Navigating change in the business world can be overwhelming, especially when many outside factors are beyond your control. To stay ahead of the curve, successful businesses put time and effort into understanding these factors. This is where a PEST analysis – no, we’re not talking about bugs – comes in to help businesses adapt to and embrace changes instead of continually operating in a reactive fashion. Let’s break this concept down.
What Is A PEST Analysis?
We’ll start by answering the obvious question – what is a PEST analysis? A PEST analysis is a research tool that evaluates the political, economic, socio-cultural, and technological factors that impact a business. In some instances, the tool is expanded to PESTLE when legal and environmental factors must be considered.
A PEST analysis considers questions such as:
How do different federal and local laws, changes in legislation, and regulations affect your bottom line?
How will certain economic indicators such as inflation, taxes, and the threat of a recession affect business income?
How do changes and trends among various demographics, lifestyles, and attitudes affect engagement with business?
How will advancements in technology affect specific factors of the business or the industry as a whole?
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What Is The Goal Of A PEST Analysis?
By examining the outside factors that influence marketplaces, businesses using a PEST analysis can identify potential threats and opportunities and chart an effective response. This allows the business to operate in the realm of facts rather than speculation. It also helps mitigate the risk involved in decision-making, increasing the chance of remaining competitive in the marketplace. By forecasting with intelligence, a business can double down on strengths while reinforcing weaknesses that could be exposed in the future.
What Are The Advantages And Disadvantages Of A PEST Analysis?
A PEST analysis is a simple tool, making it accessible without years of training for any participant. It affords a comprehensive understanding of the business environment in a relatively short period while encouraging strategic thinking. Businesses also develop buffer systems to deal with risk and identify opportunities with ample time to take advantage and remain competitive.
While a PEST analysis is an immensely valuable tool, no tool is without potential flaws. Critics of PEST analysis believe that it relies on overly simplistic data to make nuanced decisions. If assumptions made during analysis are completely off-base, decisions made from those assumptions can lead the company astray. The unavoidable reality is that trial and error are necessary to fine-tune how a business employs PEST to come to worthwhile conclusions. This process also requires that a business has an accurate understanding of its own operations, which is not always the case.
A PEST Analysis Example
Let’s talk through a PEST analysis example. To set the scene, a global B2B software solutions business is strategizing for the next fiscal year. Here’s how a PEST analysis comes into play:
A large portion of the customer base is in a South American country that is considering adopting new rules for how data can be transferred in and out of the country. The business is assessing where data is stored internally, along with 3rd-party connections it has adopted. If the company doesn’t adapt to the changing rules, a large portion of its base may be forced to find a competitor who has. If the business adapts quickly while competitors lag, it may be able to convince potential customers to switch to its solutions.
Threats of a recession have led much of the client base to reevaluate or reduce budgets, and the solutions the business offers are typically the first type of expense cut. The business must develop a clear plan to communicate the value of the product to existing customers, mitigating cancellations in the process.
News of a large data breach in a notable company has reopened public discourse around data security, causing some panic among the companies the business serves. The business must navigate reassuring customers to prevent them from making knee-jerk reactions and switching to competitors.
A new development in Artificial Intelligence has rendered one of the business’s offerings nearly obsolete overnight. The business must evaluate whether to drop the offering entirely to focus on other offerings, or to leverage AI to improve the offering.
How To Do A Pest Analysis
By this point you may understand what a PEST Analysis is, and the benefit, so naturally your wondering how to do a PEST Analysis. Fear not, we’ve outline the steps on how to do a PEST Analysis below.
- Identify potential outside factors: Brainstorm a list of all potential variables in The PEST framework, such as an upcoming election, tax hike, or change in policy.
- Mine opportunities: Considering the list of outside factors, pull out solutions to potential problems that your business could leverage to stay competitive.
- Expose risks: Consider how shifts in different components of the PEST framework could leave your business vulnerable to loss.
- Move forward: Develop a plan based on the data and findings to take advantage of opportunities and shore up threats immediately.
Pest Analysis Template
Click on the link for a downloadable PEST Analysis Template for your free use.
Considerations: government stability, policies, trade agreements, regulations
- How do governmental policies or groups affect our success?
- How will change in the political environment, either locally or nationally, impact us?
Considerations: economic growth, inflation, interest rates, spending habits
- How do shifts in spending affect pricing, costs, and revenue?
- What are the current economic factors affecting us most?
Considerations: Consumer behavior and lifestyle changes, cultural attitudes, demographic shifts
- How do our customers’ beliefs and attitudes inform their buying decisions?
- How are cultural narratives influencing behavior among our clients?
Considerations: New tech adoption, advancements, automation, AI, infrastructure, intellectual property, and patents
- What upcoming tech could disrupt our current offerings?
- Which innovations can we adapt to suit our operations?
A PEST analysis empowers companies to intelligently evaluate the impact of political, economic, socio-cultural, and technological factors on their business. It allows companies to anticipate and adapt to factors that could ultimately spell disaster or create opportunities to grow. Beyond just controlling what they can control, businesses are given a roadmap to navigate the uncertainty of the future with wisdom and forethought. A PEST analysis can serve as a vital tool to achieve that goal.