PEST analysis

A PEST analysis is an analysis of the external macro-environment that affects all firms. P.E.S.T is an acronym for Political, Economic, Social, and Technological factors of the external macro-environment. PEST analysis is a simple, useful and widely-used tool that helps us to understand the "big picture" of our environment factors. Such external factors usually are beyond the firm’s control and sometimes present themselves as threats. However, changes in the external environment also create new opportunities. As such, it is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations.

Advantages of PEST analysis:

1. First, by making effective use of PEST Analysis, you ensure that what you are doing is aligned positively with the powerful forces of change that are affecting our world. By taking advantage of change, you are much more likely to be successful than if your activities oppose it;
2. Helps you avoid taking action that is doomed to failure from the outset, for reasons beyond your control; and
3. PEST is useful when you start operating in a new country or region. Use of PEST helps you break free of unconscious assumptions, and helps you quickly adapt to the realities of the new environment.

Political Factors
The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses.

• Political stability
• Risk of military invasion
• Legal Framework for conduct enforcement
• Intellectual property protection
• Trade regulations & tariffs
• Favored trading partners
• Anti-trust laws
• Pricing regulations
• Taxation – tax rates and incentives
• Wage legislation – minimum wage and overtime
• Work week
• Mandatory employee benefits
• Industrial safety regulations
• Product labeling requirements
  

Economic Factors
Economic factors affect the purchasing power of potential customers and the firm’s cost of capital. Marketers need to consider the state of a trading economy in the short and long-terms. This is especially true when planning for international marketing.

• Type of economic system in countries of operation
• Government intervention in the free market
• Comparative advantage of host country
• Exchange rates & stability of host country currency
• Efficiency of financial markets
• Infrastructure quality
• Skill level of workforce
• Labor costs
• Business cycle stage (e.g. prosperity, recession, recovery)
• Economic growth rate
• Discretionary income
• Unemployment rate
• Inflation rate
• Interest rate
  

Social Factors
Social factors affect customer needs and the size of potential markets.

• Demographics
• Class structure
• Education
• Culture (gender roles, etc)
• Entrepreneurial spirit
• Attitudes (health, environmental consciousness, etc)
• Leisure interests
  

Technological Factors
Technology is vital for competitive advantage, and is a major driver of globalization. Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions.

• Recent technological developments
• Technology’s impact on product offering
• Impact on value chain structure
• Impact on cost structure
• Rate of technological diffusion
• Research and Development activity
  

To use this analysis, follow this three stage process:

1. Brainstorm the relevant factors that apply to you;
2. Identify the information that applies to these factors; and
3. Draw conclusions from this information.
   

The number of macro-environmental factors is virtually unlimited. In practice, the firm must prioritize and monitor those factors that influence its industry. Even so, it may be difficult to forecast future trends with an acceptable level of accuracy. In this regard, the firm may turn to scenario planning techniques to deal with high levels of uncertainty in important macro-environmental variables.