For a business to be successful, it must strive to exert significant control of the external factors that affect its work conditions. The PEST Analysis framework is a valuable management tool developed for this purpose. It is designed to help organizations understand the external factors that influence the conditions in their business environment. This article discusses the PEST Analysis.
What is it?
PEST Analysis is a management framework that ultimately helps organizations determine their most competitive position in the market. It identifies the political, economic, social, and technological factors influencing a business's operational space. These four components rank among the most significant external influences in a company. They impact the company by contributing to the challenges and opportunities that define its operation. They also provide the backdrop against which certain strategies are implemented to overcome and exploit them respectively.
Political Factors
Political factors include government policies, regulations, and other factors that the government uses to moderate the business space. It could range from the imposition of import tariffs, taxes, and other levies to the rollout of economic and fiscal policies. The business environment reacts to these impositions and policies in various ways.
Economic Factors
Economic factors ultimately affect the purchasing power of the populace in response to the impact they have. They could range from inflation, interest, and exchange rates to the overall national economic outlook.
Social Factors
Social factors influence the purchasing habit of the average consumer by influencing their choices and interests. They include the social demographics, class, religious, cultural, and societal trends that determine how people spend their money.
Technological Factors
Technological factors refer to the degree of influence technology has over the market and the consumer. It considers how technology and its related components affect market trends, consumer behavior/choices, and the general market outlook.
More recently, the PEST Analysis framework has been adjusted to account for factors other than the four mentioned above. These new factors include "Legal" and "Environmental" factors, both considered for their direct but external influence in shaping the business environment.
When do we use it?
The PEST Analysis framework is a valuable tool used in the following situations.
When you look to spot any threats to your business's growth and weaknesses, this is so that you can provide appropriate mitigatory measures.
When you look to expand operations to a different market segment, target demographic, or location, it can help you plan for new peculiarities, so your business stays afloat.
When your business needs to meet its productivity target or is underperforming in certain areas, it can help you identify the factors responsible for the underperformance.
When you are set to make changes to your business's organizational structure, operational profile, or work policy/system/strategy, it can help you identify the path with the least or greatest resistance.
Whenever you need to identify any significant political, economic, social, and technological influence in your business's environment.
It can assist an organization in recognizing and capitalizing on opportunities offered in the business environment.
What business questions is it helping us to answer?
What political factors or scenarios will affect my business? For example, what type of impact with government policies, regulations, and laws have on the business?
What national, regional, and global economic factors influence my business? What are the implications for the growth of the business?
What social factors are responsible for the reception and patronage my business receives?
How do present and future technology affect the growth of the business? How will my business respond to emerging technologies or the threat of the existing ones becoming outdated?
What present or potential threats and opportunities will present themselves to the business's operations? How will these threats and opportunities affect the business?
How do we use it?
To effectively carry out a PEST Analysis, you must assemble a team of knowledgeable persons to source and analyze the relevant data. You can now outline the political, economic, social, and technological factors influencing the company's business environment.
You must develop strategies around managing the challenges posed by these factors and exploit the opportunities they present. You can create a more productive workspace when you use the PEST Analysis tool to develop a strategy that successfully aligns these four factors.
Practical example
A PEST Analysis is undertaken on a company's clothing line to assess its market performance. The company lists the political factors impacting its performance, including government taxes on textile imports and an indigenous derivative policy. Economic factors include high inflation and interest rate and local currency devaluation that increases the cost of textile material purchases. Finally, it looks at means to face these challenges, including sourcing tax reliefs, alternative funding channels, and other ameliorating provisions.
Social factors such as a predominantly youth population and its trendy sub-culture encourage local patronage. In addition, technological factors such as access to advanced knitting machines and its massive semi-automated factories enhance production. Armed with this knowledge, it resolves to exploit the opportunities that exist in the market and ramp up the production of its stylish line of products.
Ultimately, it can roll out its clothing line to a receptive audience and a more friendly business environment.
Advantages
It provides a straightforward business management tool. It'll not take great effort to be carried out or understood by its users.
It provides a long-term strategic planning tool for businesses with a high turnover. PEST analysis will not cause any stoppages and resulting revenue loss to the operation of your business
It helps to foster improved management of your business's external environment. This is crucial to the survival and growth of the business.
It can facilitate an increased understanding of the peculiarities of your business and its operations. This is due to the amount of relevant data collected to undertake it.
It can help you identify threats to your business as well as opportunities that present themselves in your working environment.
Disadvantages
There is a risk of the Pest Analysis being outdated and ineffective in a short while. This could be due to the dynamic nature of your business environment.
The immense amount of data collected may pose a problem with analysis and use for intended purposes. Care has to be taken in organizing and digesting the information.
It involves a degree of estimation and assumptions. Thus, it may not be entirely possible to rule out the possibility of miscalculating or misrepresenting facts.
There might be certain inaccuracies in the account of the people who provide the data for the Pest Analysis. This may result in certain implications for the accuracy or effectiveness of the analysis.
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