The global business environment keeps changing, and companies need an effective mechanism to determine the risks and opportunities associated with such changes. To help keep up, many turn to PEST analysis, or the political, economic, social, and technological aspects of business climate. This form of analysis uses a four-step audit to generate insights about the environment in which global industries operate.
How Does PEST Compare to SWOT?
PEST analysis is different than, but related to, SWOT analysis, or strengths, weaknesses, opportunities, and threats. Traditionally, businesses rely on SWOT analysis to look at specific business units or projects. PEST, on the other hand, tends to have a broader scope. The greatest overlap is between the “O” and “T” parts of SWOT analysis. In other words, each of the PEST areas may highlight different opportunities and threats coming from a business’ external environment.
A Deeper Look: Political
Political factors include many of those factors that you may hear debated in a civics course or on the evening network news. Items to keep in mind include, among other things, the legal system in which businesses operate, how to handle intellectual property rights, political stability or lack thereof, and how taxes influence business decisions. Let’s say you do some business in a less-developed country without well-established property rights. It is conceivable that your business assets might be seized to serve some political purpose, making it a particularly risky climate in which to conduct business. In a more developed country, you may find that rising labour or environmental regulations make it too expensive to conduct business in specific areas or along certain lines of production. All businesses, large or small, perform best with consistent, predictable, and fair political systems. If you can’t be sure about the stability of a political situation or the cost-effectiveness of the rules imposed in a certain jurisdiction, the prudent decision may be to avoid it until conditions improve. Consider these questions:
- How might current/pending regulations impact your business?
- How sensitive is your business to changes in tax policy?
- Can those with political power harm your business without sufficient process or recourse?
A Deeper Look: Economic
Economic issues are just as important as political issues, but the difference is they tend to be unplanned and spontaneously emergent. Think about issues such as monetary policy from the central bank, levels of government spending from the Canadian or foreign governments, and general shifts in buyer preferences. Because the global economy is increasingly interconnected, you may find that economic changes as far away as China or South America affect the conditions in your industry. For example, there are huge new middle classes in India and China that could open up large buyer bases for your products. Small businesses that adapt best to changing economic conditions are more likely to outshine their competitors, take advantage of new profit opportunities, and effectively guard against unpleasant market swings. Consider these questions:
- How do changes in macroeconomic policy affect your market?
- What happens to your products or consumer demand when interest rates change?
- Is demand for your goods or services elastic or inelastic?
- Does your analysis predict an economic boom or downturn in the near future?
A Deeper Look: Social
The social, or socio-cultural, factors include the intangible or customary elements around which human societies are constructed. Some of these can change very quickly, think about how much more tolerant Western cultures are of alternative lifestyles than even a generation ago, but many change very slowly. When you perform this part of PEST analysis, you act a little like an anthropologist. Areas you might reflect on include national heritage, religion, language, human rights, and the demographics of a population. Just as with political factors, socio-cultural factors can be dramatically different from country to country. Domestic small businesses can have a decided advantage in this area. For example, your Canadian company is likely staffed by Canadians who understand the local culture. But if you have international clients, especially beyond the United Kingdom and the United States, it’s really important to ensure you are sensitive to possible cultural differences. Consider these questions:
- Does your target market promote individuality or a group-centric mentality?
- How can you best modify your marketing or product offerings to please buyers in different cultures?
- Do you have foreign contractors or employees, and if so, do they have different expectations about working conditions or contracts?
- Can you predict potential business or market changes by looking at leading demographic and/or cultural changes?
A Deeper Look: Technological
Think of technology as the intersection between the maturity of an industry’s capital equipment, items such as computers, steam shovels, information systems, and industrial manufacturing, and the availability of technology to consumers. The level of available technology may impact the inputs for your business as well as the ability to market and offer outputs. For example, a new piece of technology may make it possible for your business to automate some work, potentially saving you money on labour costs while improving efficiency. If you are able to transport products or provide remote services, then greater access to internet technology may make it possible for you to reach new consumer markets. Small business owners may be especially keen on technological improvements since increases in technological capacity often make it easier to compete with huge industry leaders. Consider these questions:
- Can your business leverage new technology to cut costs or offer better products?
- How does changing technological access change your potential consumer base?
- Will potential innovations threaten or further develop your industry?
- What steps do you need to take to protect your assets from tech-based theft?
Each of the four PEST areas can help you spot business opportunities with advanced warnings of pending threats. You may also find that PEST analysis frees you of older assumptions about how businesses or industries operate. Perhaps its most useful function, however, is its ability to help filter the endless amount of information available in the modern world.