Samar was thinking of starting his own kombucha business. As a kombucha-enthusiast, he first wanted to know whether his passion was mutual. For a deeper understanding of the market, responses and trends, he conducts a PEST analysis.
A PEST analysis is a macro-level planning strategy that helps organizations assess future changes based on four factors—Political, Economic, Social and Technological. The world is changing every minute of every day. Today, chia seeds may be trending but an exotic nut may be more important tomorrow.
For any organization to sustain competition and market changes, they need a foolproof strategy in place. Explore how a PEST analysis can help you grow your organization, overcome challenges and tackle unavoidable changes in the business climate.
What Is A PEST Analysis?
Every business operates within a specific political, social and economic environment. Whether it’s government policies, technological advancement or social factors, every aspect of this environment has the power to derail your business strategy. Of course, no one person or business has complete control over these changes—as most of these are external. But you can always prepare for and anticipate them.
A PEST analysis helps you in the following ways:
It helps you study the competition and shows you how you can survive by developing sustainable strategies
It helps you analyze market growth, standing and position with respect to your competitors and customers
It helps you assess growth strategies to expand your business
It helps you study the threats and opportunities for your business, specific to your industry
It helps you strategize based on different geographies, demographic and products/services
For instance, if you’re planning to set up a factory in a remote city, you first have to understand the environmental impact of your action(s). There may be restrictions to how much fuel you can use, waste management and even the number of employees you can hire (and wages). Considering these factors before rolling-out strategies is critical to avoid heavy losses or complete breakdown of planning.
The Four Factors Of A PEST Analysis
You can use a PEST analysis in multiple scenarios—whether you’re establishing your own business or expansion, facing a substantial shift in market preferences for your product or service or even an unforeseen change in external policies. There are four factors that you have to consider while conducting a PEST analysis:
Political factors are large-scale changes that can impact your internal policies. From employee protection and wages to government regulations that may hamper your business, there’s a lot you need to take care of. Many organizations face a loss of investments due to strict government policies. Foreign investors may be reluctant to invest in your business if there are restrictions that discourage them. The risk may be borne by you, but it’ll not be welcomed by investors.
Other political factors that can affect you are government tax policies. This can impact your output, profit and loss. Erratic governments lead to short-term planning, affecting macro-level projects.
There are five economic factors that can affect your business: supply and demand, inflation, unemployment, interest rates and foreign exchange rates. As the market fluctuates, each of these factors can be impacted in a day. You have to strategize accordingly to accommodate micro and macro-level changes. These can affect consumer demand, exports and imports, purchasing power, valuation and more.
Economic factors may force you to rehash your strategy even if it means completely changing your business plans. Always take external factors into account before jumping into a particular line of business. For instance, you wouldn’t start a business during a recession.
B2C or business-to-consumer organizations are largely impacted by social factors like culture, geography, religion, society and buying habits. If you’re tapping into a new market, you have to consider whether your consumer base is strong in that area.
For instance, McDonald’s wasn’t well-received in India at first. Not only did they have to consider the limited purchasing power of their consumers but also account for the differences in taste. McDonald’s offers unique menu items for different countries. From the Indian pizza McPuff to the fried mozzarella bites in Italy, they’ve had to tailor their menu to the local demographic.
The transition from print to digital has been a rough ride for many businesses. Many local bookstores, independent shops and business owners have had to stop operations because of decreasing demand. At a time when technology has revolutionized practically every sphere—from medicine to marketing—businesses have to rally the troops only to keep up. Technological factors include complete system updates, internet connectivity in the area where you’re operating and even policies like censorship or regulations. Data collection through information technology has streamlined operations. But many organizations are still grappling with developing sound marketing strategies.
These four factors make up your organization’s external environment in which it operates. If you want to build a sustainable model where you can keep up with changing times, you have to conduct a PEST analysis.
A Step Above—PESTLE Model
There are several variations of a PEST analysis to include other factors that may impact businesses today. One of these variations is the PESTLE Analysis in strategic management. The PESTLE model includes two additional factors—legal and environmental—that are very potent in any business environment. Let’s explore each of these factors with examples of a PESTLE analysis.
Today, organizations are hard-pressed to adopt sustainable and eco-friendly options to lower negative environmental impact. Manufacturing eco-friendly fibers to manage mass production and landfills, organizations have to look out for laws and policies around environmental factors.
Legal factors revolve around laws that determine employment, health, safety, consumers and discrimination. Organizations have to work toward protecting their employees’ interests in the context of workplace discrimination and other factors. Similarly, consumer laws ensure that they’re not exploited by organizations with respect to prices, what they offer and quality. Offering minimum wage and employee benefits are part and parcel of legal factors. An employee can take action against you if they feel wronged in any way. You have to make sure to offer a healthy and robust work environment to your employees.
Environmental factors like weather and climate can significantly impact your business. For instance, if you want to enter the tea harvesting landscape, you have to pick a place that has a conducive environment. Tea cultivation requires a specific climate and it’s important for you to take this into consideration. Again, other environmental factors affecting businesses are what impact does your product or service has on the environment. For instance, Coca-Cola has trialed a paper bottle to reduce—and eventually eliminate—plastic waste. Efforts toward eco-consciousness are increasing and you have to jump on the bandwagon if you want to stay relevant.
Whether you want to focus your efforts on PEST or PESTLE, do everything you can to make sure you stay afloat in tough situations. There should always be a plan ‘B’ or contingency plans to account for setbacks or challenges.
How To Do A PESTLE Analysis
There is no one way to conduct a PESTLE analysis, but here are the broad steps that’ll guide you:
Analyze All The Factors That May Impact Your Business
The first step in the process is to assess which of the PEST factors affect your business. It isn’t necessary that you have to be aware of all four or six factors. It varies depending on which line of business you’re in. For large-scale, industrial businesses, political, legal and environmental factors are more relevant than social factors. For a café owner, social and economic factors will be more applicable.
Information is power. The more you know, the better you can plan. Even if you don’t have complete control over external factors, you can still study past trends to strategize. It’s better to rely on concrete data to come up with solutions. Collect data, numbers and information from various (reliable) sources to make sure your strategy is foolproof. This way you minimize the risk of failure, if any.
Identify Opportunities And Threats
If you’ve recognized which factors affect your business in what capacity, you’re in a much better position to identify opportunities. You can assess how you can turn these changes into opportunities with careful planning. It could be a shift in the consumer’s purchasing power that you want to maximize or a change in policy that can help you increase profits.
One of the most important elements of conducting a PESTLE analysis is that you can’t do it alone. You need an entire team to back you up, create solutions and brainstorm ideas. As a part of strategic management, a PEST analysis is all about assessing the needs of your organization and its people in the context of your external environment.
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