1. PEST analysis is used by businesses around the world to devise a strategic approach to their activities.

Discuss this statement describing in detail the components of the said analysis. In the new economic environment that has emerged as an impact of the recent crisis, the complexity of each industry forms a demanding context that affects consistently both the internal and external environment of organizations. As a result, the majority of the firms need to maintain their competitive advantage. owever, a firm have to constantly increase the value of their products offered to clients in order to sustain their competitive advantage !"arney, #$$%&, as well as being profitable in order to exist. 'he industries can be described as a set of external and internal environment so( every firm is affected by external environment such as the mar)et, client, etc and the internal environment including the employees of the firm, contractors, sub* contractors, suppliers and so on. 'he +,-' analysis is the most common approach for considering the external business environment. +,-' analysis stands for +olitical, ,conomic, -ocial, and 'echnological analysis and describes a framewor) of macro*environmental factors used in the environmental scanning component of strategic management. 'he underlying thin)ing of the +,-' analysis is that the enterprise has to react to changes in its external environment. 'his reflects the idea that strategy re.uires a fit between capabilities and the external environment and so it is necessary for an enterprise to react to changes. In analyzing the macro*environment of an organization, it is important to identify the factors that might in turn affect a number of vital variables that are li)ely to influence the organizations supply and demand levels and its costs !/ohnson and -choles, 0112&. 'he analysis examines the impact of each of the factors on the business. 'he results can be used to ta)e advantage of opportunities and to ma)e contingency plans for threats when preparing business and strategic

plans !"yars, 0110&. 3otler !011%& claims that +,-' analysis is a useful strategic tool for understanding mar)et growth or decline, business position, potential and direction for operations. 'he use of +,-' analysis can be seen effective for business and strategic planning, mar)eting planning, business and product development and research reports. +,-' also ensures that companys performance is aligned positively with the powerful forces of change that are affecting business environment !+orter, 01%4&.

Political actors 'he political environment is a )ey component of the business environment that dictates greatly on the success of any businesses. 5sually, the term political environment is used to refer to the nature of the political situation in the country where a company is doing business or where it intends to do business. ow businesses are aware of the political aspects that affect their operations6 If businesses have not been paying any attention to those political aspects that have an effect on businesses, it is therefore important for them to understand the political environment in which they are operating because it can present political ris)s to your business. 7or instance, businesses are subject to political ris)s if a war erupts in any country where they do business. 8i)ewise, changes in government policies may either affect businesses positively or negatively. 'he prevailing political environment in any country directly affects the economic environment or performance. 9hat aspects of the political environment should businesses consider6
Stability of the government. It's important to know how stable the national government is and how stable it's likely to be in future depending on prevailing political circumstances. Political instability makes it very difficult to do business. An abrupt change in a political regime may make businessmen lose their property and hard earned money. The risk of losing business is high when operating in such environment. International relations How does a country s government relate with other governments! "oes the home government maintain good relations with other foreign governments! #or instance$ for people who run online businesses$ there are countries where it's pretty difficult for one to set up an online payment system %ust because services provided by$ say$ PayPal or &lickbank are not available in those countries. This makes it difficult to sell products or services online. A good political environment makes it possible to establish good relations with other foreign governments$ which in turn creates directly or indirectly an attractive environment for new investors. 'overnment bureaucracy The political environment in which a company wish to operate may be slow to facilitate opening or conducting businesses in the country. (ong processes may be re)uired for investors or entrepreneurs$ whereby they are sub%ected to fill in so many forms that actually discourage some of the potential entrepreneurs. *ther factors include+

,auritius can be said to have a relatively good political environment. The -orld .conomic #orum s global competitiveness inde/ for 012030124 ranked ,auritius 56th out of 266 countries and 0nd in Sub3 Saharan Africa$ after South Africa. 7The country benefits from relatively strong and transparent public institutions$ with clear property rights$ strong %udicial independence$ and an efficient government$8 states the report.

Economic Factors .very business has one goal$ to ma/imi9e its profit. This can be done by analysing the demand of consumers$ providing appropriate supply$ along with maintaining )uality of goods and services. However$ there are many factors that affect this simple operation. *wing to these economic elements$ the sales$ production and procurement of a business get adversely impacted. A list of economic factors that affect the working of business organisations has been generated below. All these factors are interconnected. "emand and supply "emand is the ability of consumers to purchase a particular commodity$ while supply is the ability of a business to provide for the demand of consumers. #or e/ample$ the newly IPhone :$ infused with the latest technology will have a higher price because of its demand in the market. ,oney and banking ;anking facilitates monetary and fiscal policies that affect business and also the customers of the business. ,oney in circulation dictates purchasing power or demand of consumers. An e/ample is the e/cess of li)uidity in ,auritius. *n the other side$ banking facility dictates the borrowing capacity of individuals and well as business while interest rates affect investment and savings. ,onetary policies influence economic activities and inflation. .conomic 'rowth and "evelopment .conomic growth dictates the amount of finances that the society at large is earning and development indicates the volumes of money that is being invested into channels of long3term upgradation. Among all the economic factors$ development are the most important$ as businesses has to cater to the demands of an economically dynamic society. ,auritius s economy suffered at the turn of the millennium as longstanding trade preferences in te/tiles and sugar$ the foundation of its growth strategy were phased out. In 0115$ the government embarked on a bold economic reform program aimed at opening the economy$ facilitating business$ improving the investment climate$ and mobili9ing foreign direct investment and e/pertise. These reforms had considerable success in accelerating the rate of growth$

reducing unemployment$ and speeding up the pace of diversification of the economy through the development of new sectors. The reforms also helped to absorb the shocks of the 011<30121 global economic recessions and the .uro39one crisis and set the stage for ,auritius to resume accelerated growth in 0121. .conomic growth was 6.0 percent in 0121$ up from 4 percent in 011=$ and was forecast at 6.5 percent in 0122. However$ the protracted global economic uncertainties and the deepening of the .uro39one crisis$ pose an increasing threat to the resilience of the ,auritian economy$ particularly in key sectors such as tourism$ te/tile$ and the offshore financial sector$ which depend heavily on the .uropean markets. Accordingly$ '"P growth in 0122 slowed down to 4.= percent in 0122 and is estimated to have dropped further to 4.0 percent in 0120. *ther factors include+

Social actors -ocial factors are based on the idea that the society and culture shape cognition. -ocial customs, values, beliefs and language are all part of what shapes a persons identity and reality. According to this approach, what a person thin)s is based on his or her social*cultural bac)ground. 'here are many factors which affect the organizations either internally or externally. 'hese factors include demography, cultural values, changing roles of women, level of education, changing lifestyle and so on. 'hey play a big part in shaping the organisation in terms of its roles, operation and functions that are practiced within the organisation. Also the trend is towards things li)e health, career and environmental issues. -ocial factors and cross* cultural communication play a critical role in international and global mar)ets and success will depend on the depth of research done in this area. :etting this wrong is costly and may not come to light until considerable investment has been made by organisations. ;ne example of social factor is the trend of <auritian of getting internet access at home and buying online. -ome years bac) most people were reluctant to purchase online due to security reasons or low information, but now the trend has changed. ;ther social factors that need to be considered are as depicted in the following diagram.

Technological actors 'echnological factors include aspects such as =esearch and >evelopment activity, automation, technology incentives and the rate of technological change. 'hey can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. 7urthermore, technological shifts can affect costs, .uality, and lead to innovation. 'his element has become a )ey factor for organisations in assessing and listing issues that could have a potential impact on its operations and that could be critical to its long term future. 'he pace of change in technology is becoming more rapid and often changes that impact a mar)et from unexpected sources. 7or instance, when a new film is release it is only a matter of time that people would stream the same rather than buy the >?> of the film. 'echnological advances have also allowed organisations much greater freedom of choice when deciding how best to manage their operation. 7or example, )nowledge based systems have enabled management to ma)e better and more informed decisions in real*time. ;rganisations that fail to )eep up with technological advances leave opportunities for a smaller producer or new entrant to enter their mar)et and erode their leadership status. 'his is what happened to mobile phone producers =esearch in <otion !=I<, the ma)ers of "lac)"erry& and @o)ia, who were slow to embrace smart phone technologies. 'he result was that they both lost significant mar)et share to Apple and -amsung. 'his example illustrates how consumers preferences from technological advances change and leads to mar)et share. 8icensing has becoming the )ey strategy for many organisations to protect their advantages. 'he impact of technology on individual levels has led to organisations to help protect privacy. ;rganisations need to be careful to the potential legislation that governments could introduce to curb what is often seen as the invasive side of the rapid growth of technology. ;ther technological factors includeA

7or organisations to maximise the benefits of the +,-' analysis, it should conduct it on a regular basis to identify new trends. 'he impact of certain factors may have more conse.uences for a specific department and +,-' analysis techni.ue can help to clarify why change is needed and identify potential options.

!. E"plain# using e"amples# how $ncome elasticity of demand as well as Price elasticity of demand are used by businesses and governments as a decision ma%ing tool. Income elasticity of demand measure the relationship between a change in .uantity demanded for a particular good and a change in real income. 'he formula for calculating income elasticity of demand is % change in demand divided by the % change in income. The diagram which follows depicts income elasticity of demand for different type of goods.

igure 1* $ncome elasticity of demand

It can be seen that as income increases from B to B0, the .uantity demanded increases from C to C0 for normal goods. @ormal goods or normal necessities have an income elasticity of demand of between & and '1 for example, if income increases by 0$D and the demand for fresh fruit increases by ED then the income elasticity is F$.E. >emand is rising less than proportionately to income. ;n the other hand, demand is rising more than proportionate for luxury goods. A change in income from B to B0 leads to an increase in luxury goods from C to C#. (u"ury goods and services have an income elasticity of demand ) '1 that is, demand rises more than proportionate to a change in income G for example a %D increase in income might lead to a 0$D rise in the demand for new car gadgets. 'he income elasticity of demand in is thus F0.#4. Inferior goods have a negative income elasticity of demand meaning that demand falls !from C to C2& as income rises !from B to B0&. 'ypically inferior goods or services exist where superior goods are available if the consumer has the money to be able to buy it. ,xamples include the demand for cigarettes, low*priced own label foods in supermar)ets and the demand for council* owned properties. 'he income elasticity of demand is usually strongly positive for superior goods li)eA
#ine wines and spirits$ high )uality chocolates and lu/ury holidays overseas. Sports cars

&onsumer durables 3 audio visual e)uipment$ smart3phones Sports and leisure facilities >including gym membership and e/clusive sports clubs?.

In contrast, income elasticity of demand is lower for

Staple food products such as bread$ vegetables and fro9en foods. ,ass transport >bus?. Income elasticity of demand is negative >inferior? for cigarettes.

+rice elasticity of demand is an important variation on the concept of demand. >emand can be classified as elastic and inelastic. ,lasticity of demand is illustrated in 7igure #. @ote that a change in price !decrease of price from A to "& results in a large change in .uantity demanded !C# to C0&. An example of products with an elastic demand is consumer durables. 'hese are items that are purchased infre.uently, li)e a washing machine or an automobile, and can be postponed if price rises. Hlose substitutes for a product affect the elasticity of demand. ,xample, if the price of fish rises, consumers will .uic)ly switch to meat.

igure +* Elasticity and $nelastic demand Inelastic demand is shown in 7igure #. @ote that a change in price results in only a small change in .uantity demanded. In other words, the .uantity demanded is not very responsive to changes in price. ,xample, if price increases from A to H, .uantity demanded will decrease by a small proportion from C0 to C#. +rice ,lasticity is the measure in responsiveness of consumers to changes in the price of a product or service. 'he evaluation and consideration of this measure is a useful tool in firms

ma)ing decisions about pricing and production, and in governments ma)ing decisions about revenue and regulation. +rice ,lasticity is impacted by measurable factors that allow managers to understand demand and pricing for their product or service( including the availability of substitutes, the consumer budgets for the product or service, and the time period for demand adjustments. 'he proper consideration of +rice ,lasticity allows managers to set pricing such that the effect on 'otal =evenue is predictable and adjustments to production are timely. 'he concept of +rice ,lasticity is employed in the management of commercial firms and government. Hommercial firms use +rice ,lasticity to manage pricing and production decisions, especially in industries where the growth in sales and revenues are the primary measure of a firms success. 3nowledge of the +rice ,lasticity for a product or service enables managers to determine the pricing strategy re.uired to get the sales results desired. 7or example, a firm with a product with a relatively high elasticity would )now that a large sales increase can be created with a small price decrease. Honversely, a firm with an inelastic product )nows that changes in pricing would have minimal effect on sales. Another example is oil refining firms use +rice ,lasticity to set pricing on the commodities they produce. 7uels and lubricants are )nown to be +rice*Inelastic products, defined as commodities with limited or no substitute and low elasticity in the short*run. 9hen production costs increase, the firms involved in refining can be confident that a price increase will have little effect on the demand for gasoline, and therefore they can pass all of the cost increase to the consumer and expect only a positive impact on sales and revenue levels. =efiners and fuel retailers are great examples of firms that use their )nowledge of the price inelasticity of their product to manage production and allow the control of revenues levels. 7ashion retailers use +rice ,lasticity to manage inventories and directly control sales and revenue levels. 'he stores are able to manipulate sales levels based on seasonal preferences for clothing and the sensitivity of consumers to pricing. 'his )nowledge of consumer preference can enable a retailer to control revenue. 9hen retailers are faced with pressure from investors, they can increase revenue by offering promotional sales( they can also maintain full pricing on items they )now to be in high demand. -imilarly, when new seasonal clothing arrives to the retailer, the store can reduce prices on existing stoc) to encourage demand and rapidly increase sales. =etailers also used principles of +rice ,lasticity in establishing outlet stores, )nowing the small reduction in pricing and retail environment would alter demand and increase sales for certain high*end brands. =etail fashion is an industry where the concept of price elasticity is a fundamental tool in managing sales and revenues. At all levels of :overnment, managers can use +rice ,lasticity to ma)e decisions in determining changes in regulations, taxes, and expenditures. 'he 7ederal >epartments of Hommerce, Agriculture, ,nergy, and 'reasury all spend resources collecting information specific to mar)et demand and price elasticity. 'he data obtained from these sources, as well as information generated by the academic and commercial sources are used by the :overnment at all levels to ma)e decision using the concepts of +rice ,lasticity. 'he setting of taxation levels re.uires an understanding of price elasticity to determine the correct level of taxation for the desired level of revenue. 'he alteration of the capital gains tax

re.uired )nowledge of the concept of price elasticity to balance the impact of lowering the tax on investment with the potential change in the level of revenue collected from the tax. -ome economists believed that lowering the rate of taxation on gains would encourage more investment, and therefore more gains, and conse.uently increased revenue. ;ther economists believed that a lower capital gains tax, although it would encourage more investment, would not necessarily increase gains. If gains from investment remained the same or reduced, the revenue from the tax would decrease. 9hen the capital gains tax was reduced in #$$2, the net effect was an increase in revenue from the lower tax rate. In all cases, tax changes are vetted against the revenue conse.uence of the change, which is in essence an analysis of the elasticity of that tax. :overnment uses +rice ,lasticity as a consideration for the regulation and taxation of certain industries or products. 'he electric utility industry is regulated to control rate increases because the nature of the demand for electricity is highly inelastic, and a monopolistic electrical supplier could manipulate pricing )nowing demand was unable to change in response. ,xample is the H,". :overnments have historically chosen inelastic products to impose taxes upon, such as fuel, cigarettes, and alcohol( principally to maintain a steady revenue flow from products with consistent demand, as well as selecting products whose demand is not easily influenced by price or other external economic factors. +rice ,lasticity can be also be used by :overnment in the use of taxes or tax incentives on elastic products to impact demand. 'his provides opportunity for policy to be enforced using mar)et mechanisms instead of strict regulation. In providing a tax credit for the conversion of personal vehicles to compressed natural gas, many states are using the tax credit to counter the price inelasticity of gasoline by providing a means to create a product substitute !in using natural gas& and as a conse.uence, forward the policy of reducing the use of higher*polluting motor fuels.

'he principles of +rice ,lasticity are used by commercial firms such as consumer products, refineries, airlines, and fashion retailers. 'he concept of +rice ,lasticity is also used in managing government as well for issues such as taxation, regulation, and the setting of fees. In general, the concept of +rice ,lasticity is a central tenant of understanding the pricing and demand for products and services, and is applicable to almost any industry. As far as Income elasticity of demand in concerned, its applications as a decision ma)ing tool are as followsA
2. Helps in determining the rate of growth of the firm If the growth rate of the economy and income growth of the people is forecasted reasonably$ then it can predict that there will be an e/pected increase in the sales of a firm and vice versa. The concept of income elasticity is important of decision making both by business firms and industries. #irst the producing products which have high income elasticity have great potential for growth in an e/panding economy. #or e/ample if a firm s product income elasticity of demand is greater than one$ it means that it will gain more than proportionately to the increase in national income. Thus firms which are producing products with high income elasticity are more interested in forecasting the level of aggregate economic activity level of nation income because the demand for their products will greatly depend on the level of overall economic activity.

0. Helps in the demand forecasting of a firm Income elasticity of demand can help in estimating future demand provided the rate of increase in income and elasticity income for the products are known. Thus$ it helps in demand forecasting activities of a firm. "emand forecasting is essential for a firm to enable it to produce the re)uired )uantities at the right time and arrange well in advance for the various factors of production. The producer can frame a suitable production policy. The firm can reduce cost of purchasing raw materials. It also enables the firm to adopt suitable price policy. It is on the basis of demand and sales forecasts that arrangements are made for raw materials$ e)uipments$ machine accessories$ labour and buildings well in advance and at the right time. 4. Helps in production planning and marketing The knowledge of elasticity income is essential for production planning$ formulating marketing strategy$ deciding advertising e/penditure and nature of distribution channel in the long run. 6. Helps in ensuring stability in production Proper estimation of different degrees of income elasticity of demand for different types of product helps in avoiding over3production or under3production of a firm. *ne should know whether rise or fall in income is permanent or temporary.

"oth income and price elasticity play a very crucial role in decision ma)ing whether for businesses or government. owever, it should be noted that these elasticity serves as a guide for the interested parties and not as a precision in decision ma)ing situations.

,eferences*

;A@A.B$ C.$ 2==2. #irm resources and sustained competitive advantage. Journal of Management, 2D>2?$ pp. ==3202.

-oo%s*
;BA@S$ (.$ 2==2. Strategic Management, Formulation and Implementation E &oncepts and &ases$ Aew Bork+ Harper&ollins. C*HAS*A$ '. and S&H*(.S$ F.$ 2==4. Exploring Corporate Strategy Text and Cases $ Hemel Hempstead+ Prentice3Hall. F*T(.@$ P.$ 2==<. Marketing Management Analysis, .dition$ .nglewood &liffs+ Prentice3Hall. P*@T.@$ ,.$ 2=<5. Competiti!e Ad!antage$ Aew Bork+ #ree Press. lanning, Implementation, and Control$ =th

.ther Sources*
The -orld .conomic #orum