PEST Analysis is a measuring method used to analyze markets for a certain product or business over a specific period of time. PEST is an acronym that stands for Political, Economic, Social, and Technological aspects. Organizations can make better business decisions after analyzing these factors.
Why this tool?
PEST Analysis helps an organization to make better business decisions, improving their efficiency by studying various factors which might influence their business such as political, economic, social, and technology. PEST analysis helps you make strategic business decisions and plan marketing and product development activities.
How to use it?
Step 1: Consider the Political factors
Political factors include any government actions or lobbying in the form of policy, legislation, taxes, and duties. It reflects the stability or instability of governments. It's essential to consider the political agenda and how it may favor or oppose your industry or practices. For example, the government may offer subsidies for green energy production or organic production that is in favor of your business industry. On the other hand, taxes imposed on tobacco and alcohol harm the tobacco and alcohol industries. To give you a better understanding, here are some political variables to think about: Government policy, stability, legislation, elections, foreign trade policies, tax policies, terrorism, military considerations, environmental policies, funding, subsidies, fiscal policy, and Government bureaucracy.
While studying political factors, you should ask yourself questions like:
- Is the political situation stable? If not, what are the chances that it will change?
- What government policies or political groupings may be advantageous or disadvantageous to the firm's success?
Step 2: Consider the Economic factors
The economic factors include the whole economic environment and the implications it may have on your firm, consumers, distributors, and suppliers. In conducting your analysis, it is critical to differentiate between long-term trends, structural issues, and seasonal issues. Here are some economic factors to think about: economic growth (e.g., GDP), interest rates, exchange rates, inflation, disposable income of consumers and businesses, savings and investment rates, propensity to spend, taxation, wages (both absolute levels and growth rates), employment/unemployment rates, financial markets, property prices, commodity and raw materials prices, availability of finance/credit, supply and demand factors.
You might also consider import/export conditions, foreign exchange conditions, and trade deficits/surpluses.
While studying economic factors you should ask yourself questions like:
- How, exactly, do the various economic conditions affect the company’s business in specific and the industry as a whole?
- What causes might lead to an improvement or deterioration in each of the various economic factors?
Step 3: Consider the Social Factors
The social factors take into account changes in social preferences and norms. These are also known as the Socio-Economic or Socio-Cultural factors. Social attitudes, habits, and trends influence your company and its target market. In this step, you should study several factors such as:
- Demographics including population growth, population age distribution, birth, and death rates
- Family size and dynamics including marriage, divorce, and cohabitation
- Living standards
- Wealth distribution
- Ethnic and religious views and norms
- Health consciousness trends
- Education standards
- Career choices and attitudes
- Work patterns and preferences including attitudes toward retirement
- Customer preferences and buying trends
- Leisure activities and lifestyles
- Cultural trends
- Fashion trends and fads
While studying social factors, you should ask yourself questions like:
- How do our customers' social circumstances affect their buying habits?
- How are our customers' and other stakeholders' social circumstances and attitudes changing?
Step 4: Consider the Technological Factors
All types of technological advancements and innovations can have an impact on how you manufacture, distribute, and promote your products and services. Technology is continually changing and the success of your business will always depend on how fast you can adopt new technologies.
In this step, you should study several factors such as:
- Research and development capability and pipelines
- Available technologies for producing goods and services
- Available technologies for distributing goods and services
- Communications infrastructure
- Digital and mobile technologies
- Internet of Things (IoT)
- Technological life cycle: including maturity and obsolescence
- Required Intellectual Property protection
- Technology training and adoption among company staff
- The return on investment in new technologies
While studying the technological factors you should ask yourself questions like:
- What innovations and technologies are currently available or in the development phase?
- How might such technologies affect our business?
Step 5: Brainstorm the opportunities and threats
Once you've recognized the possible changes that are occurring in your company environment, it's time to examine each development and consider the possibilities that may arise as a result. Could it, for example, aid in the development of new goods, the expansion of new markets, or the improvement of processes? Not only that, but you should also evaluate any threats. It's also critical to consider how these developments could jeopardize your company. If you recognize this early enough, you may be able to avoid or reduce the severity of these issues. For example, if technology is threatening a key product, you should master that technology and improve the product.
Step 6: Take an action
After assessing your opportunities and threats, go ahead and take the necessary actions to grab the opportunities or avoid the threats that may affect your business.
Omar runs an art gallery where he makes various sculptures and paintings and sets them up for sale. He also handles commissions in addition to his artwork. Omar started to get worried about his business and felt the need to examine the factors that might have effects on the business. He chose the PEST tool to do so.
First, he needed to address the Political factors.
He was pleased to hear that his art is protected under copyright law and that he can recreate it as he pleases without it being stolen. However, he also learned that he may not recreate artworks and posters made by other creators unless he is being directly commissioned.
When examining the Economic factors, he found that:
The expected upcoming growth of the economy would be beneficial to his gallery as people are less likely to invest in art if they don’t have all of their other needs met.
Upon looking into the social factors, he found that:
The majority of the upper-class segment who are willing to buy his products has an increasingly positive attitude towards art. He also found that he could cater to their interests as the attitude toward fiction, superhero movies, and shows have become more positive.
When assessing the technological factors, Omar found that new advancements in 3D printing technology created a demand for more intricate artwork.
Omar then took all those points and identified his growth opportunities. Among other strategies, he considered replicating figures and mass producing them via 3D printing. He planned to expand into new areas where his upper-class customers are residing.
Advantages and Disadvantages:
PEST Analysis helps you spot business opportunities and highlights potential threats. It shows you where your business stands compared to other businesses in the same industry. Moreover, it helps you minimize the risk of failure. However, the external factors in this analysis are dynamic and can change at a very fast pace. As such, a certain amount of uncertainty remains after carrying out a detailed analysis. Also, its simple presentation can be deceptive if you don’t critically examine its impact and findings. It is sufficient for strategic planning since it only examines the external environment and ignores the internal one as well as ignores the competitive scenario.
Click on the attachment below to download the PEST Analysis Template