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PEST analysis examines outside factors and their influences on business. It’s a strategic planning tool used to understand these factors and measure their impact.
Before we do PEST analysis, you must understand what it is and why we use it.
What is PEST analysis?
PEST analysis is a tool expressing the macro environment of businesses. Specifically, it helps to understand external factors and their influences on a company.
This analysis stands for political, economic, social, and technological factors. Each of these categories identifies forces that affect every business — but to different degrees.
Political factors often relate to legislative laws. Consumer, health and safety, trade, and regulatory requirements are a few to consider. These are laws created by the government and are set by legislative leaders. It is impossible to change these rules as an individual.
Economic factors are, but not limited to, inflation, the recession, unemployment/employment rates and interest rates. Companies can attempt to recession-proof their business, but it’s not guaranteed. Neither are the fluctuations in employment and unemployment rates. But they affect the buying capabilities of consumers. And if consumers aren’t buying products, no business is safe.
Consumer behavior, and purchasing power, are also linked to social factors. Why consumers buy products is studied and transferred into target research. This way companies can market products effectively to the right people. They must consider culture, ethnic backgrounds, health consciousness, social class and many other factors.
Like with political factors, most social factors can’t be changed singlehandedly. They must be observed and understood in order to sell to consumers. While you can offer items to users, there is no guarantee they will buy. You must solve their problem first, and that starts with understanding their needs.
Technological factors relate to technology issues, complications, and solutions. It deals with everything from cyber-security to manufacturing equipment. Technology is used to market and deliver products. It’s also used to address consumer complaints. The company with the best, most agile technology, has a unique competitive advantage.
You must stay up-to-date on the latest technology and be open to utilizing it within your business.
Now, how do you use PEST analysis?
You must gather information. If you’ve no idea how to start, you can do competitor analysis. That is, analyzing competitor data and understanding their selling points, complications, and areas they need to improve.
It can provide an overview of information related to strengths and weaknesses as well.
Now focus on PEST. Start by breaking down the categories.
You assess political factors first. Address every single law that will affect your business. This means current ones you already adhere to, and things you may need to in the future. Assess the impact of following and not following these laws.
Once done, move towards economic factors. This list may be long. You must determine market trends, inflation rates, taxes, and new influences within the economy. How high are inflation rates and how does this affect the production and distribution of products? Is the recession affecting sales or growth? How much do you pay in taxes?
Move on towards consumers. If you’ve done target market research, this section may already be completed. You’re looking at trends that affect how and why your target market buy.
For instance, bad PR for your competitor may have consumers thinking twice about using a product. If you supply a similar product, you may want to assess how to differentiate from the issue customers are reporting.
And lastly, consult your technology. What technology do you use day-to-day? How does it impact business? Where can you upgrade and how will it enhance productivity or reduce costs?
Once this is completed, you’ll be able to do PEST analysis successfully. Measure and utilize your results immediately to monitor how this data positively affects business.
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