Though structure and leadership play a large role in business success, external factors can also shape your company's potential. One method for systematically discovering and quantifying those factors is the PEST analysis.
PEST is an acronym for political, economic, social, and technological – external factors that commonly affect business activities and performance. Created by Harvard professor Francis Aguilar in 1967, PEST can work alone or be used in combination with other tools, such as Porter's Five Forces and SWOT analysis, to determine an organization's overall outlook.
Jim Makos, founder of the Pestle Analysis website, says PEST can help companies improve their decision making and timing. "The best outcome of the PEST analysis would be if your company is able to make the right decisions at the right time by analyzing different factors. Another benefit of PEST analysis is it could aid you in predicting the future by looking at the present. You will be prepared to tackle future challenges. It also helps you highlight the opportunities you can cash in on and threats which could harm your business," Makos told Business News Daily.
To get the most out of a PEST analysis, businesses should understand each of the four factors.
This factor looks at how government regulations and legal issues affect a company's ability to be profitable and successful. Issues that must be considered include tax guidelines, copyright and property law enforcement, political stability, trade regulations, social and environmental policy, employment laws and safety regulations. Companies should also consider their local and federal power structure, and discuss how anticipated shifts in power could affect their business.
This factor examines the outside economic issues that can play a role in a company's success. Items to consider include economic growth, exchange, inflation and interest rates, economic stability, anticipated shifts in commodity and resource costs, unemployment policies, credit availability and unemployment policies.
This issue analyzes the demographic and cultural aspects of the company's market. These factors help businesses examine consumer needs and determine what pushes them to make purchases. Among the items that should be examined are demographics, population growth rates, age distribution, attitudes toward work, job market trends, religious and ethical beliefs, lifestyle changes, educational and environmental issues and health consciousness.
This factor takes into consideration technology issues that affect how an organization delivers its product or service to the marketplace. Among the specific items that need to be considered are technological advancements, government spending on technological research, the life cycle of current technology, the role of the Internet and how any changes to it may play out, and the impact of potential information technology changes. In addition, companies should consider how generational shifts, and their related technological expectations, are likely to affect those who will use their product and how it is delivered.
To better understand how a PEST analysis should be conducted and the benefits it offers, businesses can examine numerous examples online. The online site Buzzle conducted several PEST Analysis examples, including one for restaurants. It examined the various political, economic, social and technological factors that a potential restaurant owner needs to consider when entering the industry.
- Government regulations regarding employee hygiene, health and food regulations, food standards, etc.
- Government policies regarding the restaurant industry and managing eateries. These may include licenses, inspections by health and food departments, etc.
- Interest rates would affect the cost of capital, the rate of interest being directly proportionate to the cost of capital.
- Rate of inflation determines the rate of remuneration for employees and directly affects the price of the restaurant's products. Again, the proportion between the inflation rate and wages/prices is direct.
- Economic trends act as an indicator of the sustainability and profitability of your business in the chosen region and help you in deciding your marketing strategy.
- Eating habits of the people in your chosen business environment may, and certainly will, affect your marketing decisions.
- Ratio of people preferring to eat out regularly.
- A good technical infrastructure would lead to better production, procurement and distribution logistics, resulting in reduced wastage and lower costs.
- Effective technology may be a decisive factor for food technology innovation, better presentation, more effective business marketing, etc.
If you are interested in getting more from your PEST analysis, consider adding more vectors to the analysis or expanding into SWOT (strengths, weaknesses, opportunities and threats), MOST (mission, objective, strategies, tactics), or SCRS (strategy, current state, requirements, solution) analysis.
"Some variations may also add legal, environmental (converting into a PESTLE analysis), demographics and ethical factors, which makes the analysis more powerful because it considers more factors as compared to a normal PEST analysis," Makos said. "The more factors you consider for analysis, the better the results you can achieve from your strategy."
PEST help and templates
For businesses wanting to conduct their own PEST analysis, additional advice, templates and samples can be found online.
- PESTLE Analysis
- Smart Draw
- Edraw PEST Software
- Purdue University PEST Template
- Keepoint PEST Template
Chad Brooks also contributed to this article.