It is always scary to get started. Often, the best way to deal with your fear is to understand it. Predicting the causes of any unexpected changes can help you create an action plan that fits your needs. How can you find them out? That’s where a PEST analysis comes in.
Read this post to understand how PEST analysis helps identify external changes impacting your business and what you should do about it.
What Is a PEST Analysis?
A PEST Analysis is a model used to define the political, economic, social, and technological aspects that could influence a brand now and in the future. The PEST analysis is a helpful framework for understanding market growth or decline. It’s meant to help a company’s management predict oncoming changes in their industry and develop strategies to adapt. It helps choose the potential, risks, and direction of a business.
A PEST Analysis is broken down into four components, each with its particular impact on a company’s prosperity. These parts include:
P (Political Environment)
This part investigates how the current political climate helps or slows down your business. You have to examine labor regulations, intellectual property (IP) protections, trade deals, tariffs, and more.
It is clear from the list above that political aspects often affect companies and how they do business. Organizations need to be able to survive with the current and anticipated future laws and adapt their marketing policy accordingly.
E (Economic)
In this part, you have to analyze external economic factors and their impact on the business and consumer base. Crises, unemployment rates, interest rates, inflation, cost of living, and the economy’s overall health are a part of the economic analysis.
These factors can be later split into macro-economical and micro-economical factors.
S (Social)
This element analyses the social situation of your chosen market and how it forms consumer wants and needs. You have to learn the level of education, growing market trends, personal values, generation preferences, and more to determine how to appeal to your target audience.
T (Technological)
This component analyses growing technological opportunities and identifies how they’ll impact your company. Check out technology that is disruptive to your business alongside potentially beneficial technologies. Automation, artificial intelligence (AI), and remote work are examples of tech changes worth analyzing.
Analyzing these parts will help you and your team gain a comprehensive understanding of the external factors that may positively or negatively affect your business’s strategic plans. Understanding those factors allows you to quickly create the strategy that would provide conventional safety in achieving its goals.
How Often Should a PEST Analysis Be Done?
A PEST analysis can be done as often as a business needs. It is good to use a PEST analysis when there have been considerable changes that may impact a business. It could be a change in interest rates, new government policies, or the introduction of new technology. It should be done often so as not to become outdated.
When to Use a PEST Analysis
A PEST analysis can help you investigate and understand external conditions and changes that are influencing your business. Check out some specific instances where a PEST analysis should be conducted.
When external conditions drastically change
Sometimes external circumstances can change the business drastically in no time. For example, in April of 2022, COVID-19 lockdowns in China caused worldwide shipping delays. This type of delay impacted a lot of companies, and it’s hard to understand how—or when—your company will be impacted as well.
A PEST analysis can help you anticipate how current external changes will impact your business in the future, so you can adjust accordingly.
Expanding into a new market
PEST analysis also can help when you’re expanding into a new audience or market. Here it will be useful to analyze the economic and cultural factors.
For example, in the 1960s, General Mills started to sell their cake mix in Japan after their success in America. They have chosen an advert showing its preparation in a rice cooker since many Japanese households at the time did not have even an oven. In addition, in Japan, rice is considered a sacred food, so the rice cooker was often solely used for just one purpose—cooking rice. The idea of mixing other ingredients with the rice was shocking for their culture.
This mistake was one of the biggest reasons why cake mix were not sold as expected. This is a good example of how a PEST analysis could have avoided this difference in attitude.
Developing a new product
When you’re developing a new product, you should do a lot of research, including figuring out the ideal customer portrait (ICP). A PEST analysis can help you think deeper about the external factors that affect your ICP and how that would influence their decisions related to your product.
PEST Analysis Advantages and Disadvantages
While a PEST analysis can be helpful, there are a few things to consider before it starts.
Pros of a PEST Analysis
Quality insight: A PEST analysis makes research about the future market trends. That knowledge then lets you diminish potential threats while investing in emerging opportunities.
Encourages strategy: A PEST analysis helps you get a deeper understanding of your market. It will allow you to improve strategic planning. Also, it can help a brand to identify and leverage opportunities.
Simple to run: A PEST analysis is easy to carry out and produces significant amounts of information.
Cons of a PEST Analysis
The danger of oversimplification: PEST results work on hypotheses, and analysts risk disregarding the context of their data. This could lead to making wrong decisions.
Difficulty in measuring change: Markets can shift quickly, and it’s often difficult to take into account all trends at a particular point in time.
Large amounts of data: A PEST analyses many parameters, but capturing too much data at once can be overwhelming. Ensure you’re analyzing the variables you really need for your business before you dive into the actual research.
How To Conduct a PEST Analysis
Below are the basic steps for carrying out a successful PEST analysis.
1. Analyse Oncoming Trends
Identify any changes occurring in your chosen market (also, the rumors about upcoming possible changes) and analyze their potential cause through a political, social, economic, and technological lens. Then, you can use that information to find out how they’ll affect your company in the short and long term.
2. Identify Potential Threats
Use the PEST analysis to identify growing trends that can or will impact your business. Use that information to create strategies that can diminish or avoid potential harm.
3. Identify Potential Opportunities
Similarly, you can use the PEST analysis to find market trends that your company can invest in. Look at the market conditions through each PEST item and find the trends, if any, you can use to your advantage.
4. Enact a Plan
Once you’ve found potential threats and opportunities within your market and created appropriate strategies for each. Then add them to your overall business plan.
PEST Analysis Example
An example in the social environment of the PEST analysis is McDonald’s. Due to the fact that the consumption of pork is prohibited in South Korea, McDonald’s cannot sell this type of meat, therefore, it has to focus on others, given the culture of the environment.
An example of changes in the political aspect: The government of one European country has stopped subsidizing the purchase of electric cars. It’s clear that the sales can’t reach the plan before this peace of news appeared. The auto companies should have diversified their plans to sell in many countries.
Example with Starbucks
After conducting the PEST analysis Starbucks declined costs and became more sensitive to the issues that are important to its customers. What they’ve improved:
Political factors
Sourcing raw materials and following fair trade practices, and this has gained a lot of attention from politicians in the USA. What managers in Starbucks have done? They’ve paid more attention to this part and adjusted to laws and regulations in other countries from which Starbucks buys its raw materials.
Economic factors
The economic recession has led many customers to seek cheaper alternatives. Rising labor and operational costs due to inflation helped the company stay number one in the niche.
Social
Starbucks adopted and changed workstyles and lifestyles, including increased remote work.
Technology
Enabling mobile payments increases the potential customer base.
Useful Tips for Conducting a Successful PEST Analysis
Are there some other methods besides a PEST Analysis?
Several other alternatives can work instead of or in combination with PEST.
SWOT
This stands for strengths, weaknesses, opportunities, and threats. It provides data into areas where your company stands out and falls behind while still using external analysis to determine how market trends will help or hinder it.
MOST
This stands for mission, objective, strategies, and tactics. It focuses more on helping your organization identify its short and long-term goals. Then it encourages you to develop a concrete plan for achieving your goals.
SCRS
This stands for strategy, current state, requirements, and solution. It helps you analyze your business’s problems and develop more effective solutions for them.
The Bottom Line
By analyzing the political, economic, social, and technological factors that impact its business, a company can plan, reorganize, and adapt to these external factors to become more efficient. A business’s success not only depends on how well it’s working but also on external factors. PEST analysis helps it to succeed in that aspect.
