opportunities or threats for an organization & list only those factors in PEST analysis. This agrees to focus on the most important changes that might have the impact on the company.
PEST analysis is the most general version of all PEST variations created. It is the very vibrant tool as a new component can be easily added to it so as to focus on 1 or another critical force affecting the company.
It involves the collection & portrayal of information about internal & external factors which have, or may have, an impact on business. PESTEL analysis is the simple & the effective tool that is used in a situation analysis to identify the key external (the macro environment level) forces that might affect the organization. These forces can create both opportunities & threats for an organization. PESTEL model is PEST including legal, environmental, ethical & demographic forces.
It is an analysis of an organization’s strengths & weaknesses alongside the opportunities & threats present in the external environment. It involves the collection & portrayal of information about internal & external factors which have, or may have, an impact on business. It is a framework that allows managers to synthesize insights obtained from an internal analysis of the company’s strengths & weaknesses with those from an analysis of external opportunities & threats. SWOT is an acronym which stands for:
Strengths & weaknesses are internal to the company & can be directly managed by it, while the opportunities & threats are external & the company can only anticipate & react to them. Often, SWOT is presented in the form of a matrix as in the diagram as below:
SWOT is widely accepted tool due to its simplicity & value of focusing on the key issues which affect the firm. The aim of the SWOT is to recognize the strengths & the weaknesses that are significant in meeting the opportunities & the threats in the particular situation.
Although there are clear benefits of doing the analysis, many managers & academics heavily criticize or don’t even recognize it as a serious tool. In relation to many, it is the ‘low-grade’ analysis. Here are the chief flaws identified by the research:
The following guidelines are very important in writing a successful SWOT analysis. They eliminate most of SWOT limitations & improve it significantly:
For example, firm’s strength is a brand image (vague); strong brand image (more precise); brand image valued at $10 billion, which is the most valued brand in the market (very good).
The SWOT can be carried on by 1 person or the group of members who are directly responsible for the situation assessment in a company. Basic SWOT analysis is done fairly easily & comprises of only a few steps:
Step 1: Listing the firm’s key strengths & weaknesses
Step 2: Identifying opportunities & threats – Opportunities & threats are the external uncontrollable factors.
Porter’s five forces model is an analysis tool that uses 5 forces to determine the profitability of an industry & shape a firm’s competitive strategy. It is a framework that classifies & analyzes the most important forces affecting the intensity of competition in an industry & its profitability level. 5 forces model was created by the Michael Porter in 1979 to understand how 5 key competitive forces are affecting the industry. The 5 forces identified are:
These forces determine an industry structure & the level of competition in that industry. An industry with low barriers to enter, having few buyers & suppliers but many substitute products & competitors will be seen as very competitive & thus, not so attractive due to its low profitability.
It is every strategist’s job to evaluate company’s competitive position in the industry & to identify what strengths or weakness can be exploited to strengthen that position. The tool is extremely useful in formulating the firm’s strategy as it reveals how powerful each of the 5 key forces is in the particular industry.
The threat of new entrants: This force determines how easy (or not) it is to enter a particular industry. If an industry is profitable & there are almost few barriers to enter & the rivalry soon increases. When most organizations compete for the same market share, profits start to fall. It is essential for existing organizations to create high barriers to entry to deter new entrants.
The threat of new entrants is high when:
Bargaining power of suppliers: Strong bargaining power permits the suppliers to sell the higher priced or the low-quality raw materials to their buyers. This directly affects a buying firms’ profits because it has to pay more for the materials. The Suppliers have strong bargaining power when:
Bargaining power of buyers: Buyers have the power to demand a lower price or a higher product quality from the industry producers when their bargaining power is strong. Lower price means the lower revenues for the producer, while the higher quality products usually raise the production costs. Both scenarios result in lower profits for producers. Buyers exert strong bargaining power when:
The threat of substitutes: This force is especially threatening when buyers can easily find substitute products with attractive prices or better quality & when buyers can switch from one product or service to another with little cost. For example, to switch from a coffee to tea doesn’t cost anything, nothing like switching from the car to a bicycle. Rivalry among existing competitors: This force is the major determinant of how competitive & profitable an industry is. In the competitive industry, the firms have to compete hostilely for a market share, which results in low profits. Rivalry among the competitors is intense when:
Although Porter originally introduced five forces affecting an industry, scholars have suggested including the sixth force: complements. Complements increase the demand for the primary product with which they are used, thus, increasing firm’s & industry’s profit potential.
For example, iTunes was created to complement iPod & added value for both products. As a result, both iTunes & iPod sales increased, increasing Apple’s profits.
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