A PEST analysis is a tool that allows organizations to discover and evaluate the factors that can affect the business in the present and in the future.
PEST is an acronym for Political, Economic, Social and Technological. This analysis is used to assess these four external factors in relation to the business situation. Analysis consists of examining opportunities and threats that arise from these four factors.
With the results that the PEST analysis offers, it is possible to have a favorable vision when conducting market research , creating marketing strategies, developing products and making better decisions for the organization.
Factors involved in the PEST analysis
As we mentioned earlier, PEST is the acronym for Political, Economic, Social and Technological. Next, we have the definition of each of these points that will help you make a better market analysis :
Political
Government regulations and legal issues affect a business’s ability to be profitable and successful. The PEST analysis is responsible for evaluating how this can happen.
Topics to be considered include tax guidelines, copyright and intellectual property law enforcement, political stability, business regulations, social and environmental policy, labor laws, and safety regulations.
Companies should also consider their local and federal power structure, and discuss how anticipated changes in power could affect their businesses.
Economic
It consists of examining the external economic problems that can play a role in the success of a company.
This factor consists of evaluating different aspects such as interest rates, changes in inflation, unemployment, gross domestic product, and the availability of credit.
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Social
With the social factor, companies can make an assessment of the socio-economic environment of the market, which allows them to understand how the needs of consumers are formed and what motivates them to make a purchase.
Items to be assessed include population growth rates, age distribution, attitudes toward work, and trends in the labor market.
Technology
Technology plays an important role in business as it can affect business negatively or positively.
With the introduction of new products, new technologies and services, a certain market may have a difficult time adapting, so it is important to evaluate it from all angles.
Specific elements that need to be analyzed include government spending on technology research, the life cycle of current technology, the role of the Internet and how changes can be made, and the impact of potential information technology.
Steps to perform a PEST analysis
Performing a PEST analysis is a task that every organization that wants to ensure its success must carry out. Here are the steps to help you do it:
1. Brainstorm
Brainstorm the 4 PEST factors: Political, Economic, Social and Technological.
You can have an initial with a large group of people or divide into smaller units and later share your contributions to get an overview.
Brainstorming questions to answer for each item in the PEST analysis include:
Political factor
- What government policies or political groups could be beneficial or detrimental to our success?
- Is the political environment stable or is it likely to change?
- When are the next local, state or national elections in the country? How could this change government or regional policy?
- Who are the most likely contenders for power? What are your views on trade policy and other policies that affect the organization?
- How well developed are property rights and the rule of law, and how widespread are corruption and organized crime? How are these situations likely to change and how is this likely to affect you?
- Could any pending legislation or tax changes affect your business, either positively or negatively?
- How will trade regulation, along with any planned changes, affect your business? And is there a trend towards regulation or deregulation?
- How does the government address corporate policy, corporate social responsibility, environmental issues, and customer protection legislation? What impact does this have and is it likely to change?
- What is the likely timeframe for the proposed legislative changes?
- Are there other political factors that can change?
Economic factor
- What economic factors will affect us in the future? How does the performance of the economy affect us right now?
- How are our prices, income and costs affected by each economic factor?
- How stable is the current economy? Is it growing, stagnant, or declining?
- Are key exchange rates stable or do they tend to vary significantly?
- Are customers’ disposable income levels increasing or decreasing? How is this likely to change in the next few years?
- What is the unemployment rate? Will it be easy to build a qualified workforce? Or will it be expensive to hire skilled labor?
- Do consumers and businesses have easy access to credit? If not, how will this affect your organization?
- How is globalization affecting the economic environment?
- Are there other economic factors that I should consider?
Social factor
- How do the beliefs and values of our customers influence their buying habits?
- How do cultural trends and human behavior play a role in our business?
- What is the population growth rate and age profile? How likely is this to change?
- Are generational changes in attitude likely to affect what you are doing?
- What are the levels of health, education and social mobility in your society? How are they changing and what impact is this having?
- What employment patterns, labor market trends, and attitudes toward work can you observe? Are they different for each age group?
- What social attitudes and taboos could affect the business? Have there been recent socio-cultural changes that could affect this?
- How do religious beliefs and lifestyle choices affect the population?
- Are other sociocultural factors likely to drive change for your business?
Technological factor
- What technological advancements and innovations are available or in the works?
- How will this technology impact our operations?
- Is there any new technology you may be using?
- Are there new technologies on the horizon that could radically affect your job or your industry?
- Do any of your competitors have access to new technologies that could redefine your products?
- In what areas do governments and educational institutions focus their research? Is there anything I can do to take advantage of this?
- How have infrastructure changes affected work patterns (for example, levels of remote work)?
- Are there existing tech hubs that I could work with or learn from?
- Are there other technology factors that I should consider?
2. Identify opportunities
Once you’ve identified the changes taking place in the business environment, it’s time to visualize each one and brainstorm the opportunities this could open up for your organization.
For this step, allow the relevant people to get involved and offer their opinion. Later, group similar ideas and eliminate duplicates. You can draw great conclusions.
3. Identify the threats
It is important to think about how these changes could affect your business. By understanding this early enough, you can avoid these problems or minimize their impact.
For example, if a central part of the market is in demographic decline, could you open up other areas of the market? Or if technology threatens a key product, can you master that technology and improve the product?
Allow your employees to rate each of the ideas based on the level of impact they think it will have on the organization.
Discuss the significant differences in grades and ask them to explain their reasoning and evaluate those ideas again in case they have changed their minds.
When everyone thinks about the various factors, they are aligned, they will better recognize and understand the challenges others face.
4. Implement the measures
Create the actions you will take to exploit the significant opportunities in your business plan, and take the appropriate steps to identify the significant risks, manage them, and eliminate them.
Where you have identified significant risks, take appropriate steps to manage or eliminate them.
The PEST analysis provides a comprehensive overview of the opportunities and threats facing the organization now and in the future. Share the results with relevant stakeholders and use the report to monitor progress.
The process needs to be repeated at regular intervals to be aware of changes in the external environment and to keep strategies and plans up to date.
Tips for conducting a PEST analysis
After knowing what PEST analysis is and the steps to perform it, we have some tips for you to help you run this process effectively:
- Carefully select participants to provide expert knowledge but also a fresh perspective.
- Use technology to involve important people in different places and not lose their input.
- Minimize group thinking by brainstorming individually and then combining problems to get a big picture.
- Offer specific ideas rather than general ideas.
- Use quantitative data when possible to focus on a specific issue.
- Provide adequate time in the session to classify and prioritize ideas.
- Communicate the results to stakeholders and regularly update the analysis process.
Advantages of PEST analysis
Here are the main benefits of carrying out a PEST analysis, one of the components of the market analysis :
- It helps you detect business opportunities and gives you a warning of significant threats.
- It reveals the change of direction within the organization. This helps you shape what you are doing so that you work with change, rather than against it.
- Avoid starting projects that are likely to fail for reasons you cannot control.
- It helps you to leave the assumptions behind when entering a new market, as it allows you to develop an objective view of this new environment.
- Provides an overview of all crucial external influences on the organization.
- Supports more informed and decisive decision making.
- Assists in planning, marketing, organizational change initiatives, business and product development, project management, and research work.
PEST analysis is ideal for all organizations that want to know and measure current and future markets.
It is important to mention that the approach that an organization gives to each factor in the PEST analysis depends on the sector in which they focus.
With a PEST analysis, companies can visualize the risks in a general way and make the most of the business opportunities that are presented in the market.
