PEST Analysis – External Business Environment Analysis

A PEST analysis is a way to analyze the general external environment of an organization. Every organization has an external environment. The external environment is quite important because it is the environment in which a company operates. PEST analysis is a useful tool for understanding the “big picture” of the environment in which industry is operating, and environmental understanding will bring the advantage of the opportunities and guide to minimize the threats. PEST components are Political, Economic, Social and Technological.

The PEST analysis is used to identify forces in the macro-environment that are affecting the business at present and are likely to continue to affect the business in the future. Macro-environmental analysis is interested in factors in the wider environment that influence the demand for the product or service offered by a company; demand for the product or service; the manner in which the product or service is distributed; the price that is charged for the product or service; as well as the manner in which organizations compete with each other. The task environment of a firm is the environment of an organization that directly affects the organization. The customers, suppliers, competitors and labor market of a firm belong to the task environment. PEST analysis is important due to the following reasons:

  • PEST analysis helps to assumes the realities of the business environment
  • PEST analysis the organizations which are doing highly with the powerful forces which change the ongoing business environment.
  • The advantage of the PEST analysis, the organization would be successful in their operations.
  • PEST analysis helps the company to take the action for the reasons beyond its control.

PEST Analysis - External Business Environment Analysis

PEST analysis components are Political, Economic, Social and Technological.

P- Political Factors

  • Structure of federal Government
  • Stability of government
  • Policy decision making process
  • Speed of decisions
  • Political interference
  • Monetary and fiscal policies

E- Economical Factors

  • Government approach for economic development
  • Growth of industry sectors
  • Purchasing power of buyers
  • Surplus available for consumption
  • Consumption patters
  • Homogeneity and heterogeneous market
  • Potential growth of market
  • Global factors

S-Social Factors

  • Culture of society
  • Education standard and literacy level
  • Population growth rate
  • Demography
  • Social security measures
  • Focus on development
  • Life style
  • Ethical and religious factors

T-Technological Factors

  • Research and development activity
  • Automation
  • Systems
  • Technology incentives
  • Rate of technological change
  • Technology advancement
  • Innovation potential
  • Technology access, licence and patent procedures

Purpose of PEST Analysis

There are many purposes for doing the PEST analysis like when we want to expand or start our business in the global market, then by the help of PEST analysis we can assess the perspective market, assess the competitors and standpoint for the perspective business as well.

The main purpose of analyzing the PEST in macro-environment is, it is very considerable that we should identify the important factors which might affect or change the vital variables which do influence any company or organization’s supply and demand levels and its costs of production factors.  In the macro-environment, there are so many factors available which affects heavily the organisation activities. These factors influence the organisation’s Demand and Supply levels to its cost. The Rapid Changes is now a part of the environment which gave a heavy impact on the function of the organization. A number of checklists are now in market which can be use in analyzing the external and internal issues of the industry. A PEST Analysis is one of them. In the present time PEST Analysis is very essential for an organisation. What PEST Analysis does is, it categorizes the environmental factors into four parts. They are; political, economic, social and technological forces. PEST Analysis analyse the impact of each of the factor on the business. Then a result came out after the analysis. A business then use this result to take advantage of the opportunities and business also use the results to take important decisions for threats while preparing for the business and strategic plans.

It is very much important to understand the market growth or decline, Position and potential of the business and also the direction of operations. For knowing and understanding all this, PEST Analysis is a best tool for an organisation. The factors involve in PEST are actually a framework for analyzing the actual situation.

  • Strategic Planning: Strategic planning of a business is affected not only by internal and external factors but also by the factors available in the macro environment. Pest analysis is the tool which scans and analyse the factor of external environment which are Political, Economic, Social and Technological. These factors affect the business as well as organisation’s activities and operations. PEST Analysis helps business and organisation to know these data and to do strategic planning in a better way.
  • Marketing Planning: The next important function which PEST helps to do for the business is Marketing Planning. PEST analyse about the market segmentation and customer segmentation that what segment should be target by the company. It also explain what makes the company’s proposition different to those of competitors, presenting details of why target customers will choose to purchase the company’s product or service. All this can only be possible because of PEST Analysis.
  • Business and Product Development: As PEST is known as an important tool for the business organization. The next purpose of the PEST is Business development as well as product development. After analyzing the factors in external environment PEST shows the result to the business management. On the basis of this result management of the company decides that what to do regarding that, as in if the business require any change or development. And in the same case is the product of the company is requiring any development regarding anything. If result of the analysis displays that business or product are requiring certain changes and development then the management start taking decision and start making plan regarding that. When a company decides to enter into a new market and also a new market of a new country PEST is useful in that also. How is it is, PEST helps the business to adopt the realities of the new environment and also helps to break free unconscious assumptions of the new market in a new country.