In business, there’s only so much you can control. You can decide which products and services you offer, how much you charge, who supplies you and whom you employ. But many factors are completely out of your control, and without detailed knowledge of those variables, it’s a lot harder to run a successful business. Show
Many companies use a political, economic, social and technological (PEST) analysis to get a better assessment of their business environment and to understand external threats and opportunities. What is a PEST analysis?A PEST analysis is an assessment of the political, economic, social and technological factors that could affect a business now and in the future. The purpose of a PEST analysis is to help a company’s management team better understand the market they’re operating in now and how they can prepare for potential shifts (for example, regulatory changes). Elements of a PEST analysisA PEST analysis covers four elements: political, economic, social and technological factors. P (political environment)The “P” in the analysis refers to the political factors that help or hinder a business. “We see this currently in the U.S., particularly in the area of international business,” said Donna Lubrano, a lecturer in the Northeastern University College of Professional Studies. “We look at tariffs, trade deals as they are developed not only by the economics or business side but what political relationships influence those decisions.” A PEST analysis examines the following political factors:
E (economic)The “E” in the PEST analysis refers to the outside economic issues that can play a role in a company’s success. It’s important to look at what the Fed is doing in terms of the tax rate, as “this is what your pocketbook/wallet lives on every day,” Lubrano said. Also look at interest rates, exchange inflation, unemployment, gross domestic product, credit availability, and the rise and fall of the middle class. A PEST analysis examines the following economic factors:
S (social)The “S” in the PEST analysis relates to the socioeconomic environment of a given industry’s market for a business to understand how consumer needs are shaped and what brings them to the market for a purchase. “We look at what changes in culture and society are taking place,” Lubrano said. “The drive to eat healthier, the drive to care for the environment, baby boomers staying in the workforce longer, adults having fewer children, later in life. All of these impact how consumers buy houses, cars, etc.” A PEST analysis examines these social factors:
T (technology)Technology plays a huge part in business and can have both positive and negative effects. Some businesses may have a difficult time adjusting to new products, technologies and services, so it’s important to assess the technology from all angles. A PEST analysis examines these technological factors:
How to conduct a PEST analysisNow that you know what a PEST analysis is, it is time to gather the data. Follow these steps to conduct a PEST analysis: 1. Identify the political factors.Conduct internal research to identify what types of laws or policies affect you. These factors may include the following:
Talk to your lawyer or legal department or the people in charge of compliance, safety, reporting, finance and accounting, each of whom should be familiar with current and proposed laws. 2. Identify the economic factors.Determine which economic factors will affect your business. For example, consider the following:
3. Identify the social factors.If you have done market research on customer or target market perceptions and demographics, this step is at least partially done. It’s also a good idea to read industry publications, which frequently highlight social factors that affect the industry as a whole. Talk to your customer service and sales staff to get feedback from customers on why they buy and why they return or cancel. If you have a local business, periodically conduct an area market analysis to understand your potential customers. Key takeaway: The Pew Research Center is a useful (and free) source of social and demographic trend research.4. Identify the technological factors.This is particularly important if you are in a tech industry such as software, but technological factors affect every industry in some way. Read industry publications, and do a competitor analysis to stay informed about new technology and innovative ways of using it to deliver products and services in your field. Look for the following updates:
Benefits of a PEST analysisMany of the issues considered in a SWOT analysis can be influenced or shaped by your company and its decisions. In a PEST analysis, however, the focus is exclusively on external factors, such as current and future regulations, taxes, political issues, environmental legislation and employment laws. Tip: If you know of major changes in legislation or market conditions that are likely to affect your business, consider this the ideal time to carry out a PEST analysis on your company.The benefits of performing a PEST analysis include the following:
When it’s done right, a PEST analysis gives your company the ability to successfully navigate changes in the world around it. As well as alerting you to potential threats, it can signal brand-new opportunities to expand into different markets and territories. In some cases, a PEST analysis may cause a company to shift some of its operations from one country to another as many U.S. automobile manufacturers have done. PEST analysis disadvantages and limitationsAlthough there are many potential benefits of a PEST analysis, it can have limitations as well. Consider the following drawbacks:
What is a PESTLE analysis?A PESTLE analysis is similar to a PEST analysis, but it includes two more factors: legal and environmental. For the legal factor, a company should examine how legal changes and interpretations could affect a company, directly or indirectly, said Daniel Feiman, managing director at consulting and training firm Build It Backwards. He advised including changes in laws, global law conflicts and Supreme Court decisions in this portion of the analysis. For the environmental portion of the analysis, Feiman said to examine how environmental regulations, such as laws regarding endangered species, could affect the business. Feiman also suggested measuring each of the factors, including the original PEST factors, against the following grid:
Other types of business analysesFor a PEST analysis to be truly valuable, it should be used in conjunction with the following other analyses:
Jennifer Dublino, Jennifer Post and Katherine Arline contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article. Which of the following is not part of the external environment analysis?The correct answer is D) competitors. Competitors are not categorized as part of an organization's environment; they are not involved in organizational decision-making and development strategies.
What are the three major parts of the external environment?In general, there are three major parts of external environment in business includes the general environment, the industrial environment and the competitor's environment.
What are the five dimensions of the external environment?The external environment is composed of general and task environment layers. The general environment is composed of the nonspecific elements of the organization's surroundings that might affect its activities. It consists of five dimensions: economic, technological, sociocultural, political-legal, and international.
What are the elements of the general external environment?In particular, PESTEL reflects the names of the six segments of the general environment: (1) political, (2) economic, (3) social, (4) technological, (5) environmental, and (6) legal.
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