PEST MODEL EXPLAINED
The organization’s environment is study of the externals factors influencing the organization. The environment of the organization keeps on changing every time. Creation of external forces is a continuous process. Some of these external forces help the organization to achieve strategic goals and some of the forces oppose working of organization. So the of these external forces necessary for organization in order to keep moving in line with its long term strategy
Environmental Factors (PEST Model)
Several environmental factors affect organization activities and these are summarized in form of PESTEL. It includes political, economic, social, technological, environmental and legal factors. Let’s analyze these step by step:
- Political and legal: includes political situation of country e.g protests, wars and similar crises and impact of laws on entity e.g industry specific laws
- Economic: includes overall economic changes e.g tax rates , interest rates
- Social and Cultural : includes attitudes and social trends of people of country, especially demographic factors
- Technological: includes effects of technology on business e.g wide use of internet has recently affected many businesses
Political and Legal Factors
Effect of Political system and government policies on Organization:
Political system is linked with government stability and attitude of political forces .Its image can be seen in policies of government. It effects organization in many ways. Political stability e.g smooth democratic government attracts investors throughout the world resulting health healthy growth of country economy while instability in political system e.g strikes, instable governments and future uncertainty badly affects working of business.
Sources of Legal Authority
Different sources of legal authority effects business. These can effects them in form of tax rate and other rates changes. Following are prominent sources of legal authority:
- Supra-national body: these are bodies which have power of oversight over multiple countries e.g in Europe EU has power to enforce law in countries, IFAC, UNO, World Bank are other examples
- National Governments: these have power to enforce new laws or change old laws within geographical boundaries of particular country
- Local Governments: these governments normally operate and have powers at districts level and can effect local businesses
Employment law
Every country has employment laws to protection employees from injustice by employer. Business should have knowledge of these laws so as to save from penalties and high costs. Following are main aspects of this law:
- Minimum wage: some countries have put bar on minimum to safe employees/laborers from low salaries/wages
- Working conditions: working conditions are also defined in some premises e.g working hours, timings, safety rules etc
- Redundancy: Redundancy is only permitted on sound grounds. Unfair dismissals can be challenged in courts
Health and Safety Law
Minimum safety requirements are also defined and it varies from place to place ,so understanding of these rules are also required for business. For example in UK safe environment must be provided to employee for work at which he/she is not exposed to unnecessary risk. It is responsibility of company to provide such environment to employees otherwise can result in huge damage of reputation and costs too.
Data Protection Law
Some countries have data protection laws which protect individuals from misuse or without permission use of data. Following are principles of data security:
- Personal data should be obtained with consent of individual by fair means
- Personal data should be taken for specified reasons
- Personal data taken should be accurate and not excessive
- Personal data should be held as long as needed so specified purpose.
- Personal data should be kept secure
- Personal data should not be transfer to other countries without data protection rules
Principles of Consumer Protection
European Union (EU) outline following principles of consume protection :
- Consumer is free to buy from where he/she want to buy
- Contract of sale must protect from customer from any possible loss if product does not serve purpose , return it if doesn’t work
- High safety standards must be set for food and consumer goods
- Before eating any food item look at ingredients
- Look at list to check any chemicals, preservatives or other harmful ingredients
- Contracts should be fair to customers, no hidden conditions be there in contract
- Right to return if customer change their mind
- Make it easy for customer to compare prices
- Customers should not be misled
- Provide protection to customers on holiday
- Effective solutions to solve cross border problems
Economic Factors
Macro-economic Factors
Study of aggregate economy at national or even global level. Its objective is to analyze inflation, unemployment, budget deficits etc
Business activity depends upon government policy especially related to interest rates, tax rates, fiscal and monetary policies, import duties etc. Also business activities strongly effect both individuals which means more benefits to individuals and households.
Impact of Inflation:
Inflation is increase in prices over time. It is measured by CPI, RI
High inflation is damaging for businesses as it causes labor, materials and other costs to rise which increase prices of goods. This is ‘spiral effect” as increases in good prices again result in demand of high wages and more increase in prices ,so it keeps going on.
Impact of Employment
Both high and low levels of employment are ‘Not suitable’ for business. High level of unemployment effects society as more people are looking for jobs and they couldn’t get their job in spite of skills. Similarly high level of employment is also not suitable as results in shortage of labor in market leading to high wages which later turns in inflation effect.
Impact of stagnation
Stagnation means no increase in national income. It shows underutilization of resources resulting in state of economic stagnation. Investors are not willing to invest in country. Economic growth ceases and living standard of people falls.
Impact of international payment Disequilibrium
Ideally imports of a country are equal to its exports creating sense of equilibrium. If imports of country exceed exports, it would create situation of disequilibrium. It would have harmful effects on economy. Government has to deficit financing to balance payments. Like any other problem disequilibrium has also got solution, it can be rectified by depreciating currency so that exports become cheaper and equilibrium is attained again.