A PEST analysis is one of the useful tools of strategic analysis. It allows you to isolate the external factors that affect the condition of the company and points out the opportunities and threats associated with them. It can be compared to a slightly more elaborate version of SWOT analysis. PEST is an acronym for words describing the following factors: political, economic, social and technological. Read on to find out more.
PEST analysis – table of contents:
- The areas assessed by PEST analysis
- How to do a PEST analysis in 9 steps
- A PEST analysis with examples
The areas assessed by PEST analysis
- Political factors – they refer to the political and legal situation in the country where the company is located, as well as in the world. It is important to pay attention to the prevailing legislation and tax system. Regulations that restrict monopolistic practices can be a barrier to well-established companies.
- Economic factors – they pertain to the economic situation in the country and the world – important factors include GDP, inflation, the unemployment rate and the level of interest rates.
- Social factors – they are conditioned by culture, professed values, demographics, consumption patterns etc.
- Technological factors – with the intensive development of technology and innovation, they are increasingly important in the strategic activities of companies.
How to do a PEST analysis in 9 steps
Assessing the company’s macro-environment requires thorough research, but the information you will draw from it is certainly worth it. It will let you gain an objective perspective and provide solutions to any problems that arise.
- Identify the subject of the analysis – it can be a specific economic sector, a business idea or a new product or service. It is important to specify it so that you know where and what information to look for.
- Find the purpose of the analysis – entering a new market, changing an existing strategy, solving a problem, or discovering potential market opportunities?
- Get the necessary data − it is best if you divide the process into the 4 previously mentioned pillars – political, economic, social and technological. Due to their nature, they will often be connected or dependent on each other.
- Learn about the political and historical background – past events have shaped the current state of the industry. In turn, the ruling parties may have made decisions directly or indirectly affecting it. In retrospect, do you notice any differences in the functioning of the subject of your research (change in legal regulations, taxation, etc.)?
- Use widely available economic statistics and sources − any economic growth or recession can affect the company’s situation. Check how similar businesses have performed over the years so you don’t make the same mistakes.
- Study social relations − examine prevailing consumer behavior, purchasing trends, as well as professed values and views. You can find this out from opinion poll reports and your own observations.
- Explore the impact of technology – what technology solutions are being used in your industry, service, product? Have there been any recent innovations that you could be inspired by when developing your own strategy?
- Distinguish the relevant factors regarding the components of the company’s macro-environment – which of them have the greatest and least impact on the organization’s performance?
- Answer the question – how do the identified factors affect (or will affect in the future) the development of the company? What opportunities and threats do you see?
A PEST analysis with examples
Example 1. Your own candle business
- Political factors – no matter what type of business you decide to do, you will have to meet certain requirements. Selling candles involves meeting standards regarding the type of substances you will use to make products and describing the characteristics of each product.
- Economic factors – the popularity of scented candles was heavily influenced by the pandemic, during which more sales of these goods were reported. Despite this, homemade products do not have as much clout, and one-person businesses are mainly focused on the local market. This is not necessarily bad news – the low cost of investment can quickly pay off, provided that it will be effectively promoted and targeted.
- Social factors – with the growing environmental awareness, soy candles are attracting the attention of people who want to care about the environment. They are a good alternative to paraffin products, however, the latter are still the most popular.
- Technological factors – the basic materials you need to start production are widely available, and their cost is relatively low. You will need basic raw materials, namely wax, essential oils and wicks. The equipment needed to make candles you probably already have in your kitchen, which means lower expenditure. These include, for example, a microwave or oven, pots (for heating the wax), glass containers, jars, and a kitchen thermometer. On the other hand, using an e-commerce platform to create an online store makes the purchasing process easier and you can reach a larger audience.
- it is worth developing a marketing plan to promote our business and environmental awareness,
- it is important to ensure the smooth operation of the store – make the necessary changes and improvements to the website,
- in the case of rapid growth and a large number of people interested in our services – consider hiring employees to help, which involves fulfilling legal requirements.
Example 2. Public healthcare
- Political factors – the state of healthcare strongly depends on government policy. Investing in this sector improves the quality of patient care, allows you to buy the medical equipment and medicines you need, as well as educate qualified personnel.
- Economic factors – such factors as interest rates, unemployment rates and inflation, shape the situation in the sector. The unemployed, who do not have health insurance, will not be able to receive free medical care. The unfavorable economic situation may negatively affect medical personnel (low wages, staff shortages, frustration and fatigue).
- Social factors – recently, we can see some changes in the worldview regarding taking care of health. People tend to focus more on improving their fitness by playing sports and choosing healthy products. This is a positive phenomenon because the healthier the population, the less strain on healthcare. However, at the same time, there may be a growing interest in unconventional medicine, which leads to distrust towards doctors.
- Technological factors – research on new drugs, products or medical equipment at scientific institutes ensures the development of medicine that is intended to serve society. On the other hand, medical institutions work on non-integrated information systems. Because of this, they are unable to collect and compile patient data. Hospitals lack the specialized equipment necessary to save lives.
- it’s worth investing in new technologies to reduce costs and increase the availability and quality of health care – telemedicine, artificial intelligence, research, etc. Due to the fact that it is a state institution and there is not enough funding for the sector, this is an extremely difficult task,
- it’s important to improve information systems to simplify bureaucracy.
Example 3. Clothing industry
- Political factors – a serious problem in this sector is the working conditions in industrial plants – forcing minors to work, irregular working hours, poor working conditions that violate basic human and employee rights.
- Economic factors – the fashion industry offers many jobs, which drives economic growth and development. Product demand depends on the overall economic situation in the country, consumer needs and the people’s income.
- Social factors – increasingly, the media is talking about the negative phenomenon of fast fashion, which should be prevented, and promoting deconsumption attitudes. This is related not only to the political and legal aspects of illegal child labor, but also to greater environmental awareness.
- Technological factors – online sales, which boomed during the pandemic, became a common practice. This facilitated an increase in territorial reach and a broader group of potential customers who previously could not and/or would not purchase goods in the traditional manner.
- it is worth investing in technology development – creating easy-to-use websites, ongoing IT troubleshooting due to the large number of consumers buying remotely,
- measures should be taken to reduce the adverse effects of the clothing industry on the environment and to develop appropriate marketing communication on the subject,
- it’s important to improve working conditions in the clothing industry and prevent the illegal employment of young people.
Read also: SWOT analysis of online stores.