Defining PEST analysis
Apestanalysis of Political, Economic, Social and Technological factors will reveal many of the external environmental influences on a business’s performance.
Sources of information
Much of the information useful forpestanalysis may already have been gathered in carrying out, say, competitor analysis and strategic and tactical planning activities. More up-to-date information can be obtained from high-quality newspapers and journals.
Government bodies, industry bodies and research organisations produce detailed forecasts, country reports and industry reports. Stockbroking firms also produce research that contains valuable information on the trends and factors influencing the markets. For small businesses, a great deal of useful information can be found on the internet.
Applying PEST analysis
Those setting up a new business must be realistic about their knowledge and awareness of the environment the business will be operating in and how it might change, and they should avoid brushing aside the factors they are uncertain about. In larger organisations, it is often useful to bring together a number of different people with different knowledge and expertise in a pestanalysis workshop.
In advance of the workshop everyone should be given a background briefing pack covering the objectives of the workshop and any existing material that examines environmental trends. The workshop should begin by agreeing and clearly defining the objectives. These may be to maximise profits, grow revenues, increase shareholder value or capture a greater proportion of market share. The participants should then “brainstorm”
all the environmental factors that could affect the business’s ability to achieve its objectives, either now or in the future. The participants should be challenged to think widely and laterally around the problem. Factors that today are benign may be highly influential in a number of years’ time. When brainstorming, the workshop facilitator should enforce some simple rules:
The participants, in turn, should be asked to write an environmental factor on a piece of paper that can then be placed on a chart.
If a participant cannot think of a factor, the facilitator should move quickly on to the next person.
The process can go more than once round the participants, but when a few people have passed consecutively the facilitator should ask for any more contributions before swiftly bringing the session to a close.
There should be no discussion of or judgments on any contributions during the brainstorming process; all contributions are assumed to be equally valid.
Note that it may be better to run four shorter sessions, each considering one of the fourpestcategories.
The following sections list typical environmental factors, but every business is different so the list should act only as a starting point.
Political
Local, national and supranational political issues to consider include:
Direct and indirect taxes, such as income tax and vat, influence consumer spending and market demand.
Corporate taxation has an impact on the profitability of businesses.
Public spending by central and local government has a direct impact on the level of demand within the economy.
Regional and industrial policy can affect businesses at a micro level, and the availability of regional grants or other forms of assistance may be a deciding factor on where to locate a business.
Monetary policy and the level of interest rates will affect demand and a business’s ability to service its debts. Exchange rate policy can have a critical effect on importers and exporters.
Changes in international trade can create new export markets. For example, China becoming a member of the World Trade Organisation, in theory at least, makes China’s huge market much more open to exporters.
Competition law lays down rules on what a business can and cannot do and may be a crucial factor in the case of a merger or acquisition.
Regulation and deregulation can have a dramatic impact on the business environment and individual business sectors.
Local practices such as onerous bureaucracy or corruption can complicate business in certain markets.
Education and training will have a long-term impact on a business’s ability to recruit suitably qualified staff and to compete effectively at international level.
Economic
Local, national and global economic factors to consider include:
Business cycle. Developed economies often follow a pattern known as the business cycle where periods of faster growth are followed by years of slower growth or even recession. Some sectors, such as advertising, leisure and restaurants, are more
susceptible to the impact of the business cycle than others, such as the manufacturers of foodstuffs where demand is less cyclical.
Employment levels. These are closely related to the economy’s position within the business cycle but also to the state of the local economy. High levels of
unemployment in a region will reduce demand there but will also mean that labour is easier and cheaper to hire.
Inflation. This can affect a business in many ways; for example, if the rate of increase in the price of raw materials is greater than the rate of inflation for the business’s products, then the business will experience a fall in profitability over time.
Interest rates and exchange rates, as mentioned under political factors, can critically affect a business’s profitability, although certain risks can be hedged.
House prices and stockmarket prices. The growth or fall of house prices and the
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movement in stockmarket levels affect consumer confidence and hence consumer spending.
Economic development. The stage of economic development – underdeveloped, developing or developed – will influence the nature of the products and services that can effectively be marketed within a country and the level of infrastructure that exists to support the performance of business activities.
Social
Shifts in a country’s demography and social and cultural values usually occur over many years. However, with improvements in communication and increased employee mobility between countries, the speed of social and demographic change can be expected to increase. The population and its values represent the starting point for a discussion of market demand. The impact of social and cultural change is best examined in relation to a specific product or service, but some macro-level observations are provided for both developed and developing economies:
Population growth. The rate of growth of the population will have a direct impact on the size of the potential addressable market for a product or service. Population growth is typically higher in developing than in developed countries.
Age structure. In the developed, western world, economies are experiencing a significant increase in the average age of their populations. In less developed economies, populations are generally much younger, as birth rates are high and the longevity of the population is lower. Differences in the age structure of the
population have implications for the overall level of saving compared with consumer spending and the relative sizes of the working and dependent sections of the
population.
Rural to urban migration. Migration in the population can take place at many levels, including internationally. In developed European markets, labour mobility has increased following the creation of a single market. Developing economies often experience a migration of the population from rural to urban areas. The increased concentration of potential consumers in an urban location has implications for a business’s sales and distribution strategy.
Social and cultural shifts. Attitudes towards risk-taking and entrepreneurship differ by country and will affect the number of new start-ups and potential competitors.
Attitudes towards work and leisure will affect the demand for certain products as well as the supply side of the economy in terms of available labour. The role of women in the economy influences demand and supply.
Technological
Changes in technology can have a rapid and dramatic impact on an economy. Issues to consider include:
Level of expenditure on research and development by competitors. This will provide an indication of whether any changes in technology-driven production processes or new products should be anticipated.
New markets. Does the introduction of new technology create a new market for a particular technology-based product or service?
Production methods. How might technology be utilised to improve production methods within the business, and how might competitors utilise technology to gain competitive advantage?
Rate of adoption of new technology. It is often a considerable time before new technology gains mass-market appeal. The business plan must examine how long it will take the new product to penetrate the market.
Below is a summary ofpestanalysis for broadband access, a telecommunications technology that enables fast data speeds.
Broadband data access
The availability of broadband access for homes and businesses and the range of digital services that it can support are crucial elements of the strategic plans of many businesses, especially those in the television, media, advertising and gaming sectors. Broadband access refers to a high-speed data connection from the home or office to the suppliers of digital services such as e-mail, interactive games, internet access and music and video downloads. Broadband technologies, such as Cable TV and Digital Subscriber Lines (DSL), are in contrast to narrowband technologies, such as slow, modem-based dial-up services provided over traditional telephone lines.
Dial-up is currently the most used method of gaining access to the internet, but broadband connectivity is growing significantly. To develop their strategic plans, businesses must establish a vision of what the future broadband and digital services industry might look like. In the remainder of this chapter, PEST analysis and scenario planning are used to develop this vision, concentrating on the impact of broadband on the homes of domestic consumers. Chart 5.1 contains the results of PEST analysis for a typical consumer.
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Chart 5.1 PEST analysis for a typical consumer
POLITICAL ECONOMIC
The charges made by incumbents for access to the local loop Degree of competition between broadband network providers The costs to the customer of broadband access
Economic growth and disposable income Interest rates
Inflation Exchange rates Equipment costs
SOCIAL AND DEMOGRAPHIC TECHNOLOGICAL
The development and availability of competing broadband technologies such as cable, DSL, fibre optics and 3G mobile Future broadband technologies such as Very High Bit Rate DSL
(VDSL)
The costs of establishing broadband networks and upgrading existing networks
The creation of “killer” (highly attractive with mass-market appeal) applications
The development and improvement of interactive television Automatic language translation software
Security of data transfer Wireless technologies
Embedded, connected (wireless) devices within the home Software developments
Regulatory pressure on incumbent telecommunication businesses to provide access to their networks which connect to the home (referred to as the “last mile” or “local loop”)
Restrictions on broadcast rights Copyright laws
Competition law in relation to mergers between network providers and content suppliers
Regulation of the television business of cable businesses
Internet penetration Population density Topography Leisure time
Home-working/tele-working
Demand for audio and video delivered on demand into the home Rate of adoption of new technologies and services Demand for gaming services
Acceptance and growth of e-commerce Increased use of distance learning
Provision of medical and financial services remotely The perceived value of a single provider and bill for television,
telephone and internet access
Internet content in languages other than English