A PEST analysis is a structured and organized framework for businesses to analyses and monitors the marketing the macro marketing environment i.e. the external marketing environmental factors which can influence the organization. The outcome result of the analysis is then utilized to find out the possible potential threats and weaknesses which are used in the SWOT analysis. Simply, it is a scan of external macro environment. PEST analysis is often replaced as PESTLE analysis which is the same term.
Apart from the organizational factors, there are several others outside factors which can influence the organization and its growth. To recognize how these factors can be good and bad for the business, the organizations conduct the PESLTE analysis. The analysis looks on various steps such as how these external factors can affect the performance and activities of the business, how much positive or negative force they can generate etc. As these factors can generate both opportunities and threats for the organization.
The main targets of conducting PEST analysis are:
- To find out the present external factors affecting the organization.
- To find out the external factors that can lead to any change in the future.
- To exploit or use the changes in a better way to extract opportunities from them.
- To access the potential of a new market.
- For marketing and business development assessment
- For decision making based on the findings
The basic difference between a SWOT analysis and PEST analysis is that the first one is used to measure a business unit while the second one is utilized for identification of the market potential showing the decline or growth, business potential etc. PEST analysis is sometimes rearranged as STEP analysis though the meaning remains same. It serves as a business measurement tool for the organization. The basic principle is to recognize the key factors which can affect the organization from the wider and uncontrollable external marketing environment. As such external factors are often beyond the organization’s control which can turn out to be a threat for the business. Though, it has been observed that changing marketing environment can bring new opportunities and growth for the organization.
PEST analysis factors
PEST stands for
P – Political
E – Economic
S – Social
T – Technical
Whereas the PESTLE has two more factors:
E – Environmental
L – Legal
All these factors are responsible in the growth of the organization. Now, let’s study these factors in detail.
- Political Factors:
Political factors tell that how much and up to what extent government intervention can affect the business economy. The factor includes government policy, political stability in the overseas markets, foreign trade, tax policy, labor law, environmental law, tariffs, trade policy and restrictions. Political factors refer to political environment and political movements which can directly or indirectly influence the business. Political factors are not in the control of the business organization and can lead to any positive and negative change, which is unpredictable.
- Economic Factors:
Economic factors impact the business in many significant ways such as how an organization does the business and how profitable they are. Depending upon the types of economy, economic factors can be broken down in to two sub – factors micro economical factors in which businesses do demand management in any defined economy such as government’s use of interest rate control, taxation policy. Macro – economical factors tells how the people spent their incomes. It has a significant impact in the business to consumer organizations. Economic factors tells about the economic growth, interest rates, inflation rates, exchange rates, employment level, monetary policies, costs of raw materials including petrol, steel and energy, distribution of wealth, life standards etc.
- Social Factors:
This factor factors includes the demographic and cultural aspects that can determine the business success in the current market. It tells how the customer makes purchases, consumers’ needs. In includes the demographics, age distribution, population growth rates, education level, career attitudes, health consciousness, safety emphasis and concerns, class structure, leisure interest, culture etc. With the help of findings of these factors, organizations can know how a business can compete in any particular demographic market.
- Technological Factors:
This factor defines how the technical issues can impact any organization, influencing the product or service into the marketplace. The technological factors are fast changing with impact on the products in the market. These factors can affect the marketing and management by new ways of product production, new ways of product distribution and new ways of target market communication. Technical factors include R &D activities, automation, technological incentives, technological change rates etc. These factors can lower barriers to the entry reducing the minimum production level. The rate of new inventions and developments, the mobile technology, internet and e commerce etc can affect the business from external environment.
- Environmental Factors:
Environmental factors target the scarcity of raw materials, pollution targets, ethical business and sustainable development, carbon footprints targets set by the government. Now the customers look for such products which do not harm the nature and environment, which are eco friendly, sourced ethically from a sustainable source.
- Legal Factors:
Legal factors are related with the law, rules and regulations. These factors include health and safety concerns, equality and equal opportunity, product safety etc. For running a successful business companies should understand how to what is legal and what is not.
For doing global business, the PEST analysis should be conducted separate for the countries as it varies from region to region. The macro environment factors are virtually unlimited.