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What Is a PEST Analysis?

Image of staff conducting a PEST analysis

A PEST Analysis is a way to examine important factors in the environment to determine what potential changes can affect a business. Here we define what this analysis is and how to conduct one.

Definition of a PEST analysis

PEST is an acronym for the Political, Economic, Social and Technological factors that can be opportunities and threats. In an earlier article, we explained how to conduct a SWOT analysis which covers internal and external factors. With a PEST analysis, you focus only on external factors. 

Let’s look at the steps for conducting a PEST analysis.

Do your research to get the facts

Before you can list the PEST analysis factors, you will need to do some research to get the facts. Besides using your current knowledge about your industry and potential external factors, conducting research is essential for an effective analysis. Your research can include reading industry news publications and reports, attending industry conventions, and discussing with your staff, suppliers and customers. 

For example, IBIS reports cover many of the opportunities and threats in the four areas that pertain to the industry covered. Here’s a sample report on the wine industry in Australia. The industry’s peak body, the Australian Grape & Wine Incorporated, also produces reports that include information that could be used to conduct a PEST Analysis. 

What are the political factors to consider?

Political factors of a PEST analysis include policies, court decisions and legislation that can impact your business in some way. Legal factors can play a positive or negative role when new legislation is passed. Changes to trade restrictions will impact the cost of a product. For example, increasing or decreasing tariffs will affect the cost of products or raw materials and affect a business. Similarly, changes to employment law can lead to an increase or decrease in wages, resulting in higher or lower labour costs. 

Examples of political factors having a big impact on Australian businesses are the VET Fee Help Program and Pink Batts Insulation Scheme.

With the VET Fee Help program, vocational students could get government loans up to $18,000 for vocational education and training. Unfortunately, the program was poorly administered so some operators rorted the system by getting vulnerable people into programs they couldn’t complete or didn’t exist. For this reason, the program was cancelled and replaced with another one that provided a fraction of the funding for most courses. However, many legitimate private vocational education and training providers had built their business on the government’s loan scheme. When the VET Fee Help program was cancelled, students no longer had a full funding option for private VET courses, so many of these businesses went out of business or decreased in size. 

With the pink batts scheme, the Commonwealth Government agreed to reimburse homeowners $1,600 when they had insulation batts supplied and installed in their homes. Many companies geared up for the program by expanding premises, buying equipment and supplies, and hiring more staff. After four workers died while installing the insulation, the program was abruptly cancelled. As a result, the businesses that ramped up for the program suffered significant financial losses and many went out of business.

Although these sudden political changes were unexpected, others are more predictable.

Potential political factors that influence your business could be at the local, state, federal or international level. So ask yourself, “What can change in the legal and political environment that could result in threats or opportunities for my company?” 

Economic factors in a PEST analysis

This includes the macroeconomic factors that can affect your business directly or through your products and services. For example, changes in factors such as the rates of unemployment, interest and inflation will impact the economic environment and potentially your business.

For businesses selling consumer goods, a higher inflation rate will result in less disposable income and potentially lower demand for what you are selling. Another example is the impact that higher interest rates have on residential home purchases. Although not an issue in recent times, residential mortgage lenders, home builders and real estate professionals know that high interest rates can dampen home sales. While this can be a threat for sellers and lenders, it can be an opportunity for landlords renting properties and businesses offering renovation services. 

Internationally, factors including exchange rates and globalisation can pose threats and opportunities. For a manufacturer importing raw materials, a fall in the value of the Australian dollar means higher production costs. On the other hand, a lower dollar will make an exporter’s products cheaper overseas, so it’s an opportunity. 

When considering how the economic factors affect your business, be open to the positive aspects of change as well.

Socio-cultural factors

This part of the PEST Analysis includes a broad range of factors such as demographics, employment trends, lifestyle choices and attitudes in general. For example, an aging population can be a threat to some businesses while others will see it as an opportunity. While a business that sells products to a younger demographic can see this as a threat, another business could see an opportunity to sell products and services tailored to older buyers. 

Consumer attitudes are socio-cultural factors that can have a large impact on businesses. One example is the use of plastic drinking straws. Once consumers became aware of the potential environmental damage caused by plastic straws, they started demanding alternatives such as paper ones. Fast food chains and supermarkets suddenly stopped carrying plastic straws. Companies manufacturing plastic straws either had to switch to paper or lose part of their business.

When conducting your PEST analysis, ask “What socio-cultural changes can bring threats or opportunities to your business?”

Technological factors

One big example of a technological factor making a big impact over the past 25 years is the rise of the internet. This has affected a large range of industries – from the news media to consumer goods. In the media industry, newspapers and television networks have seen the rise of competition from internet providers. For instance, before the widespread use of the internet, a large portion of newspaper revenue came from classified ads. This all changed when companies such as Seek and eBay offered solutions that made most newspaper classified ads obsolete. While some traditional media companies were able to adapt to the new technology, others were not so successful.

Movie rental businesses are another visible example of how technological change can be a threat or opportunity. These started as video rental businesses in the 1980s. As DVDs were introduced and gained popularity in the mid-1990s, these businesses kept up by moving to DVD rentals. When streaming services, such as Netflix, were introduced, DVD rental shops started disappearing. 

Netflix began as a DVD mailing service before it moved to a streaming platform. It’s interesting to note that in 2000, Netflix was US$50 million in the red and approached the head of Blockbuster with the proposal that he buy the business for $50 million. At the time, Blockbuster was a $6 billion company with 60,000 employees. Netflix moved from a postal DVD rental services to a streaming provider. As of 2019, Netflix is worth around US$140 billion. Blockbuster filed for bankruptcy in 2010 after experiencing $1.1 billion in losses. 

With this example in mind, consider how technological changes can lead to threats and opportunities for your business. Are there any scientific or technological advances on the horizon that could harm or help your business? How can you prepare for the changes you forsee?

Next steps for a PEST analysis

Once you have determined the threats and opportunities, it’s time to write them down in a PEST Analysis Matrix. Here’s a blank version to show you how to create your own. 

Political Factors Economic Factors
 
Social Factors  Technological Factors
 

 

Based on the probability and potential impact of these changes, you can prioritise action steps to prepare for the threats or opportunities. 

Going beyond a PEST analysis with a PESTEL analysis

One variation of the PEST Analysis is the PESTEL Analysis (also called a PESTLE Analysis). This adds two additional factors, environmental and legal. Although you can add these factors to your analysis, they can also be included in the other four factors.

For example, most legal factors can be included under the political factors category.  Environmental factors can be included under the factors one of the four. For example, a change in environmental laws could be placed under political factors, while changing attitudes about environmental protection could fall under the social factors category.

Businesses that focus on the future often require business finance to implement changes. Learn more about small business loans from Moula.

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All the thoughts, ideas and musings from the Moula team! Covering everything from work/life balance to general finance tips plus everything in between!

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