Table of Contents
Definition of PEST Analysis
PEST Analysis can be defined as,
“A framework which describes the arrayed inter-dependence of macro-environmental factors used in the environmental scanning component of strategic management”.
The PEST Model
PEST is the acronym for Political, Economic, Social and Technological factors. The environment in which an entity, lets say an organization operates is made up of external and internal environment. The internal environment is composed of the internal customers, which are the employees of the organization, the internal policies, mission and vision.
However, the external environment is a broad category which has been divided into micro environment and macro environment. The micro environment is made of factors such as the customers, suppliers, distributors, competitors etc whereas; factors making up the macro environment include political, economic, social and technological forces.
Significance of PEST Analysis on Marketing and Management Environment
When an organization is in the process of formulating or revising its strategies, conducting a market research or devising a business plan, it has to carry out a complete environmental analysis so that it takes into account those factors of external environment which can have a positive or negative impact on it.
Recently, experts have argued that there are two other forces which make an important part of the macro environment namely “Environmental” and “Legal” factors. Therefore, the PEST analysis has now been renamed as PESTEL analysis.
Let us have a look at each of the six factors and learn their importance in strategic management.
Political Factors
Political factors refer to the degree of intervention of government in the economy. There are certain formal and informal rules laid down by the government which every organization has to abide by in order to sustain its operations in a particular country. Important political factors include:
- Political stability
- Taxation laws
- Entry mode regulations
- Trade regulations such as NAFTA
- Pricing regulations
- Intellectual property rights
- Anti trust laws
- Entry requirements
- Tariffs
- Employee wages and benefits
Political decisions have a strong influence on many vital areas for business such as the education of the workforce, health of the nation and quality of the infrastructure of the economy such as the road and rail system.
Economic Factors
Economic factors are those which have a direct impact on the capital loss of organizations and purchasing power of customers. These include:
- Inflation
- Exchange Rates
- Rate of unemployment
- Literacy Rate
- Effectiveness of financial institutions
- Efficiency of free market
- Quality of infrastructure
- Interest Rates
- Business Cycle
- Stability of currency
- Skill level of employees
- Economic Growth
- Income distribution
Below is an example of economic factors and its impact on an organization, as mentioned in a book called Foundations of Economics.
- Higher interest rates may deter investment because it costs more to borrow
- A strong currency may make exporting more difficult because it may raise the price in terms of foreign currency
- Inflation may provoke higher wage demands from employees and raise costs
- Higher national income growth may boost demand for a firm’s products
Social Factors
Social factors are cultural aspects and demographic variables which are closely linked to the market potential and customers needs. These include:
- Age distribution
- Attitude towards health and environment
- Education
- Leisure activities
- Attitude towards career
- Changing lifestyle
- Gender Role
In developed countries such as UK and USA, the labour pool is growing. This means the costs for firms, who are paying pension to their employees have increased because the staff are living longer.
Technological Factors
Technology is what drives the phenomena of globalization. It provides competitive advantage to firms. Major technological factors include:
- Rate of technological innovation
- Rate of obsolesce of technology
- Technological development
- New technological platforms
- Diffusion of technology
Technology reduces costs, improves quality and leads to innovation. It can benefit consumers as well as the organizations providing the products.
Environmental Factors
Industries such as tourism, insurance and farming are being affected by environmental and ecological aspects. Environmental factors include:
- Environmental protection laws
- Waste disposal laws
- Energy consumption regulation
- Global warming
Due to the growing awareness of climate change, organizations are moving towards making products and processes which are environment friendly thus, creating new business opportunities.
Legal Factors
These are related to the legal environment of an organization and impact its demand and cost. Major legal factors include:
- Health and safety law
- Consumer law
- Competition law
- Employment law
- Discrimination law
Examples of PEST Analysis
During research reports and market analysis, PEST is normally run for the following companies and areas:
- Pest Analysis of Nike
- Pest Analysis of Coca Cola
- Pest Analysis for UK
- Pest Analysis for Tesco
- Pest Analysis for Wal-Mart
- Pest Analysis for Nestle
- Supermarket PEST Analysis
