PEST Analysis is a business analysis and organizational assessment methodology focused on the external or environmental forces which are generally not controlled by an organization or the organization has very little influence on these forces. The result of PEST Analysis gives management an overview and evaluation of the external forces and the company’s position within its environment.
These external forces can have significant impact on the success and competitiveness of the business. Since management does not have big impact on the outside forces, its major role is to position and reposition the company in order to take advantage of various opportunities and minimize risks and threats for the company.
At any time there are external trends that can be favorable for the organization and there are trends that can have negative impact on the business.
It is the strategic role of management to shape the organizational capabilities and strategies for short-term and long-term success. The PEST analysis methodology deals with the political, economic, sociological and technological forces that influence and drive the success of the organization.
External Forces and Factors in PEST Analysis:
Political forces both local and global to the company can make difference for the organizational success in the marketplace. Examples of political forces are various regulations and laws related to taxes, tariffs, import and export regulations and general political climate in different regions and countries. Organizations don’t control these forces so they can impact their business tremendously. Political analysis should be thoroughly performed and different scenarios should be evaluated by companies especially before entering new markets.
Economic forces are the traditional external elements which are considered by most organizations in shaping their strategies and also analyzed on more tactical and short term level as well. Economic drivers like inflation, interest rate, growth rate and unemployment should shape many decisions for organizations including their marketing strategies like product development and pricing in order to maximize the value for the business given the existing economic environment.
Social trends are continuously used by marketers to analyze current and potential target markets. Social forces and trends which have impact on the company’s target market like changes and trends in population age, education, lifestyle, social class and income always bring opportunities for marketers and executives for developing new business and improving current positions within established markets.
Changes and developments in technology have made huge successes and failures for many companies in the past and today. Opportunities like process automation, digitalization of entire industries, internet marketing, new product development, restructuring the way organizations do their business and new research and development offer new ways to grow businesses for any company in any market and industry.
Those organizations that are flexible and responsive to technological changes will always take advantage of these new opportunities while others may perceive those changes as threats and risks.
PEST Analysis Examples: How to use the PEST concept to take advantage of external forces?
PEST can be used as an effective organizational evaluation tool. Management teams can use this concept in a meeting to brainstorm a list of important forces within each of the PEST categories in order to identify both positive and negative forces for their businesses.
The tool helps management have a structured brainstorming session where they can create a list of relevant and important factors for their organization.
For example, the top 5 forces within each of the categories can be listed (top 5 political, economic, social and technological trends that may have an impact on the business) and for each external force managers can assign an a.) importance score, b.) potential impact and c.) develop strategies and tactics that can either minimize risks or maximize value for the company by taking advantage of potential new opportunities.
Different categories will have different importance for different companies and in different time. For example, your organization may currently face some technological threats and identify some economic and social opportunities for growth and improvement. A few months from now there might be some political forces that can open new markets and opportunities for your business…
PEST Analysis should be used periodically on an ongoing basis like every three months – changes in all of these external factors are fast today and in three months your results from PEST Analysis can be completely different than they are today.
By using this method you can develop a very simple and structured business analysis framework which will update periodically and give you the big picture you need to manage your business successfully – it doesn’t take much time and effort and the benefits are huge for organizations.