Monday, 15 October 2012

How to do a PEST analysis

A PEST analysis explores the threats and opportunities a firm faces as a result of the Political, Economic, Social and Technological changes occurring in its competitive environment. It is often termed a macro-scanning tool as it involves looking a the big picture long-term changes in the environment.

The Political quadrant includes any government, parastatal and special interest group actions or lobbying in the form of policy, taxes and duties, laws, lawsuits and regulations. It is important to understand the political agenda and how it might move for or against certain industries or practices. This might include 'positive' moves such as the subsidies offered for alternative green energy production, or 'negative' moves such as increasing taxes on alcohol or tobacco. Depending on your firm, it may be important to consider both domestic policy as well as international policy, trade policy and pressure groups. You should also consider the effects and/or threats of war and terrorism, internal political conflict, and the potential impact of future elections and political coalitions. (See, for example, Three different regulatory responses and their impact on industry.)

The Economic quadrant includes the general economic environment and the effects that this might have on customer, distributors and suppliers. Factors, to consider might include indicators such as GDP, inflation, interest rates, stock market conditions, disposable income, and employment, in aggregate or on a sector-specific basis. Internationally, you might also consider import/export conditions, foreign exchange conditions, and trade deficits/surpluses. In conducting your analysis, it is important to distinguish between long terms trends and structural issues, and seasonal or cyclical issues.

The Social quadrant considers changes in social preferences and norms. These could be driven by demographic changes such as population ageing, changes in family size and dynamics, immigration and emigration, and changes to ethnic and/or religious views and norms. They could also be driven by changes to education standards, average levels of education, work patterns and the relative attractiveness of different types of work and leisure activities, living standards and lifestyles. They could also be driven by fashion trends and fads, consumer attitudes and opinions, and lifestyle changes.

The Technological quadrant considers the impact of all form of technological development and innovation. This could include manufacturing, production and transportation technologies, as well as the use of technology in coordinating and communicating activities both upstream and downstream in the supply chain. The development of information technologies, including the internet and associated technologies such as mobile access is obviously a major factor here. You should consider both the consumer and business-to-business applications of this. But you should also consider improvement in manufacturing processes, materials, energy and transportation. In your considerations, you should also consider research a development capability and pipelines, patent protection and intellectual property ("IP") laws (and their efficacy), maturity and obsolescence.

There are countless varieties of the traditional PEST analysis, such as PESTEL / PESTLE, PESTLIED, STEEPLE, SLEPT, and STEPE, with the additional letter variously standing for Environmental/Ecological, Ethical, Legal, Labour, International, Demographic, etc. The existence of all of these variations drives home the fact that it does not really matter which words and letters you use as long as you have a systematic review of the competitive environment.

As you work through each quadrant, it is important to identify not only what is happening or could happen, but also what the impact on your firm/ division/department could be. Depending on how thorough you are being, you could also try to quantify the likelihood and impact of various levels of change happening, and the time frames over which they might happen. Finally, you could consider the environmental signals you intend to monitor to stay abreast of any changes, or the actions you might take to influence the outcomes (such as joining an industry or policy group and or lobbying for changes).

The PEST analysis is an essential strategy analysis tool for any strategist's toolkit. It is particularly powerful when used in conjunction with a Porter's 5 Forces analysis to identify the threats and opportunities a firm faces as part of a SWOT analysis.

You can build a PESTEL analysis, alone or with a team, using, the online collaborative tool for business strategy development and execution.

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