Study Material for IBBI Valuation Exam - PEST Analysis

Study Material for IBBI Valuation Exam - PEST Analysis


The PEST and ADL matrix topic appears under the heading Valuation Applications in the syllabus (https://ibbi.gov.in/SFAsyllabuswef01062020.pdf) for the IBBI valuation examination.

IBBI has assigned 35% total weightage to this heading. Within this heading, several other business strategies such as SWOT, Porter’s, Core Competencies etc are discussed.

These are theory topics and a reasonable effort in this section would yield great benefit in the valuation exam. The questions are fairly easy, testing one’s basic understanding of these topics.

Typically, students ignore these areas and focus on harder topics, looking to score well in those areas. Like other business strategies, PEST and ADL are easy topics to comprehend.

From a professional perspective as well, business strategies give the IBBI Valuer the necessary tools to analyse a given business/industry. For good reason, business strategies like the PEST, ADL etc are tested in the IBBI valuer’s exam.

Let’s read about PEST and ADL.

The environment where your business operates is a place filled with both opportunities and threats. Every change that happens there can be either to your advantage or disadvantage. Two simple and common tools, but very effective are the PEST analysis and the ADL Matrix.

For example, opportunities can come from new technologies that assist you reach new customers, from new funding streams that allow you to make purchases in better equipment, and from changed government policies that open up new markets. Some examples of threats can be the decrease of the purchasing power of your costumers, deregulation in entering your line of business, increased fiscal regulation, increased taxation rate, or any other change that can hurt your company in a negative way.

PEST stands for Political, Economical, Socio-Cultural, and Technological. The analysis helps you with the analyzing of these four fields in your business environment. As a tool, PEST analysis is fairly simply, but at the same time very helpful. It helps you understand the big picture forces of change that you're exposed to, and, from this, cash in of the opportunities that they present.

Harvard professor Francis Aguilar is assumed to be the creator of PEST Analysis. In his book, “Scanning the Business Environment”, published in 1967, Professor Francis Aguilar introduced a scanning tool called ETPS. The name of the tool was changed later to make the present acronym.

To sum it up, there are four main reasons on why PEST Analysis is useful:

Firstly, it is a great tool to find out opportunities, and at the same time to find out potential threats, giving you the time to be ready for them.

Secondly, PEST Analysis is good at showing the flow of changes happening in the environment that your business operates in. This helps you shape what you're doing, in order for you to flow with change, instead of against it.

Thirdly, it can be useful in detecting unsuccessful projects, before even starting them, for reasons beyond your control.

And lastly, it is a tool that helps you create an objective view of the environment. It can help you cast aside your subjective view or unconscious assumptions when you enter a new market.

Follow these steps to research your business environment, and therefore the opportunities and threats that it presents. Use PEST to find out the opportunities and threats arisen from the changes happening around you. Use the prompts below to guide your questioning, and tailor the inquiries to suit the precise needs of your business.

• Think about opportunities arising from each of these changes happening in your environment.

• Think about threats or issues arisen from these changes.

• Take actions to protect yourself.

Another tool to find out the competitive position of a company was created by Arthur D. Little, who developed the strategic condition matrix, which is additionally referred to as the ADL Matrix. The tool is made up from two important dimensions: the competitive position and industry maturity.

The competitive positions in the matrix are grouped into five categories. Arthur D. Little defined these categories as dominant, strong, favourable, tenable and weak.

Dominant - At this stage there's little or no competition because a brand-new or unknown product is delivered to market.

Strong - The market share is robust and stable, no matter what the competition is doing.

Favourable – In a favourable competitive position, the organization has advantages in certain segments of the market which is filled with many competitors.

Tenable - The position of the organization within the overall market is little and market share is predicated, among other things, on a distinct segment or another sort of product differentiation.

Weak - The organization experiences continual loss of market share and its line is just too small to take care of profitability.

When investigating competitive position, it's important to answer the subsequent two questions: How strong is the organization’s strategic position?

In the ADL Matrix there are four categories of industry maturity:

Embryonic stage - The introduction of the merchandise is characterized by a rapid climb market, little or no competition and high sales prices.

Growth stage – In this stage, companies continue to consolidate their position in the market while remaining profitable. The market is also characterised by few competitors.

Maturity stage - The market and market shares are stable, there's a long-time customer base and therefore the price is lowered due to the growing competition.

Ageing stage - The demand for the merchandise decreases and corporations are abandoning the market. Companies stop consolidating or leave the market.

In Arthur D. Little‘s ADL matrix the mixture of varied stages within the competitive position and within the industry maturity are decisive for an organization’s strategy.

Hopefully this article has removed some apprehension about the ‘difficulty’ of these topics. For the IBBI valuer exam these are easy scoring areas. Hence don’t miss reading and preparing. For Chartered Accountants, Company Secretaries and Cost Accountants, this is your mini-MBA. Make the best of it! Understanding these areas yield great benefit beyond the 2-hour examination. These concepts can be applied to real world cases.