In the discussion on SWOT analysis as a tool for strategy development, we talked about internal factors (strengths and weaknesses) and external factors (opportunities and threats) that can have an impact on business. In this post, we introduce another useful strategy framework – PEST Analysis.
Introduction and Definition
PEST analysis is a framework that helps ascertain aspects of various external factors (political, economic, sociological, and technological, or PEST) that can mean opportunities or threats for a business concern.
The main difference between a SWOT analysis and a PEST analysis is that while SWOT identifies the overall feasibility of a business proposition or idea at a point in time, a PEST analysis evaluates the market a company hopes to enter.
Although the quality of leadership and extent of financial resources decide a company’s future, the macro-environmental milieu represented by the PEST factors also greatly influence its prospects.
The most important aspect of these factors is that a company or business has no control over them and can only manage them as best as it can. This is why it has to evolve strategies to counter these factors, and this is where an analysis of the factors helps.
PEST analysis template
How exactly do PEST factors impact a business? Let us consider each factor.
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The policies of the government of the country where the business is operating have a big say on the sustainability and profitability of the business. For example, a strict health and safety policy would require a restaurant chain to invest more in systems to ensure hygiene.
Here are some other points to ponder:
– What is the political ideology of the government?
– Is the government socialist-leaning, or does it favour a completely free market economy?
– Will the government’s policies influence laws, regulation, or taxes?
– What is the government’s approach to trade and labour laws?
– What is the level of political stability?
– What is the level of corruption?
A business may also have to take into account local laws, too.
The economic climate would obviously affect the future of a business. Among issues to consider when analysing the economic environment are the business cycle (whether it is a time of boom or recession), rate of economic growth, rate of inflation, economic stability, and employment policy.
For example, the rate of inflation would be a major factor in fixing employee wages, and the higher the inflation, the higher the wages and the higher the business expenditure.
Social factors include the social, religious, and culture mores of the society where a business is operating and serving its customers.
Social factors bring under its sway demographics aspects, such as the average age and income of the population, level of education, and general outlook on life (whether liberal or conservative), and lifestyle preferences.
For example, a cell phone manufacturer probably cannot expect to sell a very high number of a high-end model in a society dominated by blue-collar workers.
A study of the technological factors in an external environment would focus on the leverage the use of technology would give a business.
Among questions to ponder are these:
– What level of automation is available?
– What is the scope for research and innovation?
– Is there adequate facility for online business?
For example, a garment retailer will be able to reduce costs by adopting online sales and reducing dependence on brick-and-mortar showrooms.
The PEST factors may affect companies differently. For example, a home appliance company would be more affected by social factors such as lifestyle than a defence equipment manufacturer.
Similarly, a global defence equipment manufacturer may be more affected by political factors and a government’s policy on whether to outsource defence procurement.
Example of a PEST analysis: PepsiCo
PepsiCo, the largest beverage company in the world, accounts for about 40 percent of the beverage market globally.
It operates in 150 countries, including India. Using a PEST analysis, let us see what changes in PepsiCo’s external environment (PEST factors) in these countries might affect the expectations of its global results.
- Governments may changes their tax policies and tax rates, which would affect profits.
- Governments could bring in stricter capital transfer laws and labour laws, which would affect its resource and employee management, respectively.
- Civil unrest and political instability exist in some countries, which may unsettle its expansion plans.
- Although the economies of many countries are showing signs of recovery, the threats of recession continue, which would affect consumer spending.
- Rapid fluctuations in currency rates have influenced the prices of raw materials, which would force the company to review its sourcing plans.
- Consumer awareness about the impact of carbonated drinks is increasing, which would affect sales.
- Healthy lifestyles are gaining popularity, which, again, would affect sales.
- Technological innovations have been made in beverage manufacturing, which would help maintain product quality.
- Internet-enabled technology has benefited manufacturing, which would facilitate smooth processes.
Uses of PEST analysis
Why is PEST analysis used and how is it helpful?
A company may have all the information it requires about the quality of its infrastructure, the extent of funds, and the employee talent available to it, but it may not be fully aware of the external environment in which it is to operate or launch a new project.
A PEST analysis helps it to study all these factors and evolve a strategy to take advantage of, or to overcome, these factors.
A PEST analysis helps in decision-making and timing. For example, a company can, through a PEST analysis, find out the factors both in favour of and detrimental to the launch of a project, and decide on the timing of launch.
It can even predict future prospects of a project or product by studying the PEST factors.
Extensions of PEST Analysis
Economic analysts have extended the PEST analysis to include ecological environment and legal factors—to make it the ‘PESTLE’ analysis.
In a PESTLE analysis, the PEST analysis of PepsiCo discussed earlier would bring under it additional factors—legal factors, including, for example, stricter food safety laws, and environmental factors, including media attention on beverage packaging practices.
Besides PESTLE, even more factors have been brought in for analyses of the external environment of businesses, including the following:
– STEEPLED: PESTLE plus demographic and ethics factors
– PESTLIED: PESTLE plus international and demographic factors
– LONGPESTLE: Local, national, and global analyses of PESTLE
A PEST analysis is a perfect foundation for building a business strategy. Variations of PEST can be chosen to recognise other factors. The model that is best for a particular business can be chosen.
Major Topics in Business Strategy
– Introduction to Strategic Management
— Core Competencies
— SWOT Analysis
— Horizontal and Vertical Integration Strategy
— Porter’s Five Forces Analysis
— GE McKinsey Matrix
— BCG Growth Share Matrix
— McKinsey MECE Framework
— Business Strategy Simulation Games
— Management Consulting
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