The origins of the popular PEST analysis can be traced back to Harvard Professor, Francis J. Aguilar’s book Scanning the Business Environment (1967). With the same elements as PEST, he called his framework ETPS. Aguilar proposed four primary elements of the macro-environment – Economic, Technological, Political, Social – that impact enterprise success. By the 80’s, the subject variously evolved into STEP, STEPE, STEEPLE, SLEPT, PESTEL and PEST acronyms, some of which included additional factors, like Environmental/Ecological, Legal, and Ethical. However, it is important to understand that the other definitions are largely the extensions of the original work.
PEST architecture helps in evaluating how these factors affect the overall business environment and anticipating the changes for course correction. In combination with SWOT and Porter’s Five Forces, it is an indispensable strategy building tool for savvy managers. This is regardless whether it is an MNC, SMB or a startup.
The Key Factors
- Political. Continuance of economic policies in the wake of political shake-up is a rare commodity. While a change in regime may bring about minor variations in some areas, it may completely overhaul the others. For example, a new government may significantly relax the norms for availing bank/debt finance for the small and medium entities. Simultaneously, it may create an eco-system for easy access to equity finance for the startups.
Similarly, some industries might get a stimulus package, while others may face additional regulation. For instance, a regime may allow oil companies to choose their pricing policy freely to account for the rising fuel prices in the international markets. When the power shifts to the other party, though, the focus may move to the renewable energy sources that are environmentally sustainable and reduce dependence on crude oil imports. This could mean tax breaks for solar panel manufacturers, biofuel plants, electric vehicle manufacturers and so on.
International political changes often carry far-reaching economic ramifications, e.g. hostility between two trading nations might adversely impact their exporters and importers.
There are several ways in which political affairs, both inside and outside a country affect the overall trade and commerce. These could include domestic civil unrest, strikes, other forms of obstruction in working, midterm elections, modification in statutes, and similar events.
- Economic. Small and medium ventures often carry the misconception that macro factors are too broad and apply only to the big corporations. This cannot be farther from the truth. The metrics and KPIs published by the governments and research agencies, from time to time, are useful pointers for upcoming shifts in the market dynamics. This applies to every market player.
Let us suppose, a U.S. based exporter supplies products or services to some customers in EU. In this case, a decrease in USD/EUR exchange rate would benefit the exporter irrespective of the size. In other terms, a devaluation of USD against EUR will translate into more dollars for the contracted price. However, the domestic inflation rates would temper the net gain. The reverse would be the case for an importer.
Parameters, such as GDP growth, interest rates, inflation, per capita income, credit flow, and availability of skilled labor play a very important role in planning the operations, including financial management.
Over the years, globalization has created an all-encompassing ecosystem, where no nation can operate in isolation. Time and again, global events have contradicted the decoupling theory. In this context, the theory argues that markets with strong fundamentals can remain largely unharmed by possible adverse fluctuations in the other markets. Not a very long time ago, the ripple effect of the U.S. sub-prime crisis threatened the very existence of enterprises of all sizes and in every part of the world. This event had initially seemed to be a localized reversal in domestic real estate industry.
- Social. This includes socio-cultural factors, such as demographics, population growth, state of health & education, information sources, consumer preferences, lifestyle choices, migration, history, traditional & religious beliefs, ethnic harmony, and societal drift & viral trends.
As an increasing number of women started joining the workforce, new markets for professional products started opening up, e.g. women’s workwear and formal accessories. Another example would be the growing health awareness, which has pushed up the demand for new products, such as exercise equipment and health supplements.
Better education and improved access to reliable information sources invariably lead to a demand for better quality. On the other hand, population growth could mean a market increment for FMCG goods.
The PEST data is useful only if a company’s management decides to act on it. The action, in turn, is only as effective as the strategy. Work with the experts and stay ahead in the game. Contact us here.
- Technological. Disruptive technology is a major agent of change that can even impinge upon most areas and even metamorphose the way business is done altogether.
An example would be the rise in the web and software services (SaaS/IaaS/PaaS), like Amazon Web Services, Google Apps & cloud ERP systems, that have changed the way entities deploy and manage their resources/functions. Organizations have been able to reduce the employee costs while improving time efficiency with virtually mobile offices. Better communication options are further enabling companies to serve customers in different parts of the world.
Riding on this tech wave, several startup aggregators, like Uber and Airbnb, have made huge fortunes. These companies harness the power of the IaaS and PaaS technologies at the backend and the iOS/Android marketplaces at the frontend (mobile apps that act as the user interface). Without this, most “unicorns” would not exist.
The Allied Factors
The following components are largely the functions of the other PEST constituents and will usually require a separate attention only in select cases.
- Environmental. Sustainability concerns have altered the way consumers think and choose products. For instance, there are more vegetarians and vegans today than two decades ago. This has entailed the food industry to revisit their menu cards.
Most nations have banned or are in a process of banning single-use plastic items. This means from the biggest to the smallest of organizations must take that into account. Similarly, factories that release effluents or any company that releases contaminants into the environment must comply with stringent state laws.
- Legal. Rules and regulation are nearly always created or modified in response to new events and evolving systems within the boundaries of a nation and outside.
UK was one of the first nations to enact the Cyber Laws in 1990 when computers began to proliferate rapidly and the regulators perceived a need to safeguard information against unauthorized access and misuse.
Similarly, in the early days of the online transactions, governments across the globe had a tough time framing the taxation laws due to ambiguity in the sources of origin and completion of transactions. With time legal frameworks have adjusted to the new ways of doing business.
Another case in point is anti-dumping duties imposed by nations when cheap imports tend to threaten domestic industry.
Using The Framework
So, how does the PEST analysis work in the practical world? The first step for you is to understand how the various macroeconomic components relate to each other and with your own unique circumstances. The second step is to assess the approaching changes. The third step is to find opportunities for boosting the bottom line.
Let’s take the example of a printing shop in a small town that creates flyers, posters, school projects and similar items for the local community. The Government announces its plan to develop some towns into commercial hubs and this includes the printer’s location. The first of the big companies will begin setting up their local offices in 6 months’ time. Seeing an opportunity, the printer reevaluates its business plan and financials. To tap the upcoming market, it hires some fairly-priced graphic designers/illustrators. It creates a new product portfolio (designing & printing corporate cards, letterheads, official stationery, and marketing material), develops some samples and a new marketing strategy to approach the potential customers. Considering the changing buyer preferences, a user-facing app is also created for hassle-free ordering and bulk membership options. In this way, the company will already have a head start by the time the real action begins in the marketplace and the competitors start “reacting”.
However, the devil is in the details. Always keep in mind that an organization is more than the sum of its moving parts. Therefore, a comprehensive plan for a fresh growth trajectory or a forward movement on the current path requires a holistic view of all the parts. Combine PESTEL with SWOT and Porter’s Five Forces to for most effective results. Get the most practical planning, strategy, and financial management support. If you are located in the U.S, UK, Europe or India, write to us at firstname.lastname@example.org. You can also send a WhatsApp message at +919654421064.