PEST analysis gives small companies a big advantage as it allows them to focus on targeted areas of importance that might help the business reach new heights.
Whether a business is deciding to enter the foreign market or launching a new product, business owners need to take into account several factors and understand the larger forces shaping their choices. One of the best ways to examine any decision is to conduct a PEST, Political, Economic, and Social and Technological analysis.
Any successful business needs to understand that political, environmental and social issues vary from country to country. This means you need to have a comprehensive understanding of the market you are about to deal with. At the same time, PEST helps you understand how the dynamics of one market may affect the dynamics of another. Let us closely examine what PEST analysis really is and how it can optimize your business.
Political
Political factors of a country include the government’s intervention in the economy. Some of the most important regulatory and legal factors include employment laws, tariff and trade restrictions, consumer protection laws, tax policies, labor laws and consumer protection. The foreign policy of the country plays an imperative role in determining the trade regulations of the state. This may result in a variety of trade restrictions or may offer various trade incentives. PEST analysis also takes into account the industry-specific regulations imposed by the company that may significantly have an impact on your company.
The Importance of Paying Attention to the Political Environment
Here are some major reasons why organizations and businesses need to keep track of political environment:
- A country’s political environment is the least predictable element in the business world. Keep in mind that lack of political stability may hinder business operations and can affect the appeal of a particular local market
- Governments tend to pass legislations which may impact the relationship between the organization and its consumers and suppliers.
- The actions of the government almost always influence the economic environment
- It is imperative to keep in mind that the government is a major consumer of goods and services
All these reasons point out why it is important for any business to look into the foreign country’s tax laws and structure before it decides to do business. Take, for example, Brazil, a country that imposes high import duties in order to protect its own domestic economy might not appear appealing to the US market.
Economic
Economic factors cannot be undermined in the world of business. Economic factors include interest rates in a country, exchange rates, interest rates, etc. The economic factors of any country are a prime indicator of much a company may profit from the market. The exchange rates speak volumes about how much an organization can benefit from operating in a foreign market.
The Importance of Paying Attention to the Economic Environment
Every business has a single goal in mind and that is to earn the maximum amount of profit. This can only be done if an organization is successfully able to analyze the demands of consumers and maintain quality goods and services. However, economic factors, such as recession, inflation, demand, and supply, can significantly impact a business’ progress:
- A country’s economic growth and development play an imperative role in determining how much revenue an organization can earn there. Economic growth commands the amount of finances that a foreign market generates at large and development provides an indication of the volume of money being invested in the various channels.
- Inflation is when there is an excess supply of money in the economy which is not supported by the outputs of good and services. With the increased amount of money, the prices of goods also increase in order to sustain the business, making it unprofitable for an organization to do business in this market.
- The interest rates have a direct impact on the loans organizations take to sustain and drive their growth. The higher the interest rate, the more difficult it may get for an organization to commit to projects that require high investments.
- When buying goods from an international market, a company has to convert its currency in order to make payments. If the currency of the buyer is strong, it is beneficial for the business. However, lower exchange rates would mean the company would have to shell out more money.
Before investing in a foreign market, you would want to see how economic conditions are going to influence your customer’s potential purchasing power and your revenue.
Social
Social factors include various cultural and demographic aspects of a society. This includes elements such as safety awareness, age distribution, population and career attributes etc.
The Importance of Paying Attention to the Social Environment
- If a business does not adapt to its external social environment, it will not be able to survive
- Social preferences regarding people’s wants and needs change from time to time, it is thus important for business to be aware of the wants and needs of people
- Adapting to the social environment allows businesses to use marketing campaigns and advertisements to their advantage
- A society that values higher education will provide a better workforce and will lead to more innovation and productivity
Environment considerations have also become a growing aspect in this category. It is thus important that businesses focus on all these factors to progress in the international market.
Technology
If an organization fails to adapt to the ongoing technological changes then it is doomed to lag behind its competitors in the market.
The Importance of Paying Attention to the Technological Environment
- Improved technology allows organizations to produce goods for less money, reducing production costs
- Improved technology allows businesses to expand efficiency and effectively
- Allows businesses to compete with other organizations in the marketplace
- Allows businesses to determine feasibility and profitability of the new venture
To succeed in the international market, businesses need to experiment with new technologies that can help make operating plants more efficient, resulting in low production costs.
As you can see, a PEST analysis can help any small international business make waves in its new market. PEST gives small companies a big advantage as it allows them to focus on targeted areas of importance that might help the business reach new heights.
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