Pest & R Analysis
An Important Strategic Tool For Every Business/Corporate


By

Dr. Sunil G Deshpande
B.E. D.B.M., M.B.A. M.Tech.[C.D] Ph.D.[B.A.M.], MIE, MISTE
Management Expert
(Author is expert visiting faculty at many MBA Colleges)
 


[Ignorance of PEST Analysis caused Reliance to close their Petrol outlets. The importance and magnitude of Regulatory factor in PEST Analysis is very high, if it is ignored, will cause business to go into trouble. While competing with Government owned companies one thing is certain that any threat can be arises before your firm even by slightest change in Government policy. Hence in such businesses need of close vigil and watch is necessary as any policy of Government will make immediate as well as long term effect on the company]

Every Business SBU: - Every business today is referred as SBU (Strategic Business Units) as they are operating in competitive environment. The internal and external environments putting pressures on the business, thus compelling it to go for different strategies in order to survive in cut-throat competition. The exact analysis on environments is the crux in selecting proper strategy. Another ironic but vital thing is that the strategy should be necessarily based on the strengths of company. Hence the SWOT analysis of business plays important role in this entire episode. The SWOT analysis meticulously spells out the Strengths and Weaknesses factors (Internal environments) and Opportunities and Threats factors (External environments). The internal environments are under the control of business however external environments which pose opportunities as well as threats are the major cause of concern as they are beyond our control.

The external environments spelled out by SWOT analysis contains numbers of stakeholders like Vendors, Customers, Competitor, new entrants and last but not the least a Government (Regulatory Agency) is equally important. In fact most influential factor in external environment is the Government or regulatory agency. Peter Drucker" rightly said that "Government is Environment."  i.e. while analyzing the external environmental factors special attention must be given to this vital factor. How Government policies will be emerged in next few years/ months, is very important forecast for every SBU.  These all external factors can be categorically summarized or packed into what is called PEST Analysis

PEST Analysis: - The Pest Analysis stands for analysis of the Political, Economic, Social and Technological factors which are dynamic in nature and hence constantly influencing the business environment. However there is one more predominant factor " Regulatory Factor" which greatly influences the business operations and if it not favorable may creates problems before the business. Hence along with PEST analysis R-factor is also vital. Now a day PEST analysis is couples with "R" factor (PEST & R) which is more influential. (See figure)

Unlike other strategic tools the PEST & R Analysis is prime and first tool to be used for corporate to enter into business. Some other strategic tools are also available like BCG Analysis, Five Force Model, which helps in portray the situations in advance but PEST analysis is the ultimate and first tool to work upon.  As per Michel Porter there are certain generic rules while entering in to competitive market like ,"Do not enter in to the  segment where already cut-throat competition is prevailing" Another important rule is, "S elect entry-deterrent area so that no competitor will shake-hand you immediately..

The last decade we have witnessed the Govt. policy of opening of Power sector. Petroleum sector and Insurance sector by the government. This has floated lot of opportunities before big companies for venturing in to these areas. The big houses like Reliance, Tata and Bajaj etc. have entered in to theses sectors also. But some companies failed to realize the importance of PEST Analysis


                                   
Typical PEST element along with Regulatory Factor

Corporate Planner has to give serious thought about all these factors and at the same time he should have strategic vision about how these factors will take turn in next few years and then in such situation what should be the strategies of firm to combat this unexpected threat.

Why Reliance petrol outlet ceased to operate?

The Reliance people, highly professional, no doubt they have rightly selected the Entry Deterrent area of Petroleum sector but forgotten that they are competing with Government owned companies. They might have analyzed their own PEST analysis but how they ignored the most important and influential external factor (Regulatory Factor) which has compelled them to close their petroleum out lets.

The petrol pricing in the country has a blend of subsidies and it is solely in the hands of regulatory agencies (Govt). It is one of the key factors in deciding and maintaining the economy. The Government has power to decide the rates and subsidies on such items to maintain balance of price rise and thus inflation.  The price rise of petroleum products in international market has compelled Government to increase the domestic prices of petrol in the country and that has put Reliance into deep waters (their cost control strategy also seems to have not worked also) as a result we found that most of the petrol outlets of this company have ceased to operate. The importance of PEST analysis is once again underlined here the major role of Regulatory factor along with Political Economic Social and Technological factors. (However when the international prices of oils drops down in future, the reliance once again hope to re-open their outlet provided regulatory agencies reduce the domestic prices. So again the ball is in the court of regulatory authority. This again shows the power of Regulatory factor)

From this entire episode one may conclude that any business or SBU while competing with Government owned companies can not afford to ignore the importance of Regulatory factor, its influence and magnitude as a most influential factor in the external environment of a corporate.

Ongoing Note: - The private players entered in to Insurance / life insurance sector and competing with big giant like LIC should learn lesson from Reliance Case Study. If LIC or Government in future floats the concept of "Subsidized Premium", then all private competitors will be in deep trouble. So players in insurance sectors should immediately work out suitable strategy for this unforeseen threat, its high time now.
 


Dr. Sunil G Deshpande
B.E. D.B.M., M.B.A. M.Tech.[C.D] Ph.D.[B.A.M.], MIE, MISTE
Management Expert
(Author is expert visiting faculty at many MBA Colleges)
 

Source: E-mail December 23, 2011

          

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