Numerous factors determine and affect the environment of an organization, which should be identified, understood and analyzed by the company so it can achieve optimum performance. PEST analysis categorizes these factors affecting the organization under four headings, namely:
If you want to know what is PEST analysis and how it can be used to gain an insight into the environment of your organization, you need to understand what these factors represent and how they are interdependent. Once these environmental factors are identified and analyzed, organizations are in a better position to plan an effective strategy to meet their objectives and minimize any errors that might be causing a performance-expectation gap.
Here is a brief explanation of each factor in a PEST analysis:
Political factors refer to the degree of government intervention in the economy. The legal and regulatory factors included are labor laws, tax policies, consumer protection laws, employment laws, environmental regulations, and tariff & trade restrictions. Often, the foreign policy of a country play an important role in determining the trade regulations, which can either result in trade restrictions or trade incentives. The industry-specific regulations imposed by the government also significantly impact the company and are also a part of this category in the PEST analysis.
Economical factors include the inflation rate, exchange rate, interest rate, employment/ unemployment rate and other economic growth indicators. The economic factors faced by an organization have a significant impact on how a business carries on its operations in the future. The exchange rates affect the organization by affecting the cost of imported and exported goods. Furthermore, the interest rates prevailing in the economy influence the cost of capital available to the organization and hence play an important role in the expansion and growth of the organization.
Social factors include different cultural and demographic aspects of society that form the macro-environment of the organization. Social factors include career attributes, age distribution, population and its growth rate, health consciousness and safety awareness. A study of these factors is important to understand what is PEST, and can help organizations understand the dynamics of existing and emerging potential markets and future customer needs.
Technology is evolving at a rapid pace and consumers are becoming extremely tech-savvy. With the advent of new technology, older technology gets outdated and obsolete. The technological factors an organization faces include technological changes, R&D activity, obsolescence rate, automation and of course, innovation. If an organization does not look out for technological changes, it can lag behind its competitors.
Developing an understanding of what is PEST analysis becomes even more important when an organization is about to launch a new business or a new product as all these factors play an important role in determining the feasibility and profitability of the new venture.
Recommended read: Examples of PESTLE analysis.
Therefore, developing an understanding of what is PEST analysis is useful for organizations for analyzing and understanding the ground realities of the environment they have to operate in. Realizing what is PEST and knowing how to take this analysis into consideration, the organization can be in a better position to analyze the challenges, environment, factors, opportunities, restrictions and incentives it faces. In case an organization fails to take into account any one of these factors, it may fail to plan and operate properly.