PEST or STEP Analysis External Environmental Analysis Notes

PEST or STEP Analysis External Environmental Analysis Notes

PEST or STEP Analysis External Environmental Analysis Notes :- Hello friends in this post we are provided the materials of the second part its name is fundamental of Business Entrepreneurship notes and its the first chapter of this subject and in this article you learn many more knowledge of Entrepreneurship like as Meaning of business Environment, Types of business Environment, PEST or STEP analysis, Economic environment, socio- cultural environment, demographic profile, work attitudes, diversity of work place, technological environment,

External Environmental Analysis

 What is meant by PEST analysis ? Discuss the factors  affecting it.


What is meant by STEP analysis ? Discuss the factors affecting it.


What is meant by internal and external environment?


Entrepreneurs are part of a society and exist in association with their environment. Environment is the set of factors and forces working within and outside the enterprise and influencing it.  It is in the environment that an  entrepreneur searches for and finds his opportunities. It is by tapping the opportunities present in the environment that an enterprise achieves its objectives. Again, it is in the environment that an enterprise finds it threats and challenges which it has to successfully encounter if it has to run effectively. Venture’s profitability is not determined by what products look like, nor whether it am bodies high or low technology; it is rather determined by the environment within which it operates. Thus, ventures are affected by the environment. If a venture is to remain successful and prosperous, it must regularly adapt to its environment which is uncertain and changing. Failure to adequately adapt to the environment may be a major cause of organization’s failure. Since an enterprise  functions as a part of the environment and has no existence separated from the environment, study of environment becomes central to the entrepreneur. 


The environment of a venture is divided into two distinct  categories :

(1) Internal Environment : Internal environment is a set of  those factors that affect an organization from inside its boundaries. It contains elements that exist within the venture (enterprise) and normally have immediate and specific implications for managing the venture. Broadly it includes venture’s objectives, its resources, organisational structure, processes and techniques. Venture’s resources may be financial, physical, human and technological. This environment affects the internal managing activities : planning, organising, staffing, directing and controlling. This is also called micro, specific, or organisational environment.

(2) External Environment : External environment is a set of  those factors which affect a venture from outside its  boundaries. It contains societal factors which may be economic, cultural, social, political, legal; technological and ecological. It includes various stakeholders like shareholders, creditors, suppliers, customers, employees, competitors, trade associations, interest groups, g0vernment, global firms, and community in general. External

environment has long-term implications for establishing and managing the venture. Generally, factors of external environment are uncontrollable and entrepreneurs have to change their strategies and objectives according to the changing environment.

Various factors of external environment are studied with the help of STEP and PEST analysis. 

PEST or STEP Analysis

Letters of word PEST stands for:

  • P                  For Political Factors 
  • E                  For Economic Factors
  • S                  For Socio-cultural Factors
  • T                  For Technological Factors

Arranging the letters of PEST in different order, word PEST is derived. Hence PEST and STEP analysis have the same sense and meaning.

(1) Political Legal Environment : Political environment includes the constitution of the country, behaviour of political parties, the attitudes of political and government leaders and legislators, political stability, law and order situation, government agencies, etc. Legal environment consists of factors like rules and regulations, different laws, labour courts and legal formalities. The political state of affairs including political corruption plays an important role in the location of an enterprise because sometimes it may lead to success. of a venture and at other times. its failure. There may be sudden change in government and its policies affecting the enterprise either way. Therefore, it is the government which regulates business activities. Government policies are going to influence all the decisions of the entrepreneurs regarding what to produce, how much to produce, of what quality to produce where to produce and for whom to produce. The entrepreneurs are to operate within the concessions and limits set by the government. It is in the interest of the potential entrepreneur •to thoroughly scan the government policies before taking decisions with regard to setting up his enterprise. Further, instability of government results in instability of policy and in that situation it is not possible to take a long-term view  and economic development suffers.

(2) Economic Environment : The economic component indicates how resources are being distributed and used within the environment. The state of economy at present and in the future can affect the prosperity and strategies of an enterprise. The fundamental fact for an entrepreneur to assess is whether the government believes in free market economy or state controlled economy. All the rest of the policies are dependent on this basic philosophy. In countries where the state believes in free market economy there are minimum of controls and restrictions and environment is entrepreneur friendly but if the state believes in controls, regulations, approvals of various sorts are required. The important aspects of economic environment are : the state of business cycle, national income, distribution of income, monetary  policies, fiscal (tax) policies, balance of payments, structure of industry, global economy, price level, etc. This represents general economic conditions. Under this environment, the state of various resources and facilities like capital, labour, raw materials, infrastructure (as water, communication, transport system, etc.) are important factors to consider. Each of these economic factors can help or hinder the achievement of the objectives of the enterprise and lead to its success or failure. For example, recession generally leads to unemployment and would ultimately result in reduction of sales. Similarly, if the interest rates are increased, than the funds needed for investment may become costlier. Again, business tax policies can encourage some enterprises for expansion, diversification, or modernization programmes. Export promotion schemes announced by the Government may attract many new entrepreneur to form their ventures. The influence of these economic factors may differ from venture to venture, especially keeping in mind their internal environment. Progressive entrepreneurs would consider in economic analysis such important issues as wages, taxes, costs and prices.

(3) Socio-Cultural Environment Socio-Cultural : environment strongly affect the entrepreneurial behaviour, which contribute to entrepreneurial growth. Socio-cultural environment includes values, customs, belief and attitude of the people in society. It consists of factors related to human relationship. Socio-Cultural dimensions complicate ‘the environment in which entrepreneurs have to manage their ventures. Socio-cultural factors make influence on the consumption habits, living patterns and work habits of the people. Change in social values, whether slow or quick are inevitable and they bring changes in the way people live which,  in turn, alters the business environment. Four important dimensions of the socio-cultural environment are as follows :

(i) Demographic Profile ; It denotes statistical profile of population such as size, density, literacy, education, income etc. Changes in demographic profile alters the business environment. They are valuable planning tools for entrepreneurs. 

(ii) Work Attitudes : Entrepreneurs must understand the attitude and behaviour of people towards work. Educational levels, awareness and work ethics improve the quality of work and bring success to the enterprise.

(iii) Traditions, culture and Materialism : Social and changeable attitude, values, rituals, changing life style pattern and materialism are some of the important factors operating in the social environment, affects the growth of entrepreneurship. Critical evaluation of all these factors is essential for the success of an enterprise. High social values, materialism, changeable and risk taking attitude develop the entrepreneurial environment within the country.

(iv) Diversity of Work-Place : Progressive entrepreneurs should take proper steps to better utilise the diverse workforce of their venture. Managing diversity means creating an organization culture that enables all employees, including women, to realize their full potential.

(4) Technological Environment : Technology includes equipments, techniques and procedures for transformation of various inputs into outputs. Technological changes pose new challenges before entrepreneurs to face. When technology being presently used by the enterprise becomes obsolete, that situation creates typical pressures on entrepreneurs. New procedures and new equipments demand new adjustments of various types. If due to some discovery there is new break through and or a new product is developed which may be liked by consumers there may be serious risk to existing players. Such risks are more in advanced countries. The change in the process of production improve the quality of product and increased the efficiency in terms of quality, and productivity and therefore old existing units became uncompetitive in the market both in price and product. This increases the profitability of a new unit and makes it more competitive. Therefore, units using old technology are not able to compete and they become sick. Technology considerations by the entrepreneurs are important ones because technology has increased the outputs of industrial and non-industrial sectors. It has improved the quality and reliability Of the products, and saved the capital costs. It has not only been a primary primary source of improving productivity but also created new resources. 




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