Chapter 2 Short Notes

PESTEL Analysis

Political and legal factors can impact a business in several ways :-

1.Privatization vs nationalization :Business would prefer a policy of privatization .

2.Transport & Infrastructure: Providing a sound infrastructure is governments responsibility so that economic
activities can be done easily.
3.Education: Governments education policy directly effects the skilled labor pool available to the business.
4. Environmental Policy: A strong environmental policy means increased compliance cost for the business
raising the cost of production
5. Taxation and subsidies: Higher taxation means higher costs for business and in some sectors business
requires subsidies to carry on according to governments objectives.

Sources of Legal Authority

1.Supranational bodies : A supranational body has responsibility or oversight of more than one
country.To have the ability to impose its rules, a supranational body needs the formal support of
national governments
2.National governments
3. Regional or local governments

Employment Law

1.Minimum Wage: Higher minimum wages mean higher costs for business and it impacts investment
decisions.
2.Working conditions: Business needs to understand the local laws regarding minimum acceptable
working conditions. The stricter the laws the higher the compliance cost.
3. Unfair Dismissal: This is dismissal without good reason and if an employee is found to be unfairly
dismissed it brings financial and reputational loss for business .
4.Redundancy:If an employee is made redundant on discriminatory grounds business would have to
face financial penalties along with reputational loss.
5. Discrimination: Business should understand the discrimination laws and try to abide by them .

Health & Safety Law

1.Employers Responsibility : a)to provide a comprehensive h&s policy and sound equipment b)to
provide training to employees c)to carry regular risk assesments d)monitoring and updating
2.Employee Responsibility : a)Follow guidelines provided by employer b)Inform about any risk c)don’t
expose him/herself unnecessarily to risk
3.Businesses not only comply with the health & safety laws but at times voluntarily adopt best

Arslan Arif(ACCA) SKANS School of Accountancy,Multan

practices of health & safety beyond the legal requirements.
4.Cost of non-compliance: 1)Government fines ,penalties 2.Low morale of employees 3.High labor turnover.
Data Protection Laws

Personal data means any data about a living individual. Sensitive personal data means details of a
person’s ethnic origin, political opinions, religion, trade union membership, physical and mental
health.
Principles of data protection :-
1. Personal data must be obtained and processed fairly and lawfully
2. Personal data should be obtained only for one or more specified reasons
3. Personal data gathered and stored about individuals should be accurate, relevant and not excessive
4. Data should not be held for longer than is necessary for its purpose
5. Personal data should be processed in accordance with certain specific rights of individuals
6. Personal data that is held about individuals should be kept secure.
7. Personal data cross border transfer guidelines

Competition law

1.Monopolies: Business would prefer entering a market where government policy discourages
monopolies .A business might also come under the scanner if it is about to become a monopoly and
government discourages monopolies. Mergers resulting in possible monopolies might also be
discourged in certain countries.
2. Collusion is where 2 or more players in a market collude to discourage competition and gain
unfavorable advantage.A business must be aware of the anti collusion laws and follow them to avoid
unfavorable situations.
3.Price controls are another areas effecting competition. For example bodies like PTA and OGRA in
Pakistan monitor the telecommunication & gas prices and businesses cannot increase price without
their approval. Similarly price controls may also mean that business losses its profitability and may
require subsidy to compensate for that .

Consumer protection

1. Contract law :Business must enter into fair consumer contracts fulfilling the elements of contract
like agreement,consideration,capacity,intention &legality.Similarly business must follow the statutory
requirements imposed by government on certain contracts like minimum wage in an employment
contract.Care must be taken while formulating ‘standard form contracts.

2. Sale of goods legislation: a)Title b)Description of goods c)Quality of goods

Business Response to Political & Legal changes

Business organisations need to recognise the significant political and legal factors that affect their
busines They should be alert to: changes or potential changes in each of these factors, and
changes in the significance of each factor, including the growing importance of factors that were
previously relatively unimportant. Businesses can hire specialist organisations called ‘lobby groups’ to

Arslan Arif(ACCA) SKANS School of Accountancy,Multan

safeguard the interest of business and lobby against any change that might affect business interests
and lobby for any change protecting business interest.
Economic Factors

Macroeconomic factors :The 4 macroeconomic objectives are 1)Growth 2)Inflation 3)Unemployment

4)Balance of payment

Growth:
1. Government wants to achieve a good & steady growth rate .
2. Growth can be achieved by increasing any item in the equation Economic activity = C + I + G + (X –
M) although the type of injection can have negative impact on other items of the equation e.g an
increase in I (investment) may result in an reduction in C(consumption).
3.Growth may result in an increase in inflation .
4. These are the stages of economic cycle a)Growth b)Boom c)Recession d)Depression e)Recovery.
A business should ideally make investments while recovery /growth to maximize returns and be
aware of a possible recession or depression to make necessary adjustments.

Inflation: A general increase in price levels

Implications of Inflation :
1. Cost of production increases which may result in reduced profitability or competitiveness
2. Inflationary spiral can occur where prices rise due to being connected.
3.Real economy can go into stagnation if rate of inflation is more than rate of growth
4.Real income decreases if rate of inflation is higher than increase in income
5.Redistribution of wealth occurs where lender loses and borrower gains resulting in lenders
demanding higher interests
6.Uncertainity prevails making it difficult for business to plan for the future.
A government might take the view that some inflation is unavoidable (although in some countries
there has been deflation – a fall in retail prices). However, the rate of inflation and inflationary
expectations should be kept under control, to give the ‘real economy’ an opportunity to grow.

Unemployment: Any person looking for work and not finding it is considered unemployed
Implications of high Unemployment Implication of very low unemployment
1. High social cost 1. High cost of labor
2. Country not achieving its potential due to 2. Business may lose competitiveness due to
underutilized resources higher costs.
3.Brain drain .People traveling abroad for jobs 3.Shortage of skilled labor
4. Long run erosion of skilled pool of labor
Governments can reduce unemployment by investing in education ,training and development of
human resource.
Types of Unemployment :
1.Transitional : The time when an worker has left a job to start a new one is called transitional UE.
2. Frictional: The short period of time when a worker has left a job to find a new one. Must not be
too long.

Arslan Arif(ACCA) SKANS School of Accountancy,Multan

 3. Structural : This is unemployment that arises because of a significant change in the structure of
the economy, and in particular decline and collapse of industries that used to be major employers
4.Technological: This occurs when technological changes mean that some types of workers are no
longer needed, so that large numbers are made redundant.
5.Regional: This is unemployment in a particular region of the country.
6.Seasonal : This is unemployment, often within a particular industry, because the demand by
firms for labour is higher at some times of the year than at the other.
7.Cyclical: Unemployment during recession or depression stage of economic cycle.
Possible Protectionist measures by a government :
1. Tariffs: Higher taxes on imports to make them expensive than the local products
2. Quotas: Limiting the amount of imports possible to create demand for local products
3. Import bans: Banning a product altogether.

Balance of payment & International payment disequilibrium :

1. If exports of a company a less than its imports it has a deficit on its BOP which means that
supply of its currency would increase against other currencies resulting in depreciation of its
currency. If exports are more than imports ,there is a surplus meaning an increase in demnd
for local currency resulting in an appreciation of currency. That’s why neither a long run deficit
nor a long run surplus is desirable.
2. International payments disequilibrium means that certain countries have surpluses at the
expense of others and they invariably invest in countries with deficit so that they continue to
buy from them. This cycle ,if ended, can bring a lot of problems for the world.
3. In theory a deficit should mean a reduction in a country’s currency making its exports cheaper
and resulting in elimination/reduction of deficit but practically this may not happen.

Government tools to achieve macroeconomic objectives

Monetary Policy. Fiscal Policy.
Government regulates economy through Government regulates economy by managing
managing money supply through interest its expenditure and revenue .
rates. 1. To increase growth and lower UE govt
1. If government wants to increase may increase expenditure and/or
growth and reduce UE it may reduce reduce taxation resulting in stimulated
interst rate resulting in stimulating economy but it may result in increased
economy and increase in aggregate inflation.
demand but may result in higher 2. To restrict inflation a government may
inflation leading to negative BOP. increase taxation and/or reduce
2. To control inflation interest rate can expenditure but this may result in
be increased resulting in reduction in lower growth and higer UE.
aggregate demand to decrease in Changing fiscal policy is not that simple as
economic activity but may result in cutting expenditure may not be possible
low growth & high UE. .Similarly increasing taxation is alos a tough
The changes are not immediate and take time task.
as there is a transmission mechanism.

Arslan Arif(ACCA) SKANS School of Accountancy,Multan

Governments sometimes use economic policies to achieve political, social or economic objectives.

Micro economic Factors . Concerned with the behavior of individuals within an economy.

1. Market operates at a point where demand equals supply(equilibrium) .

2. Monopoly Pricing:-Monopolies are in a unique position to charge different prices to different
segments of markets and can also charge higher prices than a perfectly competitive market. A
business entering a market where a monopoly dominates would need government support to
compete.
3. Factors affecting price in competitive market :-
(a) Cost of production .(Affected by cost of raw materials, inflation, exchange rate
movements, quality wages)
(b) Income of customers: Normal and luxury goods producers benefit for rising income of their
customer base
(c) Price of substitutes : An increase in price of substitute would result in an increase in
demand for the product.
(d) Price of complementary goods: An increase in price of complimentary goods would mean a
decrease in demand for the product.
(e) Fashion : . High prices might be obtained for ‘fashion goods’.
(f) Advertising and marketing. Sales demand can be affected by sales and marketing activities
4. Price Elasticity of demand :- a measurement of the change in sales demand that
would occur for a given change in the selling price.
Formula = %age change in demand/%age change in price
If PED is greater than 1 it means the demand is relatively elastic.
If PED if less than 1 it means demand is relatively inelastic.

For relatively elastic products: For relatively inelastic products:

1. Business may reduce price to 1. Business may increase price to
increase market share. Increasing the improve profitability .
price may be dangerous . 2. Government may increase taxes on
2. Companies try to reduce elasticity inelastic items like cigarettes.
through marketing, branding, service 3.In the long run inelastic demand can
& quality. be turned into elastic so care must be
taken while pricing .
Elasticity at different price levels might be different

Social & Demographic factors :-Social and demographic factors effecting a business are :-
1. Tastes and habits 2. Values 3. Density and spread of population 4. Age groups within a population
5.Average age & mortality rate 6.Family structure 7. Culture 8. Immigration patterns 9. Population
growth rate10. Retirement age
Government can influence these factors through policy making . For example it can control labor
mobility by incentivizing business in lesser developed areas .

Technological factors : Technology has affected business in three distinct areas :-

Arslan Arif(ACCA) SKANS School of Accountancy,Multan

 1. Work methods have changed drastically with more and more reliance on IT & other technology
based work methods.
2. Newer and unique products and services being offered .
3. Changes in organisational structures resulting in flatter organisations with wider span of controls.
The organization structural changes have occurred due to :
a) Downsizing :- Downsizing means the reduction in size of a business organisation. It does not
(necessarily) mean that the business organisation is selling fewer good.
b)Delayering :- ‘De-layering’ means removing one or more levels of management in the organisation
structure
c) Outsourcing :Where business outsources its activities to outside suppliers instead of
employing people. Business should not outsource core activities.

Advantages of outsourcing : Disadvantages of outsourcing

1. Management can focus on core activities 1. Confidentiality issues.
2. Better quality can be provided by supplier 2. Loss of competitive advantage as
as the activity being outsourced woulkd be its competitors can also outsource .
core activity 3.Poor outsourcing arrangement can result in
3. It may be less costly due to the supplier poor service and higher cost.
enjoying economies of scale . 4. Possible disagreements with supplier
4.May bring a fresh and outside perspective leading to legal disputes.
to things
d)Virtual company : A virtual organisation is an organisation that has no physical hub or center
of operations. Instead, it is a network of individuals linked by computer and
telecommunications network (such as the internet).

Ecological Factors :-

3 areas of possible environmental/ecological araes affecting business are :-

1. Renewable & Non renewable source of energies :- Business using noin renewable sources of energy
might come under scrutiny as they may not be doing sustainable growth .Similarly business using
renewable resources at a rate that replenishing them becomes difficult also need to improve .
2..Carbon foot print:- A carbon footprint is the amount of CO2 generated by an activity or a business
and it causes harm to our environment.
3. Pollution :- Noise, heat and packaging pollution are affecting our environment.
Business can limit impact to the outside environment through:-a)Improved energy efficieny
b)investment in renewable technologies c) local sourcing d)Improved inventory control through IT
initiatives e)reduce packaging or recyclable packaging

A sustainable business is any organization that participates in environmentally friendly or green

activities

Benefits to stakeholders :-
Shareholders and employees will benefit from the continued success of the business.
Suppliers benefit through the establishment of long term, ethical trading agreements
Governments benefit as the action of the company will help the government meet its
environmental obligations under treaties and provide tax revenue.

Arslan Arif(ACCA) SKANS School of Accountancy,Multan

 Society benefits through the provision of continued employment and environmental improvements

Porters Generic strategies :

1. Cost Leadership :- A company that is a cost leader in an industry is able to make and sell its
goods at a lower cost than its competitors.Examples include Suzuki Mehran,Air Safari etc . To
become a cost leader firms should :-
(a) Enable ‘economies of scale’ (b) Mass production (c) Investment if efficient technology (d)
Reduce costs
2. Differentiation :- A firm might compete by trying to give its products features that its
competitors’ products do not have.Examples are Mercedes ,Emirates Airline etc .Here the
focus is on ‘perceived quality’ and premium pricing. To differentiate a firm can:-
(a) Unique design (b) Brand Image (c) Unique packaging (d) Enhanced marketing techniques
(e) Better product features
3. Focus :- It is a strategy where the firm targets a market niche (a small segment ).For a ‘focus
differentiation’ strategy a firm tries to sell a unique product to a very small market at an
‘extra-ordinary’ price. The corner stone of such a strategy is uniqueness .’Focus cost
leadership’ is a less common strategy where a business tries to sell to a niche at a low cost.

Porter’s Generic Strategies along with other possible(Alternate method)

The different strategic approaches which enable some companies to earn superior returns on their
investments vis-à-vis their competitors are as follows:
(i) Cost leadership The company may pursue a cost leadership strategy to manufacture and sell its
products at a cost which is significantly below the costs incurred by the competitors. This strategy
enables the company to earn higher profit margins by selling its products at prices which are in line
with the prices charged by the competitors. The company may sell its products at lower prices to
capture a big share of the market and earn higher profits through larger sales volume and derive
efficiencies through expansion of the scale of its operations.

(ii) Product differentiation The company may create and attach distinctive features and
attributes to its products which are beyond the capabilities of its competitors. These features and
attributes are discernible, preferred and valued by the customers who are willing to pay higher prices
for the products. Value of the distinctive qualities can be enhanced by promotional marketing and
advertising campaigns. To retain sustainable product differentiation advantages, the distinctive
differentiation attributes should be beyond the capabilities and resourcefulness of the competitors.

(iii) Market penetration strategy The company may adopt a marketing penetration strategy to
reach out to a large number of customers and capture a substantial portion of the aggregate market
through aggressive promotional campaigns. This strategy acts as a deterrent to any threat by
potential competitors who are not able to pursue such an aggressive strategy.

(iv) Niche/Focus Marketing strategy The company may pursue a strategic approach which seeks
to cater to a distinctly identifiable segment of the market comprising of customers who are willing to
pay a high price for the company’s products. The customers in this niche market should be of
sufficient size with distinct needs and values for which they are willing to pay higher prices for these benefits.

Arslan Arif(ACCA) SKANS School of Accountancy,Multan

Arslan Arif(ACCA) SKANS School of Accountancy,Multan