You’ve likely heard of a SWOT analysis — a powerful business tool used to identify a company’s Strengths, Weaknesses, Opportunities and Threats. But many business owners are now talking about a different kind of analysis to assess “big picture” factors impacting their companies.
Referred to as a PEST analysis —which stands for Political, Economic, Social and Technology — this exercise looks at external factors that can affect your business in a significant way.
For example, if you are considering launching a new product or service, entering a new market, or investing in new technology or equipment, PEST factors will likely reflect on the soundness, timing or financing of these decisions.
Tackling the PESTs
Bringing the PEST factors into focus allows you to identify trends in areas beyond your control. It can guide you in adapting your business to accommodate external agents of change.
You’ll start by gathering information about the current and future factors that might affect your business. Next, brainstorm the impact of each factor to identify opportunities, threats and other issues arising from them so you can take appropriate action.
Your PEST analysis should look specifically at the following areas:
Political: This factor includes the governmental and legal circumstances relevant to your business climate. For example, how stable is the current government and what kinds of leaders are on the horizon? Are there business or trade regulations, legislation or tax policies that are likely to impact your company — either in your favor or to your detriment?
Concrete examples of political impacts might include new regulations, deregulation or import restrictions; OSHA or EPA laws; union or trade agreements; and tax policies, tariffs or e-commerce regulations.
Economic: Here you want to follow the money. For example, is the economy growing, shrinking or stagnant? Are your customers likely to spend more or less in the future? Are employment, inflation and interest rates working to your advantage or disadvantage? How easy is it for you, your suppliers and your customers to access financing?
Examples of these impacts include labor costs, exchange rates, stock market trends, disposable income, and even weather or climate change.
Social: This factor will help you gain insight into customer behavior and market size. For example, are demographics and generational trends working for or against you? Is your market socially mobile? Are customers becoming more educated or more safety or health conscious and are they more focused on environmental issues? Are your buyers’ attitudes changing relative to saving vs. spending or working vs. relaxing?
Examples of social impacts include your customers’ age distribution, career and family stage; ethnic and religious considerations; major events and influences; media opinions and views; and buying patterns.
Technology: This factor will help you get a handle on how technological advances will impact your business and your plans for the future. For example, what role will the internet and the cloud play? Will research and development be a major influence in your industry?
For example, is your business involved in or influenced by changes in intellectual property, patents and licensing? Are there new technologies that you could or should be using? Is your industry technologically mature and thus ripe for an innovation overhaul?
Taking Action
Once you’ve identified the changes taking place in these areas, develop a plan for how you can take advantage of the opportunities while avoiding or mitigating the threats.
Depending on your business model and structure, this endeavor might require a team to tackle each area. Don’t hesitate to call on outside resources for input. Trade organizations, government representatives, suppliers and customers may have valuable input based on their spheres of knowledge.