Strategic Risk Decision Making - Case Study Example

Student Name: Subject: Management Topic: Strategic Risk Decision Making Tutor: Department: Institution: Date Due: PEST ANALYSIS A PEST analysis is the scrutiny of the external macro-environment that affects all firms. These are the Political, Economic, Social, and Technological issues (P.E.S.T.) in the external macro-environment. Such external factors are usually beyond the control of the firm and they are sometimes presented as threats. For this reason, some say that "pest" is an appropriate term for these factors. Changes in the external environment can lead to creation of new opportunities. Pest analysis is also referred to as the STEP, STEEP or PESTLE analysis (Political, Economic, Socio-cultural, Technological, Legal, and Ethical). PEST analysis is employed in the external analysis when carrying out market research where it gives a certain indication of different macro environmental aspects that the company must consider (Babette, 2005). Political aspects include; tax policy, employment laws, environmental considerations, trade restrictions, tariffs, and political stability. The economic factors are the monetary growth, interest rates, exchange rates and inflation rate. Social factors often focus on the cultural aspects, such as health awareness, population growth rate, age distribution, career attitudes, while emphasizing on safety. Technological aspects include ecological and environmental aspects that determine the barriers to entry, lower efficiency in production level and influence outsourcing decisions. Research and Development activity, automation, incentives and rate of change in technology, are normally considered. 1. The internal environment comprise of; staff (or internal customers), office technology, wages and finance. 2. The microenvironment entails; our external customers, agents and distributors, suppliers, and our competitors. 3. The macro-environment entails; Political and legal, Economic, Socio cultural, and Technological forces, which are referred to as PEST factors. Most macro-environmental factors are specific to a country. A PEST analysis is normally performed for the interest of the countries. In a PEST analysis the following are some of the factors that are considered. Political Factors Carrying out political analysis of the company, the following were found out; In our country political arena has a huge influence upon the regulation of businesses. The political arena includes government regulations and legal issues under which businesses should operate. Government’s taxation policies and decision about the increasing the prices chemicals have affected the buying power of the individuals in U.K. The government is campaigning against the presence of the company at its present site because, parts of the local community have been quite vocal with their objection to our continued presence at the site since a small formaldehyde leak from one on site storage tank about three years ago. The leak was contained within the tank storage bund. The Government has the mandate to set probable fines for the firms that do not meet there standard law requirements. The local authority would prefer us to relocate the company, they cannot enforce the move through the planning laws as the site carries immunity The government is strongly aware of our company’s contribution to the area as a major employer. The minister in charge of industries has raised threats of imposing more stringent price control on the industry that before. This is throwing a lot of investment plan into the misery. The industrial price control organization of the industry in effect has worked contrary to the stated objectives. It has nullified the market forces from competitive pricing of goods which has been dictated by the market. At the moment, determination of pricing is done by the government basing on the agreed costs irrespective of the real cost. Effective January 2012 the country will go for the IPR (Intellectual property Rights) regime, popularly known as the patent Act. This Act will impact the company the most. Thus as far as Formaldehyde production is concerned, it could escape paying a patent fee to the investor of chemical by manufacturing it using a different chemical route. The company exploited this law and used the reverse engineering route to invest a lot of alternative manufacturing methods. By so doing a lot of money was saved. This also encouraged competing company to market their versions of the same chemical. Therefore different brands of the same chemical were truly different. Branding is used as a sign of quality and a purer brand has purer active ingredient and lesser toxic impurities. All these will be eliminated by product patent regime. Now a patented chemical would be manufactured using the same chemical production procedure and would be manufactured by the investor or his licentiates using the chemicals with the same specifications (Zheng, 2009). All brands of the chemical containing the same active ingredients would be the same in terms of purity and impurities. The different brand would have to compete basing on the non- input related innovations such as packaging, color. This is the biggest change the going to be imposed by the environment on the industry. The marketing effort would now be focalized on the logistics, communications, and economy of operation, extra- ingredients innovations and pricing The political decision as to whether a UK sign up to single European currency has an effect on the businesses. Our findings show that political environment of U.K. is stable. Issues of extension of European Union and war against territories have had an impact on the political stability of the government. As a result of increasing consciousness of the environmental consequences, U.K Government is planning actions to ensure chemical industry reflects its environmental impacts. Proposals are emerging on all chemical industry undertakings. Economical Factors Influence the purchasing power of probable customers is influenced by the economic factors and what is offered by the company. U.K economy is benefiting from gradual low inflation rate. In February 2004, inflation rate fell to 1.3%. Unemployment is low in U.K. According to labor market statistics in January 2004, unemployment fell down to 4.8 per cent. Job confidence is high; due to this consumer spending by consumer is also high. Forecast show that there will be an increasing GDP growth over the period averaging to around 2.4% a year (in fourth quarter of 2003 GDP rose by 0.9%), household spendable income rose at faster rate. Expenditures for household rose to 0.9% with the increase in spendable income (Teresa & Adrian, 1997). In February 2004 the UK’s deficit on trade stood at £3.2 billion –compared with the revised deficit for January of £4.4 billion. Recently continued growth in sales has been observed in the UK economy. Exchange rates are favorable for UK residents for travelling abroad due to strong position of British Pound exchange rate against the other foreign currencies. “Euro” used as a single currency in most of the European countries, is stable against the other foreign currencies. The forecast for the UK economy show that UK will be among the world strongest economies, with low inflation (during February 2004 inflation fell to 1.3%), low unemployment and reasonable economic growth. The short coming is the disparities between parts of the wealthier parts of the country. In the South East of England, pockets of deprivation will widen, with implications for chemicals demand. These are likely to influence the growth of the UK chemical market. The incidences of Taxes are very high. There is Excise Duty ( state and central ), Custom duty, service Tax, professional Tax, licensing Fee, Royalty, pollution Clearance Tax, Hazardous substances ( storage & handling ) licensing, income tax, stamp duty and other and charges to be paid. On an average it amounts to more than 45% of the cost. The number of qualified practitioners is high therefore high quality services are offered. Growing trend in cross-border mergers The products have a ready market as the Formaldehyde that is produced is supplied to a number of Industrial Customers throughout the UK and Europe. Approximately 1250 persons are employed in the company where the majority of which are from the nearby residential areas. As a consequence there is a general tolerance to your business. The Chemical Plant has been in its present site for more than 40 years and is strategically located because of the adjacent road and rail network which is utilized to transport our products. Some of the local have been quite vocal with their objection to our continued stay in our present area (Selim, 2011). Social Factors A fashion of using internet access at home and online buying is developing in the UK. The September 2003statistics show that 11.9 million households online were recorded. In the recent years a great change has been seen about diet and health issues in U.K population. There are changes in the population structure due to the immigrants from Europe, Asia and Africa etc. which affects the supply and demand of products within the U.K economy. Continued concerns over safety and security are found in the U.K residents. There are increasing concerns over health and fitness of the people both the employed and the unemployed. There are reduced unemployment cases as the company provides employment to approximately 1250 persons the majority of which are from a nearby residential areas There is reduced crime rate as most of the people are kept busy in the company and are able earn a living from the company. There are changes in individual’s social attitudes and tastes for example how individuals spend their leisure time for instance; one may choose going to the cinema, or just stay with friends. Technological Factors In UK and worldwide rapid growth in technology is influencing the businesses. Technology change has led to the change in the operation of the businesses i.e. Internet booking for chemical delivery. Faster change in technology growth has created the need for the businesses to react quickly to different business issues so as to maintain the competitive atmosphere by providing the similar innovative services, offered by their competitors. Product distribution by the use of technologies such as; marketing information systems, customer relationship management are being practiced in our business for effective services to our customers. The output has been increased and costs have been decreased because of the availability of advanced automated machines. Some changes have been done on some of our products for instance packaging and ingredients. New products are being manufactured in the company. Economies of scale in manufacturing of the chemicals and distribution. Consumer’s tastes and preferences changing depending on market state. Availability of advanced automated machines has improved the output and reduced the cost. Computerized system has increased the efficiency of the chemical industry New chemical delivery systems are the greatest innovations Reduced unemployment has enabled the industry to go fully automatic as the Government as well as the Labor Unions voices their appreciation of such establishments (Henry, 2008). Environmental Factors The plant is situated outside the Industrial Centre of the City and is relatively close to three housing estates and a small village, which in total have a population of 3000 people. Cans have been banned in favour of environmentally friendly recyclable bottles. A tributary to the River Ure passes directly alongside our site boundary. The River is a successful habitat for salmon and other species of wildlife thus the industry may have an adverse on these animals. Intervention by the government for conservation of the environmental. Legal Factors Some changes have been done on some law. Stronger enforcement of juvenile industrial regulations Opportunities Opportunities for growth due to the increase in demand of chemicals in the UK and Europe. Worldwide increase in chemical consumption. Steady growth for demand for the Formaldehyde processed chemicals. Demand for the Formaldehyde processed chemicals is increasing in developing countries, for example China and Brazil, this is an advantage to the chemical Industry, because there is always the opportunity to merge. Supplier Factors Numerous suppliers provide raw materials to the industry. Moreover, companies in the industry are not likely to integrate backwards. The companies in the chemical industry are the major source of earnings to the suppliers. This makes competition among suppliers more rigid. If raw material cost gets of line, companies in the chemical industry will have a hard time using different raw materials in manufacturing their products. The chemical industry is characterized by the quality and cost of raw materials which determine the quality and price of goods and services offered by the industry. The suppliers provide raw materials that are essentially interchangeable and indistinguishable. In our industry loyalty is highly considered thus there is a possibility for suppliers to forward integrate (Fullen & Diana, 2006). Threats There is increasing health conscious and fitness awareness among the company workers, that there are side affects due to the exposure to chemicals. Generally chemicals have side effects on the environment and people, such effects include climatic change, water and air pollution, respiratory problems and deformation of some part of the body. These side effects could push the Government to call for the shutting of the industry. There are numerous players within the chemical industry which means there is fierce competition Environmental abuse concern Competition with others In their history, companies in the chemical industry considered diversity, culture, and the way they do business. The products sold by the industry have low storage costs, at the same time the industry is experiencing fast market growth. The companies in the industry offered products which are essentially interchangeable and indistinguishable. Products provided by the company have been established to be a commodity to a major part of its stakeholder. Additionally it shows that there are considerable a lot of large competitors dominating the industry. In the chemical industry, companies have high fixed costs; a lot of money is spent on plant and equipment. Production capacity to be economically feasible must be done on large, expensive increments. There are significant barriers that hinder companies that want to exit the chemical industry, these barriers include; regulations labor agreements, costs of closing facilities, and the lack of secondary market for assets. In addition, staying in the industry is of great strategic importance to companies that are in the industry, probably because they lack somewhere to go. Threats of New Competitors Economies of scale play the main function in evaluation of the cost of the production of goods and services. Companies in the chemical industry have low fixed costs, relatively little amount is spent on plant and equipment. Moreover, there is no likelihood of competitors in the industry to cut their prices in order to defend their market growth, in terms of; patents, proprietary knowledge, and brand reputation are considered as barriers for companies entering the industry (Babette, 2005). Threat Caused by Alternative Products The prices of substitute products are higher. This provides the industry with a lot of members. Moreover, the substitutes generally have are lower in the quality, features and benefits. The Role of Marketing Research in the Process of Decision Making The planned method of marketing research has enabled a lot of producers and consumer a like to better understand their relationship. Generally, the role of marketing environment is provision of information necessary for the process of decision making which facilitates the development and benefit of the company. To validate the potential effects of information in our business environment obtained through marketing research numerous studies have been conducted. In enhancing performance; reduction in uncertainty, and processing business plans, the value of information in making decision has proved to be essential. A lot of quality information has been obtained through marketing research, whereby it has been seen to be an essential tool in the overall being of our company. Several experimental studies have confirmed that marketing research is indeed important element in our company’s success formulae. A good relationship exists between the use of environmental information and the firm financial performance, focusing on our firm’s environment. In the company’s decision making process, marketing research provides essential information that is vital in the growth, achievement, and survival of the marketing course of our products in relation to the business as a whole. Conclusion The result of PEST analysis carried out on the macro- environment of our company indicated a very significant effect for the industry together with the company. Thus we expect our company to be feasible and grow at faster than average for the international expansion. The company is ready for the implementation plan regardless of current trends and unpredicted circumstances (Fight, 2004). Marketing research is the most important tool that an organization could consider and it cannot be denied when starting a business relating to the role of marketing research in the process of the company’s making of its decisions. Thus, the role of market research is indispensable during expansion of the business, especially to the case of our chemical company which is ready to start the carrying out international operations and manufacture of products. References Babette, E. C. (2005). Analysis without paralysis: 10 tools to make better strategic decisions. New Jersey: FT Press. Fight, A. (2004). Credit risk management. Berlington: Elsvier Butterworth-Heinemann. Fullen, L., & Diana, P. (2006). How to write a great business plan for your small business in 60 minutes or less. Florida: Atlantic Publishing Group. Henry, A. (2008). Understanding Strategic Management. New York: Oxford University Press.. Selim, K. (2011). Sustainable Land Management: Learning from the Past for the Future. New York: Springer Heidelberg Dordrecht. Teresa, W., & Adrian, G. (1997). The business approach to training. England: Gower publishing Limited. Zheng, Q. (2009). Introduction to E-commerce. New York: Tsinghua University Press. Read More