PEST Analysis: Understanding Macro-Environmental Factors

Broad Factors Analysis, commonly called the PEST Analysis, is a key component of external analysisExternal AnalysisExternal analysis means examining the industry environment of the company, including factors such as competitive structure, competitive position, dynamics. A Broad Factors Analysis assesses and summarizes the four macro-environmental factors — political, economic, socio-demographic (social), and technological. These factors have significant impacts on a business’s operating environment, posing opportunities and threats to the company and all of its competitors. Broad Factors Analysis is widely used in strategic analysisStrategic AnalysisStrategic analysis refers to the process of conducting research on a company and its operating environment to formulate a strategy. The definition and planning because it helps companies determine the risks and opportunities in the marketplace. That, in turn, becomes an important consideration when companies are developing corporate and business strategies.

Political Factors

Political factors are factors within the regulatory environment of a particular industry or business.

Examples of political factors include:

• Barriers to international trade
• Changes in government regulation
• Tax policy
• Employment laws
• Country-specific political risk

Political factors in the macro-environment can constrain the operations of organizations and introduce opportunities and threats to companies. When a company chooses which industries to enter or which countries to expand their operations into, it might want to consider the complication of government regulatory policies in that specific industry or country and the associated risks.

Economic Factors

Economic factors are things that influence the macroeconomy, such as:

• Interest rates
• Foreign exchange rates
• Inflation
• Gross Domestic Product (GDP) growth rates

Each of these factors can have various impacts on businesses. For example, interest rates affect the cost of capital and a company’s ability to raise funds or invest in new assets. Low exchange rates reduce threats from foreign competitors and create overseas opportunities. When inflation happens, it destabilizes the economy and makes the future less predictable for companies. Lastly, the high growth rate of an economy increases customer expenditures and eases competitive pressures.

Socio-Demographic (Social) Factors

Socio-demographic factors are short for social and demographic factors, which concern population demographics and the characteristics of a company’s target customers.

Examples of social-demographic factors include:

• Population growth
• Education level
• Health consciousness and trends
• Nature and the environment
• Age cohort changes

Changing social morals and values can impact the business of an entire industry because they shift consumer preferences and demand for products/services. For example, if a majority of the popularity perceives smoking as an activity that is harmful to physical health, then demand for cigarettes and tobacco could significantly decline and, thus, impact the profitability of those businesses.

Technological Factors

Technological factors have become increasingly important for many businesses in recent years due to the prevalence of information technology and mobile devices.

Some examples of technological factors include:

• Research & development (R&D) investment
• Scientific advances
• emerging technologies
• Diffusion of technologies

These technological factors affect the height of the barrier to entry of an industry and reshape the industry structure.

Broad Factors Analysis helps a company arrive at an understanding of the net potential impact of these factors on a business, and the overall attractiveness, opportunities, and threats that exist for the company in a given market.

More Related Resources

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