Strategic planning is a necessary element for achieving a company’s long-term goals. It involves developing strategy, setting priorities, as well as assessing the current environment and making forecasts. Regardless of industry, strategic planning plays a critical role in a company’s development.
One of the most important tools for business analytics and strategic planning is PEST analysis. Usually, this method is used before launching a major project or when preparing for large-scale changes in the company. This tool is used in marketing and allows you to assess the impact of external factors, identify potential threats and opportunities, and ultimately make rational decisions. Unlike SWOT-analysis, PEST does not take into account internal factors. In this article, we will look at the concept of PEST analysis and tell you how to conduct it and what benefits it can bring to a business.
PEST analysis is a strategic planning tool that helps to assess the macroeconomic and socio-cultural environment. The author of the method is Francis Aguilar, an American scientist in the field of strategic planning and general management. Back in 1967, he invented a macro environment research tool and gave it a name – ETPS. Later the method was renamed into the easier to pronounce PEST.
The acronym PEST stands for the following:
In the research process, the listed external factors are applied, which allow to get a more detailed picture of the company’s development in the market. These fundamental attributes of the macro environment make it possible to form an overall assessment of the company’s position in the market. Let’s analyze a typical list of macro environment factors.
Political factors can have a significant impact on a company’s business strategy, especially if it is entering a global market or operating in countries with a developed political system. Let’s take a look at the most significant political factors that companies should consider before making important strategic decisions:
With these and other political factors in mind, companies can develop strategies that recognize the potential risks and opportunities associated with the political environment and adapt their actions in response to the changing environment.
Economic factors play an important role in a company’s strategic decision making. They can have a significant impact on a company’s financial performance and competitiveness. Here are some of the key economic factors that a company should consider:
By taking these economic factors into account, companies can develop strategies that take into account the current economic environment and increase their competitiveness and resilience in the face of change.
We should not forget about the influence of society itself and its cultural peculiarities. Sociocultural factors play an important role in the development of a company’s strategy, especially in the context of interaction with customers, partners and staff. Let’s look at the most significant socio-cultural factors that should be taken into account:
By taking these factors into account, companies can better tailor their products, services and marketing strategies to the realities of society. This will help attract and retain customers and maintain positive relationships with clients, partners and employees.
The level of technological development of the state and society has a significant impact on a company’s strategic decisions not only in the digital sphere, but also in traditional industries. Here are some of the important technological factors that a company should take into account:
With these and other technological factors in mind, companies can develop strategies customized to today’s technological opportunities and challenges to remain competitive.
Over time, the methodology has undergone some changes and additions, resulting in different varieties such as PESTEL, PESTELI and LONGPEST. Let’s look at each of them in more detail:
PESTEL analysis extends the classical PEST analysis by adding two additional factors:
PESTEL analysis allows a more complete and comprehensive assessment of the external environment and takes into account additional aspects such as environmental and legal factors.
PESTELI analysis, in turn, adds another component to PESTEL:
PESTELI analysis emphasizes the unique aspects of an industry and helps to better understand how external factors can impact a particular industry.
LONGPEST analysis, or long PEST analysis, is an extended version of it that involves conducting a study of the external environment at different levels: local, regional and national. This analysis can be customized to fit the unique needs and characteristics of a company or situation.
Each of these types of PEST analysis provides a broader view of the macro-environment and helps companies choose the best strategy for the next few years. The choice of a particular type depends on the company’s objectives and context.
To successfully conduct a PEST analysis, there is a step-by-step algorithm broken down into several steps. Here are detailed instructions on how to conduct the analysis:
Gather data on political, economic, socio-cultural and technological factors that may affect your business. Information can be obtained from a variety of sources such as news resources, reports from analytical agencies, statistical data, and more.
Evaluate which of the collected factors could have the greatest impact on your business. Use a scale of 1 to 5, with 1 representing a very low level of impact and 5 representing a very high level of impact. Rank each specific factor according to its importance to your company.
Don’t forget to consider the likelihood of change. On the same scale, rate from 1 to 5 the likelihood that each factor will change in the coming years. A high probability of change means that the factor is more likely to change.
So, after assessing the impact and likelihood of change of each factor, create a summary table or PEST matrix to visualize the overall impact and likelihood of change. This will help prioritize factors and develop strategies to adapt to potential changes in the external environment.
Based on the analysis, identify potential threats and opportunities for your business. Threats may include changes in legislation, while opportunities may include new market segments or technological innovations.
Based on the threats and opportunities identified, develop strategies that will enable your business to adapt to the changing external environment. This may include changes in products, marketing strategies or geographic expansion.
Gathering information for a PEST analysis requires a comprehensive study of various aspects of the external environment. Let’s consider typical sources of information that should be relied upon when conducting a PEST analysis.
When gathering information for a PEST analysis, it is important not only to rely on a single source, but also to consider a variety of perspectives and approaches. In addition, regularly updating information and monitoring changes in the external environment will help to keep the analysis relevant and orient the business strategy to new conditions.
The time period for which a PEST analysis is designed may vary depending on the specific organization and its strategic needs. Usually, the study is performed with an indicative horizon of 3-5 years ahead. This period allows the company to establish the impact of external factors on the long-term strategy and prepare for changes.
It is recommended to update the data at least once a year. However, there are situations where more frequent updating of the PEST analysis may be necessary. For example:
PEST analysis is a necessary tool for business, which allows to assess the impact of political, economic, socio-cultural and technological factors on the company’s activities. Conducting this analysis helps a business to be flexible and quickly adapt to changes in the external environment. It is an integral part of strategic planning and allows a business to successfully meet its objectives.