PEST analysis TRONICS case

PEST analysis (Political, economic, social and technological) is an environmental scanning framework
(Grantt, 2015) which is used for assessing the external environment or the market or the macro
environment of a business and is normally carried out before a SWOT analysis (Panah, 2016).
Changes in the macro-environment (measured by PEST) can impact on the industry environment
(measured by Porters five forces), thereby influence the internal environment of organizations
(resources and capabilities) (Panah, 2016). This essay will apply PEST analysis to the case of Tronics.
Tronics is an international full-service manufacturer of MEMS (micro-electro-mechanical systems) in
the oil prospecting industry. Hence, the essay will examine how each macro-environment factor
(political, economic, social, and technological) influences on the oil prospection industry and then
MEMS organizations like Tronics regarding the costs, risks, and benefits of doing business nationally
or internationally. At the end of the essay, a conclusion will show the overall impact of PEST factors
on the oil industry and Tronics.
Political factors Political factors are how and to what degree a government intervenes in the
economy. Political factors include areas such as tax policy, environmental law, labor law, trade
restriction, tariffs, and political stability (Panah, 2016). The political risk generally increases when oil
companies are working on deposits abroad. Political factors have significant impacts on oil industry
then MEMS firms like Tronics regarding cost and risk. The first significant political determinant is the
powerful impact of OPEC (the Organization of the Petroleum Exporting Countries) on crude oil price
and production. The OPEC nations (such as Saudi Arabia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar,
etc.) are the major producers of world's crude oil (account for around 43% of world oil
production(Wikipedia, 2015)). A higher crude oil price leads to a higher price of energy, which in turn
negatively affects other directly or indirectly dependent trading practices. As a result, it increases the
risk of doing business for oil industry then oil services firms like Tronics. Also, most OPEC nations
have political instability, legal instability, and corruption. Any conflict happened in the unstable
situation can disturb/influence oil production and its transport, resulting in the rising of oil price. The
political instability can also affect oil is in the regulatory sense, or regulations that limit where, when
and how extraction is done. Hence, it increases the risk and cost for oil firms and then MEMS firms
like Tronics. Another major political determinant is the license required for doing oil prospection in
the oil sources located countries. Companies specialized in oil prospection have to be granted an
exploration license and sign different contracts (concession agreements, production sharing
contracts, service contracts, and join-ventures). Hence, it increases cost for oil firms and then MEMS
firms.
Once again, political risk is significant in the oil industry which can increase risk and cost of MEMS
firms like Tronics. Therefore, it is important for the firms to have effective ways of management risk.
Economic factors Economic factors include economic growth, interest rates, exchange rates, &
inflation rate. These factors have major impacts on how businesses operate & make decisions. In
particular, these factors affect the costs and profitability of business. Because of the suppliercustomer interdependence characterizing the relationship between the oil industry and the oil
service industry like MEMS industry, in this case, the two have every similarity in their economic
patterns. The recession is one of the important determinants. Recession can cause a drop in demand
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for oil. Operations take a lot of capital and time to get going, so a drop in oil demand cause a huge
loss for oil companies that directly leads to a reduction in profits of MEMS firms as Tronics. In
general, downstream oil companies such as BP, Chevron, Exxon, Shell, etc. spend around 5 to 10% of
their total sales on prospecting, which is a significant investment. But if they face a demand drop in
the oil industry, they may become more cautious in their investments. As the case study mentioned,
due to the world recession, so the oil demand dropped, oil industry suffered a 12% drop in turnover.
Vibtech, a shareholder of Tronics, the market leader in oil exploration industry, experienced a 30%
drop in activity during the recession. However, the impact of the second economic factor which is
economic growth brings a promising future opportunity for the oil industry. Although the share of oil
decreased, oil and gas still account for almost 60% of the total world's primary energy consumption.
Moreover, the market is expected to be healthy with an increase in the demand, particularly in
developing countries, even though the recession is still affecting developed countries. Hence, oil
companies need to invest more on prospection new oil resources which helps increase revenues for
oil service firms like Tronics a positive future. As the data in the case study, the global MEMS
components market is predicted to reach 21 Billion in 2017, the unit compound annual growth rate
increased 17.4% from 2008 to 2013, and the revenue compound annual growth rate increased by
6,5%.
Social factors include cultural aspects and health consciousness, population growth rate, age
distribution, and career attitudes. Trends in social and demographic factors affect the demand for a
company's products and how that business operates, thereby influences firms cost and profits. The
social factors are not so significant as political and economic factors.
Firstly, there is a strong opinion on the sustainability of resources or green issues in oil sources
located countries. The negative effect of oil exploration such as various oil spills that have occurred
in the past, particularly the 2012 oil spill in the Gulf of Mexico, led the governments to strengthen
their regulations related to deep-water oil exploration, which has made oil exploration more time to
consume and therefore more costly. Hence, oil firms may be cautious on investments of prospecting
oil that can reduce the profits of MEMS firms like Tronics.
Secondly, there is a trend towards alternative solutions to oil such as coal coal-25%, gas-20%,
renewable energy (hydropower, 13%; nuclear -7%). The potential competitive substitutes receive
political and financial from many governments that can be threats to the oil industry. It can cause a
drop in demand for oil, so that reduce profits of firms like Tronics. However, the potential substitute
may seem a little impact at the moment due to unavailability of production of more economical
forms of alternative energy such as solar and wind energy. Moreover, global warming may offer new
opportunities for oil exploitation because global warming leads to the Arctic ice thaw, and the Arctic
Ocean contains one of the world's largest oil reserves. Therefore, oil firms may invest more on oil
exploration, so that helps increases demand MEMS products, thereby increases profits for MEMS
firms like Tronics.
Technological factors include technological aspects such as R&D activity, automation, technology
incentives and the rate of technological change. Technological factors can determine barriers to
entry, minimum efficient production level & influence outsourcing decisions. Furthermore,
technological shifts can affect costs, quality, & lead to innovation (Panah, 2016). It is a major force
which has a significant impact on the oil industry. On the one hand, the technology is profoundly
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connected with oil prices is not cheap and requires a lot of money for R&D. Firms have to invest on
technologies in each stage of oil production, from analyzing potential drilling sites, acquiring land
rights to develop new sites, drilling and extraction, pipeline construction, project operation and
maintenance, and standardizing organizational procedures. Moreover, it requires the composite
knowledge modules between oil firms, suppliers, and MEMS firms. These stakeholders are
dependent on research centers, institutions, etc regarding acquiring 80% tactic knowledge required
to industrialize MEMS products. Technologies of the complementary products and substitutable
products can be threats for oil industries. The complementary (like represented by auto vehicles,
airplanes, ships, etc.), the substitutable products (such as coal, gas, hydrocarbon, renewable energy
and nuclear) influence the demand for oil by developing technologies that will reduce the
consumption of oil products or replaced them with other a substitutable product accordingly. On the
other hand, technological advancements are being introduced at each stage of productions that
allow oil firms to reduce cost and risk. Technological advances have made it possible to drill deeper
and deeper into the seabed, which has provided opportunities to explore more areas. Few
companies in the world operate in the niche oil service market like Tronics, which is protected by
high entry barriers. Also, there are a lot of potential opportunities in the market for oil firms to
follow strategic alliances that increase the flexibility in the development of new capabilities; to
create value chain strategies and consequently, reduce cost, or joint venture to reduce cost and
share risk and access to partners resources and capabilities. The innovation of market technology
also provides opportunities for firms to reduce cost and increase efficiency.
In conclusion, it is risky (because of political factors such as OPEC impact and license requirement)
and costly (sustainability development, technologies, and R&D investment) for MEMS firms like
Tronics to invest in the oil prospection industry. However, there is a promising future for gaining
profits because of the economic growth in developing countries. Firms like Tronics need to have risk
managements as well as technology advantage to gain the competitive advantage. Because PEST just
gives a big picture, it is necessary to carry out SWOT and Porters five forces before firms can make a
decision.
(Alternative conclusion: Tronics needs to be aware of the risk caused by Political factors but also
need to keep in mind the likely future prospects of the market especially in developing countries in
terms of economic growth and the rate of technological development.)

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