Have you heard of PEST analysis?
It involves researching four external influences that affect businesses on a macro level: political, economic, social, and technological factors. In PEST analysis, an analyst thoroughly investigates these four factors in relation to the business or industry.
But PEST analysis can also be a tool to identify current and future risks. These risks exist whether you take action or not. And once you know what to be cautious of you can create a risk assessment and plan to reduce the impact of these threats.
How to break down PEST analysis
PEST analysis is broken down into four categories. Each category focuses on a primary influence that can’t be changed by individual power. The first is political factors or the ‘P.’
Answering questions is the most effective way to go through the sections. For the ‘P,’ you can answer questions regarding the current political climate. For example:
- When’s the next state or national election?
- Could a change affect current government policies, and if so, how?
- Current leader(s) in power: How do they view businesses or policies that could affect your firm?
- Are there current or pending taxation changes that may affect your business?
- How do your government approach the following (and consider how it’ll affect your organization):
- Corporate policies?
- Environmental issues?
- Customer protection legislation?
- Which (if any) political factors are likely to change within the next year?
Governmental legislation, policies, and bills can change rather quickly. It’s important to have a thorough understanding of the current political situation in your area to identify potential changes.
Once you’re aware of potential changes in bills or taxation, you can assess risks.Will it cause devastation to the business or only a minor annoyance? Risks with greater consequences should be at the top of the list. Those risks need a plan of action.
Economic factors in PEST analysis reference the economy, exchange rates, unemployment rates, and customer income. The economy can make or break a business. Remember the real estate crash awhile ago? Real estate was the industry to be in but then the recession hit. It wasn’t pretty.
You don’t want to be another business that succumbs to a crashing economy. Consider these questions for your PEST analysis:
- Is the current economy stable? Is it declining or growing?
- What are the current exchange rates?
- Is disposable income on the rise, or is it likely to stagnate?
- What’s the current unemployment rate in your state?
- Are there other economic factors to consider?
Following economic trends is critical. While it’s not foolproof, it can point you in the direction of the economic future of your business. The more areas you examine, the bigger picture of the puzzle you have at your fingers. You can also assess the risks, although many will be high. For instance, an unstable economy is a high risk, as is exchange rates if you import from other countries.
Social and technological factors
Both of these factors should be studied individually but also together. Social factors involve the population and your target market. Technology includes everything from manufacturing to marketing. You can use technology to deliver products quickly, learn more about social factors, or maintain an advantage over the competition.
- Is the population growing or stagnating?
- How greatly will shifts in consumer attitude affect your business or sales?
- What social taboos could affect your organization?
- What are the (growing) levels of health and education in your area?
- How do consumers pay or learn about your services? Is it similar for the competition? How likely is this to change?
Technological factors to consider:
- What are some new advancements in technology that could benefit your business?
- How do consumers use technology to learn about your business?
- What tech is on the horizon that could positively affect your business?
- Is remote working in your industry on the rise? How will it affect your organization?
- What technology that you currently use is slowing down production? Can it be substituted for something new?
We’re becoming a technologically dependent society. Understanding its role in buying and using products is essential, whether your business is heavily technology-based or not. The businesses who don’t focus on technology or growing trends are easily left behind by those who do.
You can assess how much current and future technology could become a disadvantage, then build a plan of action to fix it. It’s easier to change the technology you use. Social factors, especially regarding the feelings and habits of customers, must be consistently observed to identify trends.
The risks develop when customers change their minds or habits, especially regarding your product and services.
By identifying trends, you can identify potential business risks. But that’s not enough. You have to determine the level risks and build a plan to combat them. PEST analysis is the strategic tool to help your business thrive, so be sure to do it at least once.