Businesses today thrive not only on internal factors but also on external factors that are equally responsible to make or break the future of any organization. This article gives us an insight into the external factors that can impact critical business decisions.
In today’s times with every business going head-to-head competing with each other and everything being so volatile it is important to have a strong business model to evaluate how businesses can survive and thrive in different environments and countries. This includes what products or services you will offer, where you will sell them, who your target market will be etc. Both PEST & PESTLE models aim to help businesses understand their environment and prepare for changes to come. They are similar and focus on areas that are deemed critical to any company’s success: politics, economy, society, technology, law, and environment.
What is PEST Analysis?
Political Economic Social Technological Analysis (PEST) analysis is a method used to evaluate the impact that political, economic, social, and technological factors have on a business. PEST analysis can help businesses understand how their decisions may affect these factors and what they should do to mitigate any negative effects.
The political environment refers to the rules that govern how people interact with each other. In this case, we are talking about government regulations and laws.
PEST Analysis examines Political factors such as:
- Government policies: Considering a country’s next local, state, or national election and its impact on a government policy.
- Tax regulations: Considering direct and indirect taxes like income tax and VAT influence consumer spending and market demand.
- Employment regulations: Focusing on employment regulations in terms of employing staff.
- Other issues that must be considered include political stability, copyright and property law enforcement, social and environmental policy, trade regulations, and safety regulations.
The economic environment refers to the overall state of the economy. This includes things like inflation rates, unemployment rates, and GDP.
PEST Analysis examines Economic factors such as:
- Business cycle: Certain counties with developed economies follow a business cycle pattern where periods of faster growth are followed by years of slower growth. This can impact businesses like construction, advertising, leisure and restaurants where demand is less critical and more constant.
- Business investments: Analyzing whether the target market invests in the necessary equipment to scale the business.
- Political environment: Political issues can also have an impact on economic factors. When there is an unstable political environment, exchange rates can rapidly fluctuate and businesses may see a loss if the direction of the exchange rate is not favorable to them.
- Inflation: A company’s price for its products and services can be affected by a rise in the inflation rate of any economy.
Social environments refer to the norms and values that exist within society. Norms are the unspoken expectations of what behavior is appropriate and acceptable. Values are the deeply held beliefs about what is right and wrong.
PEST Analysis examines Social factors such as:
- Productive workforce: A company with a productive workforce can price their product and services competitively as well as increase profit margins. Hence, businesses must analyze the overall commitment and sincerity of employees towards work.
- Healthy workforce: Forward-looking employers develop initiatives that focus on employee health both mental and physical by emphasising meditation classes and health checkups. This results in fewer absences, increased productivity and retention.
- DEI (Diversity, Inclusion and Equality): A diverse and all-inclusive organization will benefit and draw more employees and customers. For example, some countries like Japan follow demographic trends, where all firms targeting customers must offer goods and services valued by the age groups. Launching a DEI policy can help.
- Other areas to focus on include employment patterns and job market trends, population growth rate, social mobility, etc.
Technological Factors like how technology can enhance or hinder the sustainability of your business. These include the latest technology used in the industry, internet access, software programs, etc.
- Automation: Automation of tasks can help replace human production lines with machines. This saves time, reduces human errors, reduces cost and much more.
- Artificial Intelligence (AI): Investing in AI-powered technologies can help a business save time and optimize routine processes and tasks. AI ensures security, improves efficiency, and increases customer relationships, retention rates and trust.
- Innovation: In an intensely competitive global market investing in innovation is crucial. It leads to long-term benefits like efficiency, productivity, competitiveness and ultimately increased sales.
Remote work: Focusing on whether your company or business is well-equipped to adapt to the new normal of working from home.
What is PESTLE Analysis?
While the PEST analysis is used by the organizations to identify potential risks and opportunities that might affect their operations, PESTLE analysis comes with a wider scope. Along with the political, economic, social and technical aspects that are focused upon in the PEST, the PESTLE analysis includes two more crucial factors, which are legal and environmental. This makes the assessment more comprehensive, by adding these two factors, which have lately gained high levels of significance in influencing the business decisions of companies in multiple spheres.
The PESTLE analysis is an offset of the PEST analysis, just bigger and more inclusive, providing results which are comparatively efficient and more beneficial. Adding the examination of legal and environmental factors to the analysis makes it highly efficacious and constructive, by taking into consideration factors such as regional and global laws, updates and changes in the laws, recent decisions of the Supreme Court, and environmental regulations regarding resources or species, etc.
A company should analyze how legal changes can impact their business or services directly or indirectly. This includes the laws that are currently being enforced and how these laws affect your industry. Areas to focus on include –
- Changes to legislation: Analyzing whether the company has measures to tackle changes in the legislation and governing corporate systems.
- Licenses and permits required: Obtaining license is a fundamental prerequisite in every country for businesses to conform to the regulatory framework.
- Other areas to focus on include global law conflicts and supreme court decisions.
The environmental risks associated with the industry and how to mitigate those risks include waste disposal, energy, and natural resources consumption regulation. The environmental factors to evaluate in the PESTLE analysis include,
- Climate change
- Availability of non-renewable goods
- Environment-related laws
- Existence of certain biological species
It would not be easy for a business to keep a close eye on the changing legal and environmental dimensions. However, they can work by following this framework.
- Potential impact – low, medium or high
- Type of the impact – positive or negative
- Time frame – immediate, short term or long term
- Direction of impact – increasing or decreasing
- Relative importance – high, medium or low
Pest Analysis Templates
Click the below file formats to download basic & example PEST & PESTLE analysis templates: