PEST analysis is an analysis of the external macro-environment factors affecting the firms. The external macro-environment in which the firm operates can be expressed in terms of the following factors:
Political
Economic
Social-Cultural
Technological
Such external factors usually are beyond the firm's control and sometimes present themselves as threats. For this reason, some say that "pest" is an appropriate term for these factors. However, changes in the external environment can also create new opportunities and the letters sometimes are rearranged to construct the more optimistic term of STEP analysis.
It is a part of the external analysis when conducting a strategic analysis or doing market research and gives a certain overview of the different macro environmental factors that the company has to take into consideration. It is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations.
The environmental analysis should be continuous and feed all aspects of planning. The organization's marketing environment is made up of:
1. The internal environment e.g. staff (or internal customers), office technology, wages and finance, etc.
2. The micro-environment e.g. our external customers, agents and distributors, suppliers, our competitors, etc.
3. The macro-environment e.g. Political (and legal) forces, Economic forces, Socio-cultural forces, and Technological forces.
Let’s look into the different macro-economic (PEST) factors in details
Political Factors
These relate to the degree and extent of the Government’s intervention in the economy. Some examples include:
1. Tax policy
2. Employment laws
3. Environmental regulations
4. Trade restrictions and tariffs
5. Political stability
You must consider issues such as:
1. How stable is the political environment?
2. Will government policy influence laws that regulate or tax your business?
3. What is the government's position on marketing ethics?
4. What is the government's policy on the economy?
5. Is the government involved in any trading agreements?
Economic Factors
These have major impacts on how businesses operate and make decisions. The following are examples of factors in the macro economy:
1. Economic growth
2. Interest rates
3. Exchange rates
4. Inflation rate
Economic factors also affect the purchasing power of the customers and the firm's cost of capital. For example, interest rates affect a firm's cost of capital and thus the earnings of the business.
Social-Cultural Factors
The social and cultural scenario of a country affects the business to a large extent. It is very important that such factors are considered. Some of the factors are:
1. What is the dominant religion?
2. What is the attitude toward foreign products and services?
3. How much leisure times consumers have?
4. What are the varied roles of men and women within society?
5. What is the mortality rate of the population? Are the older generations wealthy?
6. Do the population have a strong/weak opinion on green issues?
Companies may need to change various management strategies to adapt to these social trends (such as recruiting older workers). It is more important for companies engaged in international business.
Technological Factors
These can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Technology is vital for competitive advantage, and is a major driver of globalization. Furthermore, technological shifts can affect costs, quality, and lead to innovation.
These include ecological and environmental aspects, such as
1. R&D activity,
2. Rate of technological change
The affect of these changes on the parties related to the business:
1. Does technology enhances the quality of the products and services of the goods and make them available at a cheaper rate?
2. Do the technologies offer consumers and businesses more innovative products and services such as moblie banking, new generation cell phones, etc?
3. How is distribution changed by new technologies e.g. books via the Internet, flight tickets, auctions, etc?
4. Does technology offer companies a new way to communicate with consumers e.g. banners, Customer Relationship Management (CRM), etc?
PEST Variations
The model has recently been further extended to STEEPLE and STEEPLED, adding education and demographics factors.
More unnecessarily (and also confusingly) PEST is extended to seven or even more factors, by adding Ecological (or Environmental), Legal, and Industry Analysis, which produces the PESTELI model.
The original PEST has a wider acceptance, because all the other factors gets covered under these four major heads.
For example Ecological or Environmental factors can be positioned under any or all of the four main PEST headings, depending on their effect. Legal factors can be covered under the Political heading since they are usually politically motivated. Demographics usually are an aspect of the larger Social issue. Industry Analysis is effectively covered under the Economic heading. Ethical considerations would typically be included in the Social and/or Political areas, depending on the perspective and the effect. Thus we can often see these 'additional' factors as 'sub-items' or perspectives within the four main sections.
The simplicity of a four-part model is also somehow more strategically appealing and easier to convey.
Completing a PEST analysis is very simple, and is a good subject for workshop sessions and brainstorming meetings. It can be used for business and strategic planning, marketing planning, business and product development and research reports. PEST analysis is similar to SWOT analysis - it's simple, quick, and uses four key perspectives.
