What is a PEST analysis?
A PEST analysis is a technique for assessing the external macroenvironmental factors that could affect an organization’s internal procedures. The acronym PEST stands for the following four factors: political, economic, social, and technological. Policies, norms, and the government’s usual level of predictability all make up what we call the political framework. Economic forces include growth, inflation, currency exchange rates, and interest rates. Examples of social variables include cultural movements, demographic shifts, and consumer preferences. The phrase “technological factors” is used to refer to the impact that technical development has on various sectors of the economy.
Positive and negative external influences on an organization can be identified through a PEST analysis. This kind of study is useful for both making strategic decisions and adjusting to changes in the market. A more full picture of the external forces influencing a corporation can be obtained by combining the findings of a PEST study with those of other business analysis methods, such as a SWOT analysis.
Elements of PEST analysis:
To better understand the external elements that can have an effect on a company or other entity, a PEST analysis can be performed. It refers to the intersection of politics, economics, society, and technology. Here are the constituent parts of each variable:
Political: Government policies, rules, and regulations that can have an effect on a specific sector or industry are included below. Things like tax rates, labor regulations, trade barriers, and government stability are all examples.
Economic: Inflation, interest rates, exchange rates, and economic growth are all examples of economic variables. Business cycles and the spending habits of consumers also play a role.
Social: Age, gender, income, and level of education are all considered demographic characteristics. Business-related social variables also include shifting public mindsets and values.
Technological: Automation, brand-new services and products, and developments in communication and information technology all fall under this category.
A company or organization’s ability to foresee and adapt to changes in its external environment depends on taking all of these into account.
How to conduct a PEST analysis
1. Identify the political factors:
Here are some examples of political considerations that could have an impact on business in the areas you mentioned:
Finding a place to buy needed stuff:
- Import quotas: Import restrictions set by the government could reduce the amount of items a company can bring into the country if it relies on materials or products from outside the country.
- Tariffs: To put it simply, tariffs are levies made on imported goods. The competitiveness of a company’s products could be negatively affected if the company imported resources or items that were hit with tariffs.
- Price supports and subsidies: Subsidies and price supports are two methods governments use to encourage production of particular goods and services. It’s possible that some companies in those sectors will gain from these regulations, while others would not.
- Preferences: A government may favor a particular supplier or product by mandating that a certain amount of that supplier’s goods be purchased. This could make it more difficult for a company to get supplies or items from its go-to vendors.
- Visas: If a company has to hire foreign labor, it may be affected by changes in visa policies.
- EEOC requirements: The EEOC is responsible for upholding anti-discrimination legislation in the workplace. The hiring and employment policies of businesses must be in accordance with these regulations.
- Vaccine requirements: Businesses may face difficulties or increased costs if the government mandates that their staff undergo medical procedures such as immunizations.
- OSHA requirements: OSHA, or the Occupational Safety and Health Administration, regulates workplace safety policies. For the sake of worker safety, businesses must adhere to these guidelines.
Accounting and finance:
- IRS requirements: Businesses are obligated to disclose and account for their financial transactions in accordance with IRS regulations.
- Tax hikes, breaks, and deductions: The bottom line of a company could be affected by changes in tax regulations, such as tax increases or decreases.
- SEC reporting requirements: To comply with SEC regulations, some businesses must submit periodic reports and other disclosures. If a company meets the qualifications, it must follow these rules.
2. Identify the economic factors:
Conditions that affect the supply and demand for products and services are referred to as economic factors. Among these potential causes are:
- Gross Domestic Product (GDP): The monetary worth of all final goods and services created inside a nation during a given time frame.
- Inflation: The rate at which the cost of living as a whole is increasing.
- Interest rates: The interest rate on loans and the rate of return on savings, both of which have an effect on discretionary spending and capital expenditures.
- Unemployment rate: How many people in the labor force are now without work.
- Exchange rates: Changes in the value of one currency relative to another can have an effect on commerce and investment across national borders.
- Government policies: Taxes, trade pacts, and employment rules are just a few examples of laws and regulations that have an impact on businesses and customers.
- Consumer confidence: A measure of how consumers feel about the economy and how it may affect their discretionary spending.
- Market trends: Buyer and seller actions in a market, taking into account supply and demand, levels of competition, and the impact of new technologies.
Individuals and organizations can benefit from a deeper understanding of these economic issues when making decisions about spending, pricing, and staffing.
Conducting market research is essential for gaining an understanding of your target market’s demographics and point of view. Customers’ preferences and buying patterns can be better understood and catered to through this research. Market research can shed light on customers’ purchasing habits, lifestyle choices, and general emotions about the industry.
In addition to undertaking market research, businesses should read trade publications to stay abreast of the societal factors that could affect their sector. Market trends, consumer habits, and policy shifts that impact a specific industry are all explored at length in journals dedicated to that field. By keeping an eye on these metrics, businesses may better modify their marketing and product offerings to match the ever-changing needs of their target market.
4. Identify the technological factors:
Technological factors can impact every industry in various ways, including:
- Innovation and disruption: Whenever there is a breakthrough in technology, it has the potential to either pave the way for brand new products and services or to utterly upend existing markets. For instance, the popularity of online shopping has caused havoc for conventional malls.
- Automation: While automation and AI have the potential to boost production and efficiency, they also have the potential to alter employment trends and replace workers.
- Communication and connectivity: Thanks to technological advancements, we are now more connected than ever before and can do our jobs from anywhere. The way people interact with each other and in the workplace has evolved as a result.
- Data and analytics: The ability to gather and analyze data has grown in significance, influencing shifts in how various sectors make decisions and conduct business.
- Cybersecurity: Strong cybersecurity measures are required to preserve sensitive information and prevent data breaches in light of the rising reliance on technology.
Software development processes, programming languages, and emerging technologies like cloud computing, mobile development, and artificial intelligence are all examples of technological elements that can affect the development process and a company’s competitiveness in the software business. To be successful in the tech industry, it is essential to keep up with these technological variables and incorporate them into business strategy.
Benefits of a PEST analysis
To better understand the external elements that can have an impact on a company’s operations, a PEST analysis can be conducted. The combination of political, economic, social, and technological considerations is known as PEST analysis. PEST analysis has the following advantages:
- Identifies external factors: The PEST analysis is a useful tool for identifying and assessing those elements outside of an organization’s control that may have an effect on its operations. This is useful information for formulating plans to lessen the blow of these variables.
- Helps in decision making: By giving a snapshot of the external environment, PEST analysis aids businesses in making educated decisions. Making informed strategic decisions is facilitated by the ability to recognize opportunities and dangers.
- Provides a comprehensive view: Analyzing the political, economic, social, and technological components of the external environment is known as a PEST analysis. The impact of macroeconomic forces on firms is clarified.
- Facilitates strategic planning: Strategic planning that takes into account the external environment can be greatly aided by a PEST analysis. It aids in spotting potential dangers and gains that can be made to maintain growth and compete successfully.
- Helps in risk management: To better understand the risks and dangers that could affect their operations, firms can conduct a PEST analysis. With this knowledge, we can better prepare for and respond to any threats.
PEST analysis disadvantages and limitations
Although PEST research can be helpful in identifying potential external influences on a company or sector, it is not without its drawbacks and limits.
- Limited scope: PEST analysis ignores internal elements like company culture, management, and resources in favor of looking at potential external influences on a company.
- Lack of specificity: The external environment can be surveyed using a PEST study, but no actionable insights or specifics are provided.
- Static analysis: Because PEST analysis only examines the external environment at a single moment in time, it cannot predict or account for future shifts or developments.
- Overemphasis on external factors: Internal elements like innovation, strategy, and execution run the risk of being overlooked in favor of external ones while conducting a PEST analysis.
- Subjectivity: Judgment is required in PEST analysis since different people will place different weights on the various external aspects.
- Incomplete analysis: It’s possible that PEST analysis doesn’t take into account all of the external elements that could have an effect on a company.
- Lack of strategic guidance: PEST analysis is useful for getting a bird’s-eye view of the external environment, but it may not tell you how your company should respond strategically to that environment.
Other types of business analyses
Here are some other types of business analyses:
- SWOT analysis: Weaknesses, opportunities, and threats are the four parts of a SWOT analysis. It’s a method for analyzing potential internal and external influences on an endeavor. SWOT analysis is a useful tool for assessing the opportunities and risks facing a company, as well as its own strengths and weaknesses.
- Porter’s Five Forces: The competitive landscape of any given industry can be examined using Porter’s Five Forces model. There are five aspects of an industry’s competitive landscape that are taken into account: the potential for new entrants, supplier negotiating strength, buyer bargaining power, the possibility of substitute products or services, and the intensity of rivalry among existing competitors.
- Value Chain Analysis: The goal of a Value Chain Analysis is to pinpoint the points in a company’s operations where value is created and destroyed. This aids companies in pinpointing places they may save money and boost productivity, as well as ways they can increase the value they provide to their customers.
- Financial Analysis: To evaluate the success or failure of a company, financial analysts look at its financial accounts. A company’s financial analysis can reveal its strengths and weaknesses, as well as new avenues for development.
- Benchmarking: The term “benchmarking” refers to the practice of comparing one company’s results or methods to those of its rivals or industry peers. By comparing itself to its peers, a company can spot weak spots and discover ways to boost its performance.
- Customer Analysis: The goal of conducting a customer study is to discover untapped markets by examining customer behavior, requirements, and preferences. Businesses can use this information to better understand their customers’ wants and needs, which in turn can lead to increased satisfaction among those customers.
- Market Analysis: Opportunities for expansion and improvement can be uncovered through studying market trends, the competitive landscape, and customer actions. This can aid in the creation of more effective advertising campaigns and the making of more calculated choices regarding expansion into new markets.
5 must-read books about PEST Analysis
Businesses and other organizations can benefit greatly from using PEST analysis to evaluate the external influences that could have an effect on their operations. Making educated decisions and keeping up with the competition in today’s ever-changing market requires an understanding of the political, economic, social, and technological factors at play. We’ve compiled a list of five essential books that will help you become more proficient in PEST analysis and gain new ideas and methods. Come on, then, and we’ll start in.
PEST analysis A Clear and Concise ReferenceAlthough not entirely concerned with PEST analysis, this classic text on strategic management does devote an entire chapter to the topic. It discusses a number of concepts, such as PEST analysis, and offers advice on how to put them to use strategically. This book is perfect for readers who want to learn more about strategic management and how PEST analysis fits in.
Plant Pest Risk Analysis: Concepts and Application This helpful primer on PEST analysis from The Economist is both brief and interesting. It provides a brief and straightforward explanation of what PEST analysis is, why it’s important, and how you may use it. The book also features case studies showcasing the usefulness of PEST research in helping firms seize opportunities and limit threats. If you want to learn about PEST analysis in a straightforward and useful way, this book is a good choice.
- “Strategic Planning Kit For Dummies” by Erica Olsen This book does not concentrate solely on PEST analysis, but it does discuss environmental analysis together with the other components of strategic planning. A PEST analysis, among other things, is included in this detailed guide to establishing a strategic strategy. This book may be used by anybody, from novices to seasoned experts, thanks to its straightforward style and abundance of useful examples and templates.