There are several macroeconomic factors apart from the internal resources of the company and industry factors that may have a profound impact on the organization’s performance. During particular situations like the launch of new products or ventures, the external factors should be carefully analyzed to determine how big will be their role in the success of the company. One of the most common and famous tools for analyzing the external macro environments for a particular situation is called a PEST analysis.
Definition of PEST analysis
PEST stands for Political, Economical, Social and Technological factors. This analysis is implemented to access the effect of these four factors on business. In other words, PEST helps to determine how the activities and performance of a business will be affected by these four factors in the long term. It is mostly used in amalgamation with other analytic tools like SWOT analysis or Porter’s five forces to give a clear picture of the situation related to the internal as well as external factors.
The Factors of PEST analysis
Before the implementation of this analysis in the business, let us see what each of the factors is and what they signify.
- Political: Legal factors and government regulations are the main political factors that need to be assessed. These two factors can have an impact on the environment of the organization or trade markets. The main issues that are included in this factor are political stability, guidelines for tax and safety, regulations of the trade, new tax policies for state accounting, and new laws for employment for the maintenance of employee book.
- Economical: The company scrutinizes the economic issues that could have an impact on their operations. The factors included in this section are fluctuations in the interest rates, unemployment policies and rates, inflation, international economic growth, and the cycle of the business that are followed in that specific country where the company is operating.
- Social: Through this factor, a company can analyze the economical and social environment of a market. It also helps the businesses to understand the demands and needs of the customer and what could bring them to the market to purchase your service or product. The elements of social factors included are Cultural limitations, demographics, attitude lifestyle, changes in the career, growth rate of the population, and changes in the requirement of the education.
- Technological: In this segment, companies can analyze how technologies can negatively or positively impact the introduction of a service or a product. The attributes that are included in this segment are technological lifestyle and advancements, automated processes in a specific industry, innovation rate, role of the internet, changes in the technological incentives, and money spent on the technology by the government.
Advantages of PEST analysis
The benefits of the PEST analysis in the strategic planning of an organization are as follows:
- Visualization of all the important factors in one place: Having all the information in one place is very important during decision or strategy planning. A PEST analysis which is a combination of the above mentioned four factors represents all the vital facts that are necessary to build strategies that will fail-proof and will help in making a final decision. Thus employing PEST analysis before strategic planning is important for correct decision making that will assist your team to be on the right path.
- Identification of Threats and Opportunities: Gathering the required information is the first step of the analysis. After that, the next stage will be to properly evaluate them. Through evaluation, the team will be able to distinguish which ones the opportunities and which ones are threats are caused by the external factors. This will help you to take advantage of the upcoming opportunities and counteract the threats.
- Ability to collect information from the experts: A PEST analysis is also a process of seeking information from the experts who knows the current situations and can see future shortcomings. This type of information is extremely valuable in creating the most effective marketing strategies.
Other Benefits of PEST analysis
Apart from the above vial advantages, there are a few other benefits of PEST analysis also, which helps the businesses to reap high dividends. They are as follows:
- A greater and better understanding of the company
- The strategic planning is more effective in the long term
- All the potential dangers and threats are highlighted in bold
- Provides valuable insights for numerous business opportunities
Purpose of PEST Analysis
Many factors might change or affect the variables and influences the supply and demand level, and the production cost of a company. PEST analysis analyzes those factors in the macro-environment. PEST analysis categorizes the attributes into four segments of Politics, Economy, Social and technology and examines the impact of each element on the performance of an organization.
Through PEST analysis, the graph of the growth or fall in the market, potential and position of the company and the direction of the operations an also be known. PEST analysis can be described as a framework for taking strategic decisions in a company.
Limitations of PEST analysis
Even though most of the factors are examined in the PEST analysis, but there is still a chance that they might change within a day due to their dynamic nature. Some elements are based on assumptions and thus may be inaccurate. For a PEST analysis truly to be effective, it should be combined with SWOT analysis.
Thus we can conclude that PEST analysis is a vital part before commencing any type of strategic planning process. Without properly knowing the external elements, the companies will never be able to identify the threats and accomplish their goals. The insights from the PEST analysis will make sure that the strategies made after analyzing each of the factors will be successful.
