PEST Factors and their impact on International Business

Session II Date: 22.7.2011 Prof. Rakhi R. Shrivastava

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Session Objectives
1. Introduction: What is PESTLE analysis?
2. What does PESTLE analysis include?

3. Importance of Environmental Factors

4. Analysis of risk associated with each factors 5. Case study on post harvest losses and Starbucks.
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What is PESTLE Analysis?

An international business man is required to understand, evaluate and work out various parameters before venturing into any country. These parameters are called environmental factors. They determine the direction and purpose of the international business operations. PESTLE is an analytical tool which considers external factors and helps you to think about their impacts
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What is PESTLE Analysis?

An international business man is required to understand, evaluate and work out various parameters as useful tool for understanding the big picture of the environment in which you are operating By understanding your environment, you can take advantage of the opportunities and minimize the threats. This provides the context within which more detailed planning can take place to take full advantage of the opportunities that present themselves. meters before venturing into any country. These parameters are called environmental factors. They determine the direction and purpose of the international business operations. PESTLE is an analytical tool which considers external factors and helps you to think about their impacts

Break up of Key Factors influencing International Business

1. 2. 3. 4. 5. 6. 7. 8. Political Environment Economic Environment Social Environment Technological Environment Legal Environment Environmental analysis Cultural Environment Competitive Environment

Break up of Key Factors influencing International Business

Political
The current and potential influences from political pressures

E - Economic
The local, national and world economic impact

S - Sociological
The ways in which changes in society affect the project

T - Technological
How new and emerging technology affects our project / organization

L - Legal
How local, national and global legislation affects the project

E - Environmental
Local, national and global environmental issues 6

Significance of Studying key factors influencing International Business

The environmental analysis is very important to study because many decisions depend on environmental factors like:
Selection of a country Location of the plant Liaisons with the government The entry of investment from local bodies Product launches. Channel management The promotion and opening of the outlets

Role of PEST
Therefor
PESTLE+CC Helps assess the market including Competitors from the stand point of a Particular Business. PESTLE +CC is relevant for any type of Business large, small & medium.

Challenges for an organization

Navigation from home country to the host country
Development of proper business system

Interaction with right people to make business deal effective

Revenue earning

Knowledge of all regulatory bodies both in home and host countries

Customers attitude towards foreign goods

Knowledge of customer's changing taste

Why Key factors analysis?

Political risk Expropriation Nationalization Domestification Economic risk Exchange control Import Restrictions Local Control Requirement Commercial Risk Socio-Cultural Risk Financial Risk Legal Risk Technological Risk Competitive risk Infrastructural risk Labour related risk

To safe guard from future dangers (risks) related to

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Why Key factors analysis?

Political risk

Managing Risk in International Business

Strategic Management of Political Risks Sharing Ownership Increasing Perceived economic benefit to the host countries Follow political Neutrality Assuming Social Responsibility Adapting to local environment
Insurance and Guarantees Exchange control

Import Restrictions
Local Control Requirement

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PESTLE+CED
Political
Government type and stability Freedom of the press, rule of law and levels of bureaucracy and corruption Regulation and de-regulation trends Social and employment legislation Tax policy, and trade and tariff controls Environmental and consumer-protection legislation Likely changes in the political environment

Economic

Stage of a business cycle Current and projected economic growth, inflation and interest rates Unemployment and supply of labor Labor costs Levels of disposable income and income distribution Impact of globalization Likely impact of technological or other changes on the economy Likely changes in the economic environment

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PESTLE+CED
Cultural aspects, health consciousness, population growth rate, age distribution, Organizational culture, attitudes to work, management style, staff attitudes Education, occupations, earning capacity, living standards Ethical issues, diversity, immigration/emigration, ethnic/religious factors Media views, law changes affecting social factors, trends, advertisements, publicity Demographics: age, gender, race, family size

Sociological:

Technological:

Maturity of technology, competing technological developments, research funding, technology legislation, new discoveries Information technology, internet, global and local communications Technology access, licensing, patents, potential innovation, replacement technology/solutions, inventions, research, intellectual property issues, advances in manufacturing Transportation, energy uses/sources/fuels, associated/dependent technologies, rates of obsolescence, waste removal/recycling
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PESTLE+CED
Legal:
current home market legislation, future legislation
European/internatio nal legislation regulatory bodies and processes

Environmental:
environmental issues, environmental regulations
customer values, market values, stakeholder/ investor values management style, staff attitudes, organizational culture, staff engagement

environmental regulations, employment law, consumer protection

industry-specific regulations, competitive regulations

Ecological

removal/ recycling

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PESTLE+CD
Cultural: Demographic:

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PESTLE+CD Analysis on Projects

It is possible to use the PESTLE analysis on projects as well for organizations It is not always needed, especially if the projects are small If PESTLE analysis is used for a project, then the focus should be on solving the focal problem and analyze how the external environment is affecting the process of solving the focal problem
e.g. the guidelines from the European Commission do not include PESTLE in their logical framework approach

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Issues and Concerns

The main problem with these external PESTLE factors is that they are continuously changing Therefore PESTLE analysis should include a thorough analysis of what is affecting the organization or a project Now, and what is likely to affect it in the Future The result of a PESTLE analysis is usually a list of positive and negative factors that are likely to affect a project
However, by themselves, theses factors they mean very little It is important to bear in mind, that PESTLE analysis requires careful Application of results

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1. Political & Legal Factors

This is the most important influence on the regulation of any international business.
How stable is the political environment? Influence of the Government Policy / Law on your business Governments position on Marketing Ethics Governments policy on the economy Governments view on culture under religion

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Political & Legal Factors - Contd.

Political System is responsible for Law Making. Immediate laws which affect any business in general are Central Excise, Sales Tax/ VAT, Corporate Income Tax, Personal Income Tax & Service Tax Environmental Protection Law Controls if any on Marketing Strategies Like Marketing / Advertising of Cigarettes, Tobacco, Alcohol etc.
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Political & Legal Factors - Contd..

Control on Pricing
like sugar, drugs etc.

Control on crime, terrorism and violence Government Policies on the Economy

Role of Public Sector Role of Private Sector Role of Joint Sector
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International Political Environment includes 1.International Political Systems and Ideologies- As

an international trader, your business is affected by these:
Type of Government according to economic system Communism Socialism Capitalism Type of Government according to political system Democracy Totalitarianism Secular Totalitarianism Fascist Totalitarianism Authoritarian Communist Theocratic
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International Political Environment includes International Political Systems and Ideologies.

Type of Government according to Structure: Parliamentary
Parliamentary Republic Semi Presidential System Fully Presidential System

(As an international
trader, your business is affected by these):

Monarchies
Constitutional Monarchies Absolute Monarchies

Theocracy
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International Political Environment includes 2. Trade Embargos and Sanctions 3. Bureaucracy 4. Terrorism, Crime and Violence:
2. TE&S are hostile political measures. These prohibit trade completely with a country so as to economically isolate it and exert political pressures on its govt. Case of UN imposed trade embargo on Iraq following its invasion on Kuwait

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International Political Environment includes 2. Trade Sanctions 3. Bureaucracy 4. Terrorism, Crime and Violence:
2. TS are used to impose selective coercive measures to restrict trade with a country. Under Sec. 301 of the Trade Act 1974, the US government exercises its authority to impose trade sanctions on foreign countries on the ground of violation of trade or maintaining laws and practices that are considered unjustifiable or restrict US trade

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International Political Environment includes 3. Bureaucracy 4. Terrorism, Crime and Violence:

3. It refers to the form of administration based on hierarchical structure, governed by a set of written rules and established procedures. Authority is derived by the officials based on their position not on their competence. An international firm finds it difficult to deal with a foreign bureaucratic system.

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Business Costs of Terrorism

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International Legal Environment includes -

The major types of legal systems are:

Common Law Civil Law Socialistic Law Theocratic Law International Law Principles of International Law Principles of Sovereignty International Jurisdiction Doctrine of Comity Act of State Doctrine Treatment and rights of Aliens Forum for settlement of disputes

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2. Economic Environment of IB
Forms of economic System
Centrally planned economy Market Based Economy Mixed economic system

Levels of Income and its distribution

Low income country Middle income Country High Income Country
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2. Economic Factors
Preliminary economic indicators
Government outlook Towards
The size of demand for its product The expected cost of production and net earnings Whether it will smoothly repatriate its earnings back to its country
Bank Financing Interest Rates Exchange Rate Mechanism Incentives for Exports Restrictions for Imports Inflation Labour Policies Fiscal, Monetary and Industrial Policies Consumption Behaviour Network of Infrastructure Strength of external sector

Economic Factors - Contd.

Level of Government Spending Avenues for Capital Creation
Size of the Capital Market Role of the Regulator Type of the Instruments Nature of the Investors

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Economic Factors - Contd.

Business Cycles Monsoon Energy Availability Cost of Energy

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3. Socio-Cultural Factors
Why to study socio cultural Environment?
To understand the significance of culture in international business decisions. To understand cross cultural behaviour and its implication in International business. To understand the sensitivity of cultural knowledge of host country in order to get success in business.
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The concept of culture

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Levels of human mental programming

Specific to Individual Specific to Group
Universal

Personality

Inherited and learned Learned

Culture
Human Nature

Biological

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Constituents of culture
Value system Norms Aesthetics Tradition and Customs Language Religion

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Comparison of Cross Cultural Behaviour

The most widely used tool to study cross cultural behaviour is the hofstedes classification. On the basis of massive survey of 1,16000 respondents from 70 countries working in IBM subsidiaries, Hofstede has classified culture into:
Power distance Individualism vs. collectivisms Masculinity vs. femininity Uncertainty avoidance

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Other Classification of Cross Cultural Behaviour

High context vs. low context classifications Expressive vs. reserved culture Homophilous vs heterophilus cultures

Polychronic (fluid time) vs monochronic (rigid time) culture Formal vs Informal Cultures

Relationship focused vs deal focused cultures

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Cultural orientation in International Business

Ethnocentric orientation

The behavioural attributes of international managers may be portrayed through EPRG approach:

Polycentric orientation

Regiocentric orientation

Geocentric Orientation

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3. Factors affecting Socio-Cultural aspects:

Demographic s

Education al Levels

Distribution of Income

Difference in perception and behaviour of people

Social Mobility

Consumer ism

Life Style Changes

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Socio-Cultural Factors - Contd.

Demographics & Distribution of Income
Division of population - Male / Female Age Group of the Population Disposable Family Income
Disposable Income in the hands of the different Age Groups Education Level of the Age Groups

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Social Cultural Factors - Contd.

Life Style Changes & Consumerism
Attitude to living
Different Age Groups In tune with available disposable income Thrust on taking care of present needs by spending than saving for the future. Joint living and nuclear families Availability of various media tools Reach of the media to the population
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4. Technological Factors
Advantage of Technology
In terms of Economies of Scale

New Discoveries & Innovations Speed & Cost of Technology Transfer Rate of Obsolescence

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Other Factors
Judicial System Insurance System Banking System Regulatory System Infra Structure
Communication Transportation
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