PEST Analysis: How Correct Analysis of the External Environment Affects Business Success

What is PEST analysis and what is it for?

PEST analysis is a strategic marketing tool that is commonly used to assess the impact of the external environment on a particular company. That is, the PEST analysis method gives an idea of ​​what circumstances and with what force affect the enterprise. It is intended for planning a program of actions in the long term: from three years and more.

Here we will dwell in more detail on one important concept – “external factors”. Factors are circumstances, events that have a direct or indirect impact on the company’s activities.

There are internal factors: those that a company can influence. And external environmental factors — they are beyond the control of business: the political situation, inflation, natural disasters. A striking example is the coronavirus pandemic.

The main objectives of PEST analysis

The PEST methodology is, first of all, an analytical tool for long-term planning. It helps a company identify threats and opportunities that are likely to await it in the future.

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Finding different significant factors that influence the enterprise is necessary so that the business can adapt to new potential changes and needs in advance. This will significantly reduce the negative impact of factors on the company or, conversely, increase profits even more.

PEST Analysis Factors

PEST analysis includes the study of four key categories of external environmental factors: political, economic, social and technological. All of them significantly affect the work of the company and determine its business strategy, as well as the future model of behavior. Let’s consider the four groups of PEST analysis factors in more detail.

1. Political factors

Political factors may be related to the influence of the state or interstate relations on the management and operation of a business. This group of factors will be important because just one new law or an emergency world situation can either completely destroy a business or create development potential for a new niche. It is worth paying attention to the following factors:

1. Domestic Law and Regulation. This refers to any potential domestic activity at the government level that may impact your business.

For example, amendments, new laws regulating the activities of companies: labor legislation, environmental standards and consumer protection rules. In particular, it is worth considering tax amendments, the degree of government influence on the industry, the possible presence of benefits, subsidies, and so on. All this greatly affects the intensity of sales, overall profit and financial performance of the business.

2. Foreign policy of the country . Positioning of the country on the world stage. How the state is perceived by other countries, what risks are associated with this, potential conflicts, and so on.

3. Global political situation, international relations. The situation in the world in general: relations between countries, conflicts. Participation of different states in political and economic unions: sanctions and incentives.

Of course, such factors are extremely difficult to predict and take into account, but it is still necessary to try to analyze the external environment. Without taking them into account, it is impossible to build a strong business that will exist for a long time.

2. Economic factors

Economic factors should be prioritized. They are considered significant and relevant for every business, regardless of its niche. Such factors reflect the state and dynamics of the economy, as well as the ability of consumers to make purchases.

The main factors that experts most often evaluate are:

• the ratio of the exchange rate of national and foreign currencies;
• change in gross domestic product;
• unemployment rate, employment rate, and general income of the population;
• level of purchasing power, demand;
• general real and nominal inflation rate;
• trends in the development of related markets and the competition associated with them.

3. Social factors

Social or sociocultural factors are quite specific and may be particularly relevant only for certain companies in specific niches. They include demographic and cultural aspects that influence general trends as well as demand for the company’s products.

Typically, experts focus on assessing the following list of factors:

• characteristics of the population: cultural or religious;
• everything related to demographics – age, gender of clients, mortality and birth rates in the region, percentage of a certain nationality;
• the level of education, knowledge of the local population, their skills, and work qualifications;
• influxes and outflows of immigrants and emigrants;
• Trends in a particular region or country, such as interest in environmental issues, can influence demand for organic products.

4. Technological factors

Associated with changes in technology (innovations, novelties), which, on the one hand, can create huge advantages for the enterprise, but on the other hand, destroy it. The degree of influence of technological factors on the company depends on the sphere and specifics of the business.

Pros and Cons of PEST Analysis

PEST analysis, like any other analytical tool, has its advantages and disadvantages. And before using the method, you should familiarize yourself with them. Disadvantages of PEST analysis:

1. Spontaneity. The problem and main vulnerability of this tool is that sometimes it is simply impossible to predict how circumstances will develop in the future. What can happen, how soon it will happen. There are many phenomena that are considered natural disasters: natural disasters, wars, or the coronavirus pandemic, for example. Errors in forecasts are not uncommon.

2. Subjectivity. Another obvious disadvantage of the tool is the difficulty in objectively assessing the results of the PEST analysis of an organization. All the information received can be interpreted in their own way by different experts. The quality of the analysis will depend on the competencies of the person working on it.

How to Conduct a PEST Analysis: A Step-by-Step Algorithm Using EcoMarket as an Example

The analysis should be carried out according to a specific methodology, which includes 6 consecutive steps. Let’s analyze the algorithm and stages of conducting a PEST analysis using the example of a new store with organic food products that wants to open in a medium-sized city with a population of 600 thousand people.

Step 1: Define the analysis objectives and factors

Before you start analyzing and solving operational issues, it is important to find your goals. Find out why exactly you need a PEST analysis. The goals can be different: from developing a new strategy to assessing the risks of entering a new market.

Understanding the goals will help you focus on the how to organize training for promoters most relevant factors and reduce the time and resources spent on analysis. You need to understand what influencing factors you need in a specific situation. In our case, the goal is to understand what risks, problems, and challenges a new company in a new region may face.

Step 2: Gathering information

The next step is to collect data on each of the four groups of factors: political, economic, social and technological. Sources of information may be:

Step 3: Making a table

Then all the data obtained must be converted into factors for PEST analysis and entered into a table. For example, one of the template options for such a pivot table is presented below:

The data is most conveniently perceived in a tabular format, since we will then need to evaluate each factor and analyze the results.

Step 4: Factor Evaluation Process

Now comes the most important stage. It is necessary to independently or with the help of invited experts to evaluate two parameters for each factor:

1. The level of influence and significance of factors. That is, the force with which the company and business processes are affected by the factors that we have collected in the table. It is customary to use a three-point assessment system depending on the expert’s opinion:

2. Probability of change of factors. Estimated forecast of numbers lists whether any changes with the factor can happen in the future. A five-point system is used:

It is worth involving several experts, each giving their own assessment. This way you will get a more accurate and objective result. In our example, the selected factors are assessed by 5 experts.

Step 5: Calculate all ratings

At this step, you need to start calculating all the indicators. First, you need to calculate the average assessment of all five experts on the “probability of factor change”. To do this, add up the 5 assessments and divide them by 5. In the case of the first political factor, this will be: (2 + 4 + 4 + 5 + 3) / 5 = 3.6.