Macro-economics and PEST Analysis

Introduction

In analyzing the macro-environment, it is important to identify the factors that might in turn
affect a number of vital variables that are likely to influence the organization’s supply and
demand levels and its costs. The "radical and ongoing changes occurring in society create an
uncertain environment and have an impact on the function of the whole organization". A
number of checklists have been developed as ways of cataloguing the vast number of
possible issues that might affect an industry. A PEST analysis is one of them that is merely a
framework that categorizes environmental influences as political, economic, social and
technological factors. Sometimes two additional factors, environmental and legal, will be
added to make a PESTEL analysis, but these themes can easily be subsumed in the others.
The analysis examines the impact of each of these factors (and their interplay with each
other) on the business. The results can then be used to take advantage of opportunities and to
make contingency plans for threats when preparing business and strategic plans claims that
PEST analysis is a useful strategic tool for understanding market growth or decline, business
position, potential and direction for operations. The headings of PEST are a framework for
reviewing a situation, and can in addition to SWOT and Porter’s Five Forces models, be
applied by companies to review a strategic directions, including marketing proposition.
These of PEST analysis can be seen effective for business and strategic planning, marketing
planning, business and product development and research reports. PEST also ensures that
company’s performance is aligned positively with the powerful forces of change that are
affecting business environment. PEST is useful when a company decides to enter its business
operations into new markets and new countries. The use of PEST, in this case, helps to break
free of unconscious assumptions, and help to effectively adapt to the realities of the new
environment. Main Aspects of PEST Analysis Economic conditions affect how easy or how
difficult it is to be successful and profitable at any time because they affect both capital
availability and cost, and demand. If demand is buy out, for example, and the cost of
capitalist low, it will be attractive for firms to invest and grow with expectations of being
profitable. In opposite circumstances firms might find that profitability throughout the
industry is low. The timing and relative success of particular strategies can be influences by
economic conditions. When the economy, as a whole or certain sectors of the economy, are
growing, demand may exist for a product or service which would not be in demand in more

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depressed circumstances. Similarity, the opportunity to exploit a particular strategy

successfully may depend on demand which exists in growth conditions and does not in
recession. Although a depressed economy will generally be a treat which results in a number
of organizations going out of business, it can provide opportunities for some economic
conditions are influenced by political and government policy, being a major influence
affecting government decisions.

The Difference between Macro and Microeconomics

Economics

Microeconomic issues Macroeconomic issues

How much income will a

How much will a country saves?
consumer
spend on food?

How much leisure time What is the appropriate

will consumers enjoy? exchange rate between
consumers enjoy? currencies?

What will happen if taxes are

How much outputs will a raised?
firm produce?

How much research and What will the unemployment rate

development? be?

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These distinctions show that a gray area exists between micro and macroeconomics that
relates to aggregation at what point do the actions of a number of firms cease to be a
microeconomic issue and become a macroeconomic issue? To answer that question, let’s
think of another way of outlining the differences between microeconomics and
macroeconomics. In microeconomics the focus is on a small group of agents, say a group of
consumers or two firms battling over a particular market. In this case economists pay a great
deal of attention to the behavior of the agents the model is focusing on. They make
assumptions about what consumers want or how much they have to spend, or about whether
the two firms are competing over prices or market share, and whether one firm is playing an
aggressive strategy, and so on. The result is a detailed analysis of the way particular firms or
consumers should behave in a given situation. However, this microeconomic analysis does
not explain what is happening in the wider economic environment. Think about consumers’
choice of what goods to consume. In addition to consumers’ own income and the price of the
goods they wish to purchase, their decisions depend on an enormous amount of other
information. How high is unemployment? Is the government going to increase taxes? Is the
exchange rate about to collapse, requiring a sharp increase in interest rates? Or consider our
two firms competing, over a market.
If one firm is highly leveraged (i.e., has a lot of debt), it may not be able to adopt an
aggressive price stance if it fears that interest rates are about to rise sharply because then the
losses from a price war might bankrupt it. Similarly, if imported materials are important for
the firm’s production process, then a depreciating currency will lead to higher import costs,
reducing profit margins even before the firm engages in a price war. While none of these
background influences shifts in interest rates or movements in the exchange rate is under the

control of the firm or consumer, they still influence their decisions.3

How the Macro-environmental Factors affect to the Business Decision of a

Firm

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Political Environment

Political Environment is the laws, official regulations, rules and guidelines some of which are
designed to protect people, consumers and communities. Some are designed to make
contracts enforceable and to protect property rights. Many are designed to regulate the
behavior of the managers and their subordinates. There is relatively little that a manager can
do in any organization that is not in some way concerned with, and often specifically
controlled by, the existence, introduction or change in laws or regulations. In Sri Lanka., for
example, the differences between the major political parties could result in very different
business conditions.

Political
• Ecological/Environmental issues
• Current legislation home market
• Future legislation
• International legislation
• Regulatory bodies and processes
• Government policies
• Government term and change
• Trading policies
• Funding, grants and initiatives
• Home market lobbying/pressure groups

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• International pressure groups

The following examples are shown , how affect the Macro-economical environment under
political factors.

Interest rates
Monitory Board of Central Bank of Sri Lanka can control the interest rates, financial
services and banking and non banking activities of such institutions. It directly
influences the activities of Financial Institutions including banks and other financial
institutions such as insurance companies and etc.

Vehicles tax

The recent government policy to reduce vehicle import taxes in Sri Lanka exposed
new avenues to prospective buyers and sellers both. But the total market behaves
according to the customers that involved.

GSP Plus

The very recent example for international trade barriers which are also macro factors
among others can be seen as the GSP+ issue in relation to Sri Lankan exports. Due to
the decision taken by the International Rehabilitation & Development Bank (World
Bank) to eliminate the GSP+ concession, Sri Lanka definitely gets affected heavily at
the international market and would not be able to compete with other products in term
of ‘Price’

Economic Environment

Analysis of the economic environment is the concern of all organizations whether they
produce goods or services, or operate in other areas. In looking at any organized enterprise as
a system, we can see that it imports various things from the economic environment and
exports a product or service to it. There are a number of elements in the economic
environment which an organization must introduce as an input and other matters where the

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output of an organization is affected by economic elements in the environment. The close

interactions of business with the economic environment are hardly surprising since the
mission of business is usually economic. However, all other kinds of enterprises must also
interact, to a considerable extent, with the economic environment.
A few examples include a government agency which takes resources, usually from taxpayers,
and provides services desired by the public. A temple or a church takes contributions from
members and serves their religious and social needs. A university takes resource inputs from
taxpayers, students, and contributors of various kinds and transforms these into educational
and research services.

• Home economy situation

• Home economy trends
• Overseas economies and trends
• General taxation issues
• Taxation specific to
• Product/services
• Seasonality/weather issues
• Market and trade cycles
• Specific industry factors
• Market routes and distribution
• Trends
• Customer/end-user drivers
• Interest and exchange rates
The following few examples under economical factors can be shown

Inflation-
Governments all over the world try to reduce inflation rates in order to stabilize the
economy and make it easier for international trading. Inflation erodes the purchasing
power of money and causes other problems for marketers in areas such as pricing and the

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accurate estimation of demand. The "rate of inflation" is often an indicator of how stable
the economy of a country is.

The labour market

The labour market reflects the availability of particular skills at national and regional
levels; this is affected by training, which is influenced by government and other regional
agencies. Labour costs will be influenced by inflation and by general trends in other
industries, and by the role ad power of trade unions.

Gas industry
As a result, the costs incurred by a new entrant will be higher than those of existing
competitors. As an example: Liquid Petroleum (LP) Gas industry needs large amount of
capital to start up a new plant and to exist in the market. Hence, it is unlikely to be able to
benefit immediately from economies of scale that existing competitors will have
established. This fact economic factor has to be considered in making such a decision for
a new start up.

Social Environment
It is extremely difficult to separate, even for discussion purposes, the social and political
environments. The social environment is made up of attitudes, desires, expectations, degrees
of intelligence and education, beliefs and customs of people in a given group or society. The
political environment is primarily that complex mix of laws, regulations and government
agencies and their actions, which affect all kinds of organizations, often to a varying degree.
The ethical environment - which could well be included as an element in the social
environment - includes sets of generally accepted standards of personal conduct. These
standards may or may not be codified by law, but for any group to which they are meant to
apply, they sometimes seem to have the force of law.

The interweaving and complexity of these environmental elements are such that their study
and comprehension are difficult. To forecast can anticipate and prepare for changes is even

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more difficult. It must be added, however, that this factor should not be prepared as an
excuse for possible failure - the skill of a strategic manager is to manage his/her organization
successfully within the changing environment. Bad luck is a phrase that really means bad
strategic planning if we are to be really committed to the concept of pro-active management.
We are all social animals in one degree or other, so it will always be a mistake to consider
that any organization is an isolated ivory tower. The organization is a complex social
structure operating in a wider complex social structure. This must always be considered when
planning.
• Lifestyle trends
• Demographics
• Consumer attitudes and opinions
• Media views
• Law changes affecting social factors
• Brand, company, technology image
• Consumer buying patterns
• Fashion and role models
• Major events and influences
• Buying access and trends
• Ethnic/religious factors
• Advertising and publicity

Demographic
The concept of Demography is the study of population dynamics, which has wide
implications for both the nature of the workforce and the business market. Generally
populations of a country does not change rapidly, but, elements which have an interaction
with it can have fluctuations frequently, the bellow mention key demographic factors
have to be taken in to consideration in decision making process of an organization, those
are as follows,

Culture

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Knowledge of a culture of a society is heavily important to organizations for several

reasons. For example, the acceptance of products or a working practices can be affected
by the way those products

Ethnic/religious factors

During the Ramazan period, the demand for the Salvers and other garments related to the
Islam culture are highly demand around the area that are included in higher Muslim
population density. Like-wise during the Sinhala/Tamil New year festival season most of
products are highly demand all over the island, as an example there is a high demand for
Indian sarees in Jaffna
In the macro environment, directly it effects for the organizational decision making
process because, under the social factor: ethnic and religious factor gives more influence
for marketing on such products aspects. As an example same business could not be done
in other areas. So this factor gives a considerable change for the decision making process.
s or working practices appear to 'fit' the culture of the existing society.

Technological

The changing pace of technology in all its forms has meant stable markets have been
turbulent and sections of industry and commerce have declined rapidly or ceased to exist.
Technological developments can have a strong impact on the operation and management of
any kind of organization.
Technology is an all-encompassing term denoting the sum total of the knowledge we have of
ways to do things. It includes inventions, techniques and the vast store of organized
knowledge that we have. But its main influence is on ways of doing things as we design,
produce, distribute or sell our goods and services.
Any business that wishes to survive in a changing world must keep abreast of the technology
applicable in its products and services and to its methods of operation. To do otherwise is to
risk destruction as competitors take advantage of new developments. There are few

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organizations whose operations and effectiveness are not touched by technology and
technological developments.

Technological Environment
• The technological environment refers to new technologies, processes, materials,
which create new or better product and market opportunities.
• Technology has a tremendous effect on life-styles, consumption patterns, and the
economy.
• It is a driving force for changing every aspects of world and people at a fast pace
• But thankfully, it is a most manageable uncontrollable force faced by marketers.
• Once advancing, you can start new industries, destroy existing industries, and
stimulate entirely targeted markets.
So, organizations must quickly adapt in terms of product and process, then turn resources and
advances into opportunities and a competitive edge

Some Categories of Technological Change

• Increased ability to master time and distance for the movement of freight and passengers:
Railways, automobiles, trucks and aircraft (which also speeds up and improves
communications)
• Increased ability to generate. Store, transport and distribute energy: electricity, nuclear
power, fiber optics and the laser
• Increased ability to design new materials and change the properties of others so that they
better serve needs: steel alloys, synthetic fibers, plastics, new drugs
• Mechanization or automation of processes: robotics and the computer, which greatly
expand our ability to store manipulate, select and supply data
• Increased understanding of individual and group behavior and how to deal with it:
Psychological bases of motivation, group behavior patterns, improved managerial techniques
• Increased understanding of diseases and their treatment: inoculations for polio, kidney
transplants, antibiotic treatment of infections.

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Within this technological area you may wish to consider the influence that buyers have, as
preferences and choices are made through technological differences.

Advantages of PEST Analysis

• Simple framework.
• Facilitates an understanding of the wider business environment.
• Encourages the development of external and strategic thinking.
• Can enable an organization to anticipate future business threats and take action to
avoid or minimize their impact.
• Can enable an organization to spot business opportunities and exploit them fully.

Disadvantages of PEST analysis

• Some users over simplify the amount of data used for decisions – it is easy to use
scant data.
• To be effective this process needs to be undertaken on a regular basis.
• The best reviews require different people being involved each having a different
perspective.
• Access to quality external data sources, this can be time consuming and costly.
• The pace of change makes it increasingly difficult to anticipate developments that
may affect an organization in the future.
• The risk of capturing too much data is that it may make it difficult to see the wood
for the trees and lead to ‘paralysis by analyses.
• The data used in the analysis may be based on assumptions that subsequently
prove to be unfounded (good and bad).

PEST analysis dos and don’ts

Do’s
• Do get other people involved.

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• Do exploit any expertise and resources that are already available within the
organization.
• Do use PEST analysis in conjunction with other techniques, such as SWOT
analysis, Porter's five forces competitor analysis or scenario planning etc.
• Do incorporate your analysis within an ongoing process for monitoring changes in
the business environment.
Don’t

• DON’T try to do this on your own.

• DON’T jump to conclusions about the future based on the past or the present.
• DON’T get bogged down in collecting vast amounts of detailed information
without analyzing your findings appropriately

What is SWOT analysis?

Developed as a tool for marketing in which internal and external environment are scanned as
an important part of the strategic planning process.
Internal factors can be classified as strengths (S) or weaknesses (W).
External factors can be classified as opportunities (O) or threats (T).

Why use SWOT tools?

SWOT is a structured analytical framework, which can be used in conjunction with other
tools for audit and analysis e.g. PESTLE analysis, Port er's Five-Forces analysis. SWOT
helps to focus on areas of strength, recognise limitations and develop opportunities in the
most promising directions.
SWOT is used widely because it is quick and easy to learn. You can apply SWOT analysis to
competing techniques. This may produce some interesting insights!
Strengths
Resources and capabilities that can be used as a basis, for developing a competitive
advantage. And, characteristics that can be controlled.

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Weaknesses
In some cases, a weakness may be the flip side of strength. Take the case of a state-of-the-art
digital technology that requires a large capital investment. While automated technology may
be considered a strength that other technologies do not share, it also may be a considered a
weakness if the large investment limits the financial resources available for training the
specialists required to use the equipment or distribute the data.
Opportunities
Developments in science and technology are known as opportunity that changes in markets
on both a national and international scale. Changes in government policy, e.g. removal of
international trade barriers, signing international agreements between countries, homeland
security and the fight against terrorism, changes in social patterns, population profiles,
lifestyle changes, etc.
Some other factors can be shown for examples.
– Mergers, joint ventures or strategic alliances based on geopolitical and public-private
partnerships.
– Non-investment or other reason leading to a market being vacated by a competitor
technology.
– An unfulfilled customer needs e.g. a specific data requirements or data required for a
particular geographical area.
– Opportunities to add value and increase profit margin e.g. new business models for
the knowledge economy and information society.

– A later stage in SWOT analysis is to look at the strengths and ask whether these open
up any opportunities. Alternatively, look at weaknesses and ask whether you could
open up opportunities by eliminating them.
Threats
Some examples of such threats include:
– Changing demand.
– Emergence of new technologies or innovative products and services.
– New regulations or increased trade barriers e.g. environmental lobby seeks a ban on
launching spacecraft.

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– Government subsidies for competing technologies or disadvantageous taxation e.g.

gaseous emissions.
– Competing technologies that blend better with societal and technological trends.
– Changing specifications for products and services.
– Economic sustainability.
– Could a non-technical weaknesses seriously undermine the technology?
Example
A start-up small consultancy business might carry out the following SWOT analysis:
The points under four factors can be illustrated in point form as follows

Strengths:
– We are able to respond very quickly as we have no red tape, no need for higher
management approval, etc.
– We are able to give really good customer care, as the current small amount of work
means we have plenty of time to devote to customers
– Our lead consultant has strong reputation within the market
– We can change direction quickly if we find that our marketing is not working
– We have little overhead, so can offer good value to customers
Examples of strengths include:
– Patents
– Strong brand names
– Good reputation among customers
– Cost advantages from proprietary know-how
– Exclusive access to high grade natural resources
– Favourable access to distribution networks
– Specialist marketing expertise.
– A new, innovative product or service
– Location of business
– Quality processes and procedures
– Any other aspects that add value to the product or service e.g. Digital workflow and
data distribution.

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Weaknesses:
– Our company has no market presence or reputation
– We have a small staff with a shallow skills base in many areas
– We are vulnerable to vital staff being sick, leaving, etc.
– Our cash flow will be unreliable in the early stages
For example, each of the following may be considered weaknesses:
– lack of patent protection
– a weak brand name
– poor reputation among customers
– high cost structure
– lack of access to the best natural resources
– lack of access to key distribution channels
– lack of marketing expertise
– undifferentiated products and service (i.e. in relation to your competitors)
– location of your business
– poor quality goods or services
– damaged reputation

Opportunities:
– Our business sector is expanding, with many future opportunities for success
– Our local council wants to encourage local businesses with work where possible
– Our competitors may be slow to adopt new technologies

Threats:
– Will developments in technology change this market beyond our ability to adapt?
– A small change in focus of a large competitor might wipe out any market position we
achieve

– The consultancy might therefore decide to specialize in rapid response, good value
services to local businesses. Marketing would be in selected local publications, to get

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the greatest possible market presence for a set advertising budget. The consultancy
should keep up-to-date with changes in technology where possible.

Successful SWOT analysis

To be a success SWOT analysis, following limitations should be fulfilled.

– Be realistic about the strengths and weaknesses.
– Analysis of case studies should distinguish between state of the art of technology and
potential or unproven technologies.
– Be specific. Avoid grey areas.
– Highlight distinctive characteristics that differentiate between techniques.
– Keep your SWOT analysis short and simple. Avoid complexity and over analysis.
– Remember. SWOT is subjective.
–
The SWOT matrix

– A firm should not necessarily pursue the more lucrative opportunities. Rather, it may
have a better chance at developing a competitive advantage by identifying a fit
between the firm's strengths and upcoming opportunities. In some cases, the firm can
overcome a weakness in order to prepare itself to pursue a compelling opportunity.
– To develop strategies that take into account the SWOT profile, a matrix of these
factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is
shown below:

 S-O strategies pursue opportunities that are a good fit to the companies’ strengths.
 W-O strategies overcome weaknesses to pursue opportunities.
 S-T strategies identify ways that the firm can use its strengths to reduce its
vulnerability to external threats.
 W-T strategies establish a defensive plan to prevent the firm's weaknesses from
making it highly susceptible to external threats.

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The business decision of a firm

• Describe different types of decisions and the decision-making process

• Evaluate the role of information systems in helping people working individually and
in a group make decisions more efficiently
• Demonstrate how executive support systems can help senior managers make better
decisions
• Assess how systems that support decision making can provide value for the firm
• Identify the challenges posed by decision-support systems, group decision-support
systems, and executive support systems and management solutions

The major factors to concern for the decision making

A PEST analysis is, therefore, a framework for a detailed study of internal and external
environment to help make decisions about the future.
 Macroeconomics is the study of aggregates
 Macroeconomics is concerned with the behavior of the economy as a whole – with
booms & recessions, economy’s total output of goods & services, the growth of
output, the rate of inflation & unemployment, the balance of payments, & exchange
rates
 Macroeconomics deals with the long-run economic growth and with the short-run
fluctuations that constitute the business cycles
Macroeconomics is a policy-oriented part of economics. The subject matter of
Macroeconomics includes factors that determine both the level of these variables and how
the variables change over time.
 Macroeconomics focuses on the economic behavior & policies that affect
–Consumption & investment
–Trade balance (exports – imports)
–Currency & exchange rates
–Determinants of changes in wages & prices

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–Money, interest rates & Monetary policy

–Taxation, union budget, Govt. deficit, govt. debt & Fiscal policy, etc.

 Three central issues addressed by Macroeconomics are:

 How do we explain periods of high & persistent unemployment?

 How do we explain periods of inflation?

Another important issue: Should the govt. fix exchange rates or should exchange rates be
market determined?

 Policymakers & health-checkup Macroeconomic policymakers focus on improving the

health of the economy
 Crucial is the ‘thermometer’ readings of their key goals –

– High & sustainable rates of economic growth

– Low inflation

– Low unemployment

 Common economic yardsticks to measure these goals are:

– Gross Domestic Product (GDP)

– Consumer Price Index (CPI) or Wholesale Price Index (WPI)

– Unemployment rate

Conclusion

PEST analysis looks at the external business environment and is an appropriate strategic tool
for understanding the "big picture" of the environment in which business operates, enabling
to take the advantage of the opportunities and minimize the threats faced by company’s
business activities. When strategic planning is done correctly, it provides a solid plan for the
company to grow into the future. With a PEST analysis, the company can see a longer
horizon of time, and be able to clarify strategic opportunities and threats that the company
faces. By looking to the outside environment to see the potential forces of change looming on
the horizon, firms can take the strategic planning process out of the arena of today and into

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the horizon of tomorrow. PEST is not a set of rigid compartments into which ideas need to be
sorted. It is better thought of as a set of hooks that can be used to fish for important facts.
Once the factors have been "fished out", it does not matter which hook they were attached to.
When it comes to writing up the analysis, there is no need to mention the PEST labels at all.

Economics is the study of the allocation of scarce resources. Macroeconomics studies how
the economy as a whole allocates resources, for instance, how the overall level of saving in
an economy is determined; how the total level of investment is generated; how the level of
unemployment evolves; the pattern of overall imports and exports; what determines the level
of training of the workforce. Macroeconomics is therefore essentially about the backdrop of
economic activity against which firms, governments, and consumers make their decisions.
However, this backdrop of economic activity represents nothing other than the overall effect
of the thousands of decisions made by millions of different consumers and firms. Because
macroeconomic factors have a huge impact on financial markets and on the demand for
goods and services produced by companies, they are an important determinant of corporate
performance. Business people are increasingly expected to contribute to the policy debate,
and because the long-run trends in the business world are driven by macroeconomic factors,
a crucial part of a business education must be the study of macroeconomics.

- END -

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Bibliography

Macro-economics Understanding the Wealth of Nation - David Mills and Andrew Scott
V.M.Patel Institute of Management - Sonam Zaveri
Indicators of Macro Environment -Dr.Mrutyunjay Dash
World Wide Web sites -Inter-net
Wayamba University- MBA lectures -by-senior lecturer Mr.Gamage

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