PEST ANALYSIS: Meaning, Importance, and Application

You can only exercise so much control in the business. You have control over the goods and services you provide, the prices you charge, the suppliers you use, and the personnel you hire. It’s much more challenging to run a successful business without comprehensive awareness of the many variables that are absolutely outside your control. In this post, we will be looking into what makes up the PEST analysis, its examples, and how it is useful in strategic management during international business

Pest Analysis

PEST analysis is a measurement technique used to assess markets for a specific industry or product over a predetermined time period. The right meaning of PEST stands for political, economic, social, and technological elements. When these factors are carefully taken into account, organizations are able to make better business decisions. To aid businesses in making wiser decisions and boosting efficiency, PEST analysis looks at a variety of factors that could have an effect on a corporation, such as political, economic, social, and technological issues.

PEST analysis facilitates the organization of research, product development, and marketing activities. Similar to the SWOT analysis, this (Strengths, Weaknesses, Opportunities, and Threats).

How to Conduct a PEST Analysis

It’s time to start gathering data now that you are more aware of what a PEST analysis entails. Follow these steps to conduct a PEST analysis:

#1. Enumerate the Political Influences.

Conduct an internal analysis to determine the kind of rules or regulations that apply to you. Talk to your lawyer, the legal department, or the people in charge of compliance, safety, reporting, finance, and accounting about the laws that are now in place and those that are being evaluated.

#2. Compile an Effect List for the Economy.

Find out which economic factors will affect your business.

#3. Discover the Societal Influences That Exist.

If you have carried out market research on customer or target market opinions and demographics, this phase has at least been largely done. It’s also advisable to read trade periodicals because they regularly feature social issues that affect the industry as a whole. Speak with your sales and customer service teams to learn the reasons why customers purchase, return things or cancel purchases. If you run a local firm, a local market analysis will help you comprehend your potential customers.

#4. Identify The Influences of Technology.

Technical advances affect every sector in some way, but if your line of work is one that is intimately related to technology, like software, you cannot ignore them. Read trade publications and carry out competitive analyses to stay up to date on new technology and inventive ways to use it for the delivery of goods and services in your company.

Advantages of PEST Analysis

They can affect or influence many of the variables included in a SWOT analysis as well as the decisions made by your company. On the other hand, PEST research simply takes into account external factors including current and proposed regulations, taxation, political concerns, environmental laws, and employment restraints. Performing a PEST analysis has the following benefits:

A deeper understanding of your company. There is no such thing as a company that operates independently of its customers and the larger community. By examining the factors that have a positive or bad impact on your company’s success, you can get a sense of how your firm may affect other people’s lives.
More successful longer-term strategic planning. By using PEST analysis to help you make decisions in the future, you may stop being startled every year. You have the chance to prepare for societal and economic changes. You will be well-positioned to compete, make cost reductions, and halt revenue loss.
Greater knowledge of possible threats and hazards. When you are aware of potential threats, you may control them or fully avoid them. To achieve a competitive advantage, implement preventative measures, spend money modifying possibly harmful legislation, or create strategic partnerships with other companies.

Limitations and Shortcomings of PEST Analysis

A PEST analysis may have negative effects in addition to all of its possible benefits. Consider the following drawbacks:

Surroundings that change frequently. Your analysis can become outdated in a matter of days or even hours due to how quickly these settings can change.
A lot of conjecture You run the risk of committing an error every time since you have to make certain assumptions.
Release of data A PEST study uses large data sets, thus it takes rigorous analysis to categorize the data and determine how to use it.
The possibility of mistake You won’t acquire insider information very frequently, so you can’t be certain that it’s correct to the last nuance.

What Does a PEST Analysis Include?

The four components of a PEST study are political, economic, social, and technical considerations.

Examples of Pest Analysis

Here are some examples of PEST analysis, shown below. It draws attention to the opportunities and threats a company encounters in its wider environment. The examples of PEST analysis are explained in a detailed way below:

Political

The government must dramatically reduce CO2, HC, and NC emissions from autos according to new regulations.
There may be new political parties opposed to a tax reduction in the 2018 elections.
Import restrictions will become more stringent.
There is an increase in government funding for “some” industries.
Government employment regulations are becoming laxer.
Governmental tensions with our largest export partner are getting worse.

Economic

The GDP will grow by 3%.
The amount of readily accessible loans to firms will either rise slightly or remain unchanged. Throughout the first half of the year, the cost of credit stayed the same.
The unemployment rate is projected to decrease to 7%.
Inflation will be 3% or 2%.
The following year, the corporate tax rate will decrease by 2% to 23%.
The dollar and euro will trade at a lower exchange rate.
There will be less money available.
Metals and oil prices will increase by 5% and 6%, respectively.

Socio-Cultural

A bright future for green cars
Online purchases are currently made by 45% of enterprises and 67% of consumers, respectively; these numbers are expected to rise.
Immigration increasing
A change in viewpoint towards duties requiring shorter workweeks
People prefer to buy domestically made goods over imported ones, on the whole.
People now frequently consume healthier meals as a result of changing eating habits.

Technological

The creation of new machinery could reduce production costs by 20%.
The largest telecom company in the country disclosed intentions to expand the network of fiber optic connections and modernize its internet infrastructure.
Soon, autonomous vehicles could be employed extensively.
The next year, a brand-new variety of tables will be offered on the market.

What Are the 3 Categories of Pest?

Bite and Chew Insects
Piercing and Sucking Insects.
Stupid insects.

Why Pest Risk Analysis Is Done?

A tried-and-true method for locating and evaluating elements that can adversely affect a project’s or company’s success is risk analysis. It enables you to evaluate the risks that you or your company face and aids in your decision-making process.

Pest Analysis in International Business

When deciding whether or not to sell a new product or enter a new market, business leaders must think about a number of factors and understand how their actions fit into the bigger picture. Every successful business needs to know how political, environmental, and social problems (PEST) in different international countries differ in their analysis. This suggests that you should have expertise in the field in which you’ll soon be employed.

#1. Political

How much a country’s government gets involved in the economy is a part of its politics. Employment standards, consumer protection laws, tax laws, tariff and trade restrictions, and tax laws are some of the most important laws and rules. The state’s trade laws are strongly impacted by the nation’s foreign policy. This could result in various trade limitations or offer various trade incentives. The PEST analysis also takes into account the international company’s industry-specific rules, which may have a big effect on your business.

#2. Economic

The corporate sector cannot contest the significance of economic factors. Economic considerations include things like a country’s interest rates, currency exchange rates, and interest rates. The amount of money a company may make in the market is greatly influenced by the economic position of each individual nation. The exchange rates in the PEST analysis business represent the precise amount of profit a company might expect from conducting international business abroad.

The various cultural and demographic characteristics that make up a society are known as social variables. These determinants include things like population size, age distribution, employment traits, and safety consciousness. In this area, environmental influences are likewise becoming more and more important. Companies must focus on each of these elements if they want to succeed in the global market.

#4. Technology

If a company does not keep up with the rapid advancements in technology, it will eventually lag behind its competitors in the market. If businesses wish to compete on the global market, they must experiment with cutting-edge technology to improve operating plant efficiency and reduce production costs.

You can see that a PEST analysis can help any small, international business generate awareness in a new market. Small businesses gain a lot from PEST because it enables them to concentrate on a few crucial areas that could take the firm to new heights.

Pest Analysis in Strategic Management

Management teams and boards apply the model to their business risk management and strategic planning procedures. PEST analysis is a popular tool among both the community of financial analysts, where variables may have an impact on model assumptions and the budgeting process, and management consultants, who assist their customers’ firms in developing cutting-edge product and market strategies. Below are the different strategic management in PEST analysis:

#1. Political Factors

Political factors are, generally speaking, those that are affected by governmental acts and policies. It is imperative to keep in mind that even in the absence of current or prospective future trade disputes or antitrust difficulties, management teams may experience considerable risks and opportunities. The differing positions of the opposition parties on crucial platform topics could present difficulties for the administration of a corporation before elections. This is true because election results have such a big impact on the range of potential outcomes.

Example of a political factor in PEST analysis in strategic management: To relocate operations to an area with lower tax rates and/or better chances for governmental assistance and grants, a multinational corporation closes many locations in a higher tax jurisdiction.

#2. Economic Factors

The national economy and money are often at the core of economic considerations. Economic problems may be evaluated and modeled more easily than some of the other components in this framework, so financial services sector analysts’ research occasionally gives them more weight (which is somewhat qualitative in nature).

Example of an economic factor in PEST analysis in strategic management: An equity research analyst may change the discount rate in their model assumptions depending on where we are in the economic cycle and the movement of Treasury yields. The value of the companies they cover may significantly change as a result.

Typically, social factors are more challenging to quantify than economic factors. They talk about how changes or improvements in how stakeholders think about work, leisure, and other parts of life could affect how a business runs. In comparison to more tangible issues like interest rates or corporate taxation, social issues may appear inconsequential. They still have the power to affect whole parts of the economy in ways that are shockingly out of proportion. Think about how the trend toward healthier and more active lifestyles has led to many changes in the foods we eat and the way they are packaged and sold.

#4. Technological Factors

The corporate environment of today is one in which technology is pervasive and developing quickly. Management teams and analysts must both be aware of potential technological impacts on an industry or a specific business. Think about how Uber disrupted the transportation sector or how the advent of e-commerce transformed traditional retail trade to get a sense of the pace and scope of technological disruption in today’s economic environment, which has had a devastating effect on many established organizations and industries.

Example of a technological factor in PEST analysis in strategic management: A management team must consider the financial and logistical effects of switching from physical servers located on-site to a cloud-based data storage solution.

What Do We Use PEST Analysis for?

PEST Analysis, a straightforward and often used tool, enables you to assess the political, economic, sociocultural, and technological developments affecting your company’s environment.

How Do You Conduct a PEST Analysis?

Conduct a PEST analysis using these steps:

The political influences should be noted.
What economic elements are there?
The social influences should be determined.
The technical influences should be noted.

Is PEST Analysis the Same as SWOT Analysis?

PEST analysis stands for political, economic, social, and technological aspects that have an impact on the commercial environment. The acronym SWOT stands for strengths, weaknesses, opportunities, and threats. Strategic planning is heavily influenced by these variables.