Aside from the company’s internal resources and industry factors, there are several other macro-economic factors that can have a profound impact on the performance of a company. In particular situations such as new ventures or product launch ideas, these factors need to be carefully analyzed in order to determine how big their role in the organization’s success would be.
One of the most commonly used analytical tools for assessing external macro-economic factors related to a particular situation is PEST Analysis.
What is PEST Analysis?
PEST is an acronym for Political, Economic, Social and Technological. This analysis is used to assess these four external factors in relation to your business situation.
Basically, a PEST analysis helps you determine how these factors will affect the performance and activities of your business in the long-term. It is often used in collaboration with other analytical business tools like the SWOT analysis and Porter’s Five Forces to give a clear understanding of a situation and related internal and external factors.
Why Do PEST Analysis for Your Business
It’s simple: To succeed.
For a business to be successful, they need a few things:
- A solid product.
- Identifiable brand.
- Happy customers.
- Thorough budget.
- An investor or two.
- Marketing plan.
- Unique selling position.
Throughout the endless target market research, customer acquisition costs, and project risk assessments, you forget about outside influencers.
If you’re aware of the influencers, they can aid your business. But if you don’t know them, they can cripple your business before it begins.
Understanding the PEST Factors in PEST Analysis
Before you jump ahead and start using this analysis, you should understand what each of these factors in this analysis signifies.
- Political – Here government regulations and legal factors are assessed in terms of their ability to affect the business environment and trade markets. The main issues addressed in this section include political stability, tax guidelines, trade regulations, safety regulations, and employment laws.
- Economic – Through this factor, businesses examine the economic issues that are bound to have an impact on the company. This would include factors like inflation, interest rates, economic growth, the unemployment rate and policies, and the business cycle followed in the country.
- Social – With the social factor, a business can analyze the socio-economic environment of its market via elements like customer demographics, cultural limitations, lifestyle attitude, and education. With these, a business can understand how consumer needs are shaped and what brings them to the market for a purchase.
- Technological – How technology can either positively or negatively impact the introduction of a product or service into a marketplace is assessed here. These factors include technological advancements, lifecycle of technologies, the role of the Internet, and the spending on technology research by the government.
A quick breakdown of PEST analysis
Every business is different. Some factors may not affect your firm or industry as it would with others. But it’s beneficial to have a well-rounded view of the many factors that could affect you. Along with the ones that will affect you.
This is why we do PEST analysis for your business — to be aware of risks, opportunities, influences, and limitations.
Here is a concise list of external factor. They highlight these factors impact the success of your business.
Political factors: Government laws, legislations, and politics
These factors are often legislative bills, regulations, and laws. You will experience them on a federal and national level. If you expand your business to several states, you must be aware of the laws in each location, respectively.
- Tax incentives.
- FDA regulations.
- Employment laws.
- Import restrictions.
- Health and safety laws.
- Regulation and deregulation.
There’s plenty more where that came from. But consider a few things on the list.
FDA regulations must be followed by food establishments and drug companies. If you’re selling mattresses, this won’t entirely apply to you — the FDA risks are limited.
So while the list of political factors (and economic, social and technology) are long, they’re not necessarily relevant to your business.
But profits? Revenue? Interest? That will affect your business.
Economic factors: Money related forces
These factors will affect monetary funds, sales, revenue, and profits. It’s rather straightforward.
- Inflation rates.
The factors can go further. But no matter where you are, taxes will follow you. They can’t be ignored (unless you want big trouble knocking on headquarters’ door). But the percentage of tax and the type of tax depends on your business.
The recession affects every business. But some (such as the real estate industry) over others (IT related careers).
The recession, among other things, affects your customers too.
Social factors: The people
These factors are more unpredictable than economic and political factors. Because social factors influence your target market.
And people are unpredictable.
But every business needs customers. What and how they buy depend on many different factors.
- Family size.
- Ethnic background.
- Health consciousness.
- Culture and sub-cultures.
This is a small portion of the many factors that affect social buying behavior. Many of these things are what marketers use to create buyer personas. These personas are necessary to market to your customers successfully.
If you’re selling whey powder, you go after gym rats and bodybuilders — not a father who spends his whole day in a cubicle and eats most of his meals from a fast food restaurant.
But social factors affect consumer attitude. It’s what makes a customer buy now rather than buy later (or never).
And we use technology to understand customers and create products they need.
Technological factors: From distribution chains to social media
If you run a tech-related business, this part of PEST analysis is particularly important. But even if you don’t, technology is in every business. The impact differs but it’s non-negotiable.
- POS systems.
- Online databases.
- Debit/credit machines.
- Distribution and supply chains.
If you offer wifi in your store, it’s an added luxury. It’s annoying if it goes down but won’t ruin sales.
However, if you handle all receipts on your online database and that goes offline — then you have a major problem. Especially after big holidays like Black Friday.
Again, this is about impact. How hurt will sales be if X technology doesn’t work? How will it affect business in the long and short term?
That’s what we’re trying to figure out with PEST analysis.
Here is a PEST analysis example that can give you a clear understanding of how this works:
|– New state tax policies for accounting|
– New employment laws for employee handbook maintenance
– Political instability in a foreign partner country
|– International economic growth|
– Changes in interest rates
|– Shift in educational requirements and changing career attitudes|
– Population growth rate
|– Automated processes in the industry|
– Rate of innovation
– Changes in technology incentives
Find more PEST analysis examples:
- PEST Analysis of Samsung
- PEST Analysis of Australia
- PEST Analysis of Instagram
- PEST Analysis of Netflix
- PEST Analysis of The Healthcare Industry
- PEST Analysis of Brexit
PESTLE Analysis: An extension of PEST Analysis
What is PESTLE Analysis? PESTEL analysis is an extension of PEST that is used to assess two additional macroeconomic factors. These factors are the Legal and Environment conditions that can have an impact on the company. Examples of PESTLE analysis are similar to those of a PEST analysis, but they would include the following:
- Discrimination laws
- Health and safety laws
- Consumer protection laws
- Copyright and patent laws
- Changes in weather and climate
- Laws regarding pollution and recycling
- Waste management
- Use of green or eco-friendly products and practices
So, if you want to assess a business situation in a comprehensive way, a PEST analysis is a definite must that can help you understand the macroeconomic business environment.
Why PEST Analysis Is Important For Every Business
What does your five-year business plan look like? Or your ten-year plan?
It likely involves growth. Whether it’s the expansion of a product line or opening stores in new locations, business changes need proper preparation. And that’s where PEST analysis comes in.
PEST analysis is the foolproof plan for business expansion
Both new business owners and veterans should include PEST analysis in their business plan. PEST can help you identify significant changes in the political, economic, social, and technological landscape. And these landscapes will affect your business in the future. By breaking down the critical influences in these four categories, business owners get a better understanding of whether their next business move is strategic or idiotic.
For example, political factors aren’t only related to elections, but also the regulations about wages, taxation, and intellectual properties. You also have to consider laws in any other country you do business. Even if you aren’t doing international trade yet, it could be a possibility in the future, and going in blind is a good way to toss success out the window.
Internal vs. External
Many business owners focus on internal relationships, such as marketing, accounts, and sales. Each of these departments is controllable from the inside. You can influence the marketing budget or put more people on the floor to close sales. At the end of the day, these results depend on the people you directly oversee.
But the categories of a PEST analysis can’t be influenced easily. Political, economic, social, and technological factors exist and will continue to exist without your input.
For example, technology continues to advance. More products and apps are being built to streamline business decisions. Developers are building artificial intelligence in the form of chatbots to talk to customers on websites. And while you don’t have to use this technology, it could provide opportunities in the future.
And you never want to miss an opportunity just because you weren’t aware of it.
Again, why do PEST analysis?
Because we learn…
- What external factors influence your business.
- Why they influence your business.
- And how much of an impact it’ll have.
All you need to do a proper PEST analysis is time. And the payoff is worth every second.
How PEST analysis works
PEST analysis requires research and data, sometimes ten years old, sometimes only a couple. The more information you have to sift through, the more accurate your final results will be. By looking into the past and the present, we can make predictions for the future.
Right now, the crypto-currency industry is booming. In the past, it’s been rocky, but always there. But now, interest is skyrocketing. People are buying more Bitcoin, and with the payout being high, more people are looking to expand into this area.
By studying these recent developments through an economic and technological lens, owners are deciding whether to jump into this for the long haul or for the time being.
You want to look at your industry in a similar light. Ten years ago, did it exist? Has it slowed down within the last two years or are more companies diving in? More competition can be a strong sign an industry is booming, but it could also be the first sign of oversaturation.
You can break down your assessment into the four categories of PEST analysis. Political includes regulations, political parties, and relevant bills recently passed. Are they in favor of businesses or against? Will they make it more difficult to break out into a new area? How can any of these influences negatively impact your company growth?
Now apply these questions to the remaining three categories and you’re on the way towards proper business preparation, no matter the industry.
How to Research and Write a PEST Analysis From Scratch
I’ve written dozens of PEST analyses over the last couple of years. And below I document my process on how, even when you’ve never written one before.
PEST analysis helps people become aware.
Aware of how political parties and regulations can impact a business. And how the economy (past, present, and future) affects an industry. It allows people to understand consumers — who they are, what they buy, and why they don’t buy. And finally, it identifies what technology is necessary for the development and success of a product, business, or industry.
It’s almost like an outline. It shows people what influences impact the quality, success, or devastation of businesses and industries. You can’t stop the four influences, but if you’re aware of them and their impact, you can plan around, against, or with them.
PEST analysis is often used by business analysts, marketers, students, and business owners, since it’s super important for every business!
Where to find information for your PEST analysis
It’ll be easier to find and segment information if you break your analysis down into four sections.
Each section will require its own information. However, some of this information will overlap. For instance, the economy is often closely tied to political (in)stability. And the state of the economy always affects consumers (social). You don’t need to look for these patterns specifically— it’ll become apparent as you discover new information.
Since I’ve written countless PEST analysis’ over the years, I’ll explain my process of how I research and write a PEST analysis from scratch.
You should have a topic in mind. Most PEST analyses are about a specific business, industry, or product. However, they can also be applied to countries too. You can’t start without a topic though, so have it ready.
Start with the history
You should be familiar with your topic. If you’re not, read about its history. Learn how it was established, how long it has been around, and who founded it. Read about any major achievements about the topic over the last few years. Jot down notes whenever something that seems relevant or important pops up.
After this informational primer, it’s time to start on the four sections. I do my PEST analysis in order of the acronym because the information often bleeds into the next section.
Finding Political Information
Political information is easier to find than other sections of the analysis (social and technological, specifically). Here, you’ll want to look into the current political climate where your topic originates and/or does business.
For instance, if your topic originates from America, you’ll research into the current political parties. Who is in charge? Has this affected your topic in any way?
If your topic (business, product, industry) was established years ago, what was the political climate like then? Are different parties in power now? If this is the case, then you’ll want to compare how things have changed for your topic from then to now.
This is also the section where you’ll look into laws and regulations affecting business. Common political regulations include:
- Employment laws
- Health and safety
- Tax policies
- Trade control
- Consumer production.
Searching for political information
I find this information with a simple Google search.
Such as “tariff laws America” (plug in the country you’re searching if it’s not America/the United States). It’s best to get this information from a government site. These sites end in .gov. You may also find information from organizations (websites ending in .org) but not all of these sites are legitimate organizations. Be wary while you research.
Honestly, most of the information you’ll find is dense. But it’s easier if you have a goal. Look for signs of…
- Possible political corruption
- Government (in)stability
- New bills/regulations that may impact your topic
- Any issues your topic has had with current/former regulations or political parties
If your topic is a company, finding the right information may be easier. Search for “company name + political issues” or “company name + policies” and see what comes up. Avoid any information from untrustworthy sites like the DailyMail and Wikipedia (unless there’s a legitimate source at the bottom).
Finding Economic Information
While you’re researching political information, you may come across connections to the current economy. For instance, political instability often leads to economic instability. This causes unemployment rates to rise and employee strikes. This affects how much disposable income people have.
The specific economic issues to keep in mind are:
- Interest rates
You may have already found information during your political section that confirms problems. But if you haven’t, search government sites for current tax rates, interest rates (if your topic involves international business), and the current state of the economy. Is it good? Thriving? Or bad and declining?
Again, use government websites. Search for economic statistics over the last few years. If your topic is an industry, see how many companies (startups) have started within the last few years.
If your topic is a business that has international stores, look into the relationship between the country of origin and each country the company does business. If the relationship is good, it’s often a good outlook for the company. But if it’s bad, it may lead to problems. What problems? Do a bit of digging online.
Also, if your PEST analysis is for a company, you may look into stocks. Have they been declining? On the rise? Because if it’s the former, then the business may not be looking good. And you’ll want to find out why. Other companies may be accepting payments in Bitcoin to attract younger customers. Not only will the business be appealing to them, but it will also show how it embraces new technology.
In some cases, I check out the competition if my topic is a business. I’ll look into how that other company has been fairing, economically. Specifically, how their sales have risen or fallen over the last couple of years. If they’ve dropped products, shifted marketing efforts, etc. And I want to know why. A competitor analysis isn’t always necessary, but it can shed light on possible problems your topic may face.
Finding Social Information
This section is a bit trickier. Political and economic sectors rely heavily on data and evidence. You can find this information on government websites. News sites too, even. And although you can find databases about demographics and population growth for this section — all applicable in a PEST analysis — I wouldn’t stop there.
Connections between economic and political influences
In the social section, I often examine how consumers are impacted by political and economic factors. You can draw conclusions based on the information you’ve already gathered from your political and economic segments.
Such as, if there is political instability, and the economy is on the fritz, then consumers may feel uneasy. They may have fewer job options. And that means they’re less likely to spend frivolously. If your topic is a luxury product, it may mean the company that makes it may have lower sales this year.
But you also want to learn about how consumers feel about your topic. If it’s a company, do consumers generally like it? Or is public opinion souring? There should be a reason for why.
Consider Facebook. The company’s CEO, Mark Zuckerberg, has consistently been in hot water over the past year. If not for data breaches affecting millions of users, but for their shady involvement with fake news and political tampering. This has led many consumers to shy away from using Facebook. And this affects businesses who use Facebook to reach new customers.
In this section of the PEST analysis, I’m more likely to search for my topic on news sites and publications. The more popular the topic, the easier it’ll be to find articles written about it. But if the topic has ever been in the news, you’ll likely find it online.
Websites to search include…
- The New York Times
- Local news websites
- Consumer Reports
If you know your topic has been in the news for something bad (like Facebook and data breaches) you can search the topic + the problem (i.e Facebook + data breach). When I do this right now, the top results are from respectable websites:
- Consumer Reports
- The Guardian
- New York Times
Each of these sites is known for being reliable. Although the information may overlap, take keynotes here. See how the problem is affecting consumer opinion. You may even want to take a look at the comments (if there are any) and see what people are saying. It’s coming straight from the lion’s mouth (consumers).
I think many PEST analyses favor numbers too much. We live in a world where anyone with an opinion can be heard, thanks to the internet. And enough of those voices can cause a business to change its policies and products. It can even cause the company to collapse. So it’s important to search for how consumers feel about your topic too.
Finding Technological Information
This section of the PEST analysis is a bit abstract as well. You’re looking into how new technological advancements how affected your topic positively or negatively. You should also look into what technology your topic uses (currently). And what technology they may want to incorporate.
You may want to look at competitors if your topic is a product or business. See what others are using. And think about why they are.
It may be beneficial to search for press releases involving your topic, if possible. If your company is using new technology, they may have announced it through a press release. You can search “company name + press release” or search through these press release websites:
- NPR: National Public Radio
- PR NewsWire
You may also find other information here for the other sections of the PEST analysis. Which is just an overall bonus. If all else fails, check if your topic has a website (unless it’s an industry or country). Discuss how they use social media (if they don’t then… discuss that too!). In this section, you’re assessing what your topic uses, what it doesn’t, and why.
Putting it all together in a final PEST analysis
You’ll likely have heaps of information at hand. Many it’ll feel like too much — but that’s never the case for a PEST analysis. As you begin to read through each section’s notes, incorporate the most interesting, pressing, or surprising information. If anything overlaps with other sections, include that too.
I write each section of a PEST analysis at a time. I take my notes and create coherent sentences. Sometimes I make a list of the most important points and include them that way. If the section is long, I’ll use subheadings to break up the information.
Work on each section separately. And then if there are overlapping themes, incorporate those in. You may want to use those at the end of each section to connect to the next.
Once you’ve done this, you’ve completed your PEST analysis! Most of the work is in finding the information and making it coherent. The last 10-20 percent is putting it all together. So, once the research phase is done, you’re basically done too!
Images: Becca Tapert, Green Chameleon on Unsplash, dizain/Shutterstock.com and DepositPhotos