Political, economic, social and technological variables (the PEST factors) have great influence upon any business decision in a given business environment. You cannot imagine the amount of hard work and research that is involved whenever a new product or commercial utility is launched. For that matter, any change in the business management and development strategy calls for minute scrutiny of the environment which would form the background for such change. It is with respect to this detailed dissection of the environment and the proper understanding of the verdict that is assimilated from such dissection that any decision pertaining to expansion, entry, exit or any other transition is reached. PEST analysis is one tool of strategic management which scans the business and market environment to enable the firm to understand the surroundings in which it is operating or which it intends to enter. Before proceeding towards the example, let's get to know this strategic management tool better.
PEST - An Overview
PEST is an acronym for Political, Economic, Social, Technological - the categories into which a compound business environment is broken up for analytical ease. It is a strategic planning tool for gaging the various factors in a potential business environment to estimate its suitability for the enterprise at hand. Therefore, let's take a look at all these building blocks of a business environment separately.
refers to all those things pertaining to and perpetrated by the government that affect the economy and business scenario in general. Government regulations and policies that impact the business environment the most may include trade and labor laws, tax policies, environmental laws and regulations, trade restrictions, commercial tariffs, infrastructure and development policies, etc. The degree of political stability also has a huge impact upon business environment and the economy in general.
refers mostly to the macroeconomic factors as these factors may have a high impact upon the business environment but a firm does not have any control over them. The most it can do is modify its business strategies and various commercial and financial policies accordingly to make the most of the economic situation at hand. These economic factors may include the currency exchange rate, interest rate, economic growth rate, rate of inflation, etc.
refers to the social, religious and cultural aspects of the business environment that may be affected by, and may react to, the firm's transitional strategies either positively or negatively. These may include demographic aspects like age distribution, population growth rate, employment and income statistics, education and career trends, religious beliefs and social stigmas, overall general attitude (conservative or liberal), etc. These factors may have a huge impact upon the firm's operations within the business environment as any action by the firm which goes against or threatens the societal norms may face criticism, negative publicity and protests.
refers to the technical aspects of the business environment and may include the level of automation available in the current times, technical facilities and infrastructure, rate of technological progress and research and development activities. These factors may assume decisive proportions and may impact the cost, quality and scope of innovation for a product, service or commercial utility.
Later, two more categories were added to the above - Environmental (as in ecological factors) and Legal - turning PEST into PESTLE. Environmental factors include climate, weather, ecological balance, level of pollution, wildlife conservation, tourism, farming, etc. Legal environment includes various laws and legislation pertaining to consumers, discrimination, employment, competition, public health and safety.
PEST Analysis Example - Restaurant
The various Political, Economic, Social and Technical factors that a firm needs to consider and research in order to enter the restaurant business in a new environment may be depicted as follows:-
- Government regulations regarding hygiene, health and food regulations, food standards, etc.
- Economic policies of government regarding the restaurant industry and running eating joints; these may include licenses, inspections by Health and Food Ministry departments, etc.
- Interest rate would impact the cost of capital, the rate of interest being directly proportionate to the cost of capital.
- Rate of inflation determines the rate of remuneration of employees and directly affects the price of the restaurant's products. Again, the proportion between the inflation rate and wages/prices is direct.
- Economic trends act as an indicator of the sustenance and profitability of your business in the chosen region and help you in deciding your marketing strategy.
- Certain cultures abhor certain foods. For instance, Hindus will not eat beef and Muslims would not even touch pork. Therefore knowledge of these cultural facts about your business environment will help you decide whether or not you'll be able to do any business there.
- Eating habits of the people in your chosen business environment may, and certainly will, affect your marketing decisions.
- Ratio of people preferring to eat out regularly.
- A good technical infrastructure would lead to better production, procurement and distribution logistics, resulting in reduced wastage and lower costs.
- Sound technology may be a decisive factor for food technology innovation, better presentation, more effective business marketing, etc.
That was a sample PEST report. Hotel and food processing businesses would also have a similar PEST structure with some changes here and there. All in all, PEST analysis is a great way of getting to know the battlefield environment before you jump headlong into it. A PEST report allows you to take in all details about the ring, the spectators and the opponent to better equip you for the fight! After all, it's always good to look before you leap!