PEST analysis
External factors affecting business
A PEST analysis is used to identify the external forces affecting an
organisation .
This is a simple analysis of an organisation’s Political, Economical,
Social and Technological environment. A PEST analysis
incorporating legal and environmental factors is called a PESTLE
analysis
Political
The first element of a PEST analysis is a study of political factors. Political factors influence
organisations in many ways.
Political factors can create advantages and opportunities for organisations.
Conversely they can place obligations and duties on organisations. Political factors include the
following types of instrument:
 Legislation such as the minimum wage or anti discrimination laws
 Voluntary codes and practices
 Market regulations
 Trade agreements, tariffs or restrictions
 Tax levies and tax breaks
 Type of government regime eg communist, democratic, dictatorship
Non conformance with legislative obligations can lead to sanctions such as fines, adverse
publicity and imprisonment. Ineffective voluntary codes and practices will often lead to
governments introducing legislation to regulate the activities covered by the codes and practices.
Political factors affecting
Tesco
Operating in a globalized environment with stores around the globe (Tesco now operates in six countries
in Europe in addition to the UK; the Republic of Ireland, Hungary, Czech Republic, Slovakia, Turkey and
Poland. It also operates in Asia: in South Korea, Thailand, Malaysia, Japan and Taiwan), Tesco’s
performance is highly influenced by the political and legislative conditions of these countries, including
the European Union (EU).
For employment legislations, the government encourages retailers to provide a mix of job opportunities
from flexible, lower-paid and locally-based jobs to highly-skilled, higher-paid and centrally-located jobs.
Also to meet the demand from population categories such as students, working parents and senior
citizens. Tesco understands that retailing has a great impact on jobs and people factors (new store
developments are often seen as destroying other jobs in the retail sector as traditional stores go out of
business or are forced to cut costs to compete), being an inherently local and labour-intensive sector.
Tesco employs large numbers of; student, disabled and elderly workers, often paying them lower rates.
In an industry with a typically high staff turnover, these workers offer a higher level of loyalty and
therefore represent desirable employees.
Economical
The second element of a PEST analysis involves a study of economic factors.
All businesses are affected by national and global economic factors. National and global interest rate and fiscal policy
will be set around economic conditions. The climate of the economy dictates how consumers, suppliers and other
organisational stakeholders such as suppliers and creditors behave within society.
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An economy undergoing recession will have high unemployment, low spending power and low stakeholder
confidence. Conversely a “booming” or growing economy will have low unemployment, high spending power and
high stakeholder confidence.
A successful organisation will respond to economic conditions and stakeholder behaviour. Furthermore
organisations will need to review the impact economic conditions are having on their competitors and respond
accordingly.
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In this global business world organisations are affected by economies throughout the world and not just the
countries in which they are based or operate from. For example: a global credit crunch originating in the USA
contributed towards the credit crunch in the UK in 2007/08.
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Cheaper labour in developing countries affects the competitiveness of products from developed countries. An
increase in interest rates in the USA will affect the share price of UK stocks or adverse weather conditions in India
may affect the price of tea bought in an English café.
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A truly global player has to be aware of economic conditions across all borders and needs to ensure that it
employs strategies that protect and promote its business through economic conditions throughout the world.
Economical factors affecting
Tesco
Economic factors are of concern to Tesco, because they are likely to
influence demand, costs, prices and profits. One of the most influential
factors on the economy is high unemployment levels, which decreases
the effective demand for many goods, adversely affecting the demand
required to produce such goods.
These economic factors are largely outside the control of the company,
but their effects on performance and the marketing mix can be
profound. Although international business is still growing, and is
expected to contribute greater amounts to Tesco’s profits over the
next few years, the company is still highly dependent on the UK
market. Hence, Tesco would be badly affected by any slowdown in the
UK food market and are exposed to market concentration risks.
Social
The third aspect of PEST focuses its attention on forces within society such as family, friends, colleagues,
neighbours and the media. Social forces affect our attitudes, interests and opinions.
These forces shape who we are as people, the way we behave and ultimately what we purchase.
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For example within the UK peoples attitudes are changing towards their diet and health. As a result
the UK is seeing an increase in the number of people joining fitness clubs and a massive growth for
the demand of organic food. Products such as Wii Fit attempt to deal with society’s concern, about
children’s lack of exercise.
Population changes also have a direct impact on organisations. Changes in the structure of a
population will affect the supply and demand of goods and services within an economy. Falling
birth rates will result in decreased demand and greater competition as the number of consumers
fall.
Conversely an increase in the global population and world food shortage predictions are currently
leading to calls for greater investment in food production. Due to food shortages African countries
such as Uganda are now reconsidering their rejection of genetically modified foods.
In summary organisations must be able to offer products and services that aim to complement and
benefit people’s lifestyle and behaviour. If organisations do not respond to changes in society they
will lose market share and demand for their product or service.
Social factors affecting Tesco
Current trends indicate that British customers have moved towards ‘one-stop’ and
‘bulk’ shopping, which is due to a variety of social changes. Tesco have, therefore,
increased the amount of non-food items available for sale.
Demographic changes such as the aging population, an increase in female workers and
a decline in home meal preparation mean that UK retailers are also focusing on
added-value products and services. In addition, the focus is now towards; the ownlabel share of the business mix, the supply chain and other operational improvements,
which can drive costs out of the business. National retailers are increasingly reticent to
take on new suppliers (Clarke, Bennison and Guy,1994; Datamonitor Report, 2003).
The type of goods and services demanded by consumers is a function of their social
conditioning and their consequent attitudes and beliefs. Consumers are becoming
more and more aware of health issues, and their attitudes towards food are constantly
changing.
One example of Tesco adapting its product mix is to accommodate an increased
demand for organic products.
Economical factors affecting
Tesco
Economic factors are of concern to Tesco, because they are likely to
influence demand, costs, prices and profits. One of the most influential
factors on the economy is high unemployment levels, which decreases
the effective demand for many goods, adversely affecting the demand
required to produce such goods.
These economic factors are largely outside the control of the company,
but their effects on performance and the marketing mix can be
profound. Although international business is still growing, and is
expected to contribute greater amounts to Tesco’s profits over the
next few years, the company is still highly dependent on the UK
market. Hence, Tesco would be badly affected by any slowdown in the
UK food market and are exposed to market concentration risks.
Economical factors affecting
Tesco
Economic factors are of concern to Tesco, because they are likely to
influence demand, costs, prices and profits. One of the most influential
factors on the economy is high unemployment levels, which decreases
the effective demand for many goods, adversely affecting the demand
required to produce such goods.
These economic factors are largely outside the control of the company,
but their effects on performance and the marketing mix can be
profound. Although international business is still growing, and is
expected to contribute greater amounts to Tesco’s profits over the
next few years, the company is still highly dependent on the UK
market. Hence, Tesco would be badly affected by any slowdown in the
UK food market and are exposed to market concentration risks.
Technological
Unsurprisingly the fourth element of PEST is technology, as you are probably aware technological advances have greatly
changed the manner in which businesses operate.
Organisations use technology in many ways, they have
1.
Technology infrastructure such as the internet and other information exchange systems including telephone
2. Technology systems incorporating a multitude of software which help them manage their business.
3. Technology hardware such as mobile phones, Blackberrys, laptops, desktops, Bluetooth devices,
photocopiers and fax machines which transmit and record information.
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Technology has created a society which expects instant results. This technological revolution has increased the
rate at which information is exchanged between stakeholders. A faster exchange of information can benefit
businesses as they are able to react quickly to changes within their operating environment.
However an ability to react quickly also creates extra pressure as businesses are expected to deliver on their
promises within ever decreasing timescales..
For example the Internet is having a profound impact on the marketing mix strategy of organisations. Consumers
can now shop 24 hours a day from their homes, work, Internet café’s and via 3G phones and 3G cards. Some
employees have instant access to e-mails through Blackberrys but this can be a double edged sword, as studies
have shown that this access can cause work to encroach on their personal time outside work.
The pace of technological change is so fast that the average life of a computer chip is approximately 6 months.
Technology is utilised by all age groups, children are exposed to technology from birth and a new generation of
technology savvy pensioners known as “silver surfers” have emerged. Technology will continue to evolve and
impact on consumer habits and expectations, organisations that ignore this fact face extinction.
Technology factors affecting
Tesco
Technology is a major macro-environmental variable which has influenced the development of many of
the Tesco products.
The new technologies benefit both customers and the company: customer satisfaction rises because
goods are readily available, services can become more personalised and shopping more convenient.The
launch of the Efficient Consumer Response (ECR) initiative provided the shift that is now apparent in the
management of food supply chains (Datamonitor Report, 2003). Tesco stores utilise the following
technologies:
• Wireless devices
• Intelligent scale
• Electronic shelf labelling
• Self check-out machine
• Radio Frequency Identification (RFID).
The adoption of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and
electronic scanners have greatly improved the efficiency of distribution and stocking activities, with
needs being communicated almost in real time to the supplier
Environment
In 2003, there has been increased pressure on many companies and managers to
acknowledge their responsibility to society, and act in a way which benefits society
overall.
The major societal issue threatening food retailers has been environmental issues, a
key area for companies to act in a socially responsible way. Hence, by recognizing this
trend within the broad ethical stance, Tesco’s corporate social responsibility is
concerned with the ways in which an organization exceeds the minimum obligations
to stakeholders specified through regulation and corporate governance.
In 2003 the government launched a new strategy for sustainable consumption and
production to cut waste, reduce consumption of resources and minimise
environmental damage.
The latest legislation created a new tax on advertising highly processed and fatty
foods. The so-called ‘fat tax’ directly affected the Tesco product ranges that have
subsequently been adapted, affecting relationships with both suppliers and customers
Legislative Factors
Various government legislations and policies have a direct impact on the performance of Tesco.
For instance, the Food Retailing Commission (FRC) suggested an enforceable Code of Practice should be
set up banning many of the current practices, such as demanding payments from suppliers and
changing agreed prices retrospectively or without notice.
The presence of powerful competitors with established brands creates a threat of intense price wars
and strong requirements for product differentiation.
The government’s policies for monopoly controls and reduction of buyers’ power can limit entry to this
sector with such controls as license requirements and limits on access to raw materials.
In order to implement politically correct pricing policies, Tesco offers consumers a price reduction on
fuel purchases based on the amount spent on groceries at its stores. While prices are lowered on
promoted goods, prices elsewhere in the store are raised to compensate.