Although easy to recollect and simply forgotten by firms in developing a long-term strategy, a “PEST analysis” is an acronym for analyzing the external environment (political, economic, sociological/demographic, and technological) and setting the stage for strategic planning. Also known as “environmental scanning,” the PEST analysis reviews the environment of a market—whether emerging or existing—and provides a snapshot of the external situation which will impact an industry or the firms within that industry.
Political Environment
Often considered more relevant when entering an overseas market, the political situation in any new or existing market is invaluable to study and understand. Existing government policies and regulations can deter new entrants into an economy, particularly in underdeveloped or developing areas of the planet, or can swiftly affect incumbents in an industry with new regulations and policies that can have both positive and negative results. as an example, even though the Graham-Leach-Bliley Act within the 1990s within the United States repealed the New Deal era Glass-Steagall Banking
Act and allowed some financial companies to expand their services, it also impacted those firms because they weren’t permitted to sell both institutional and investment services. Likewise, the
Sarbanes-Oxley Act of 2002 prohibited firms like those in accounting and financial services from providing consulting and auditing services. Additionally, government policies can add extra expense to firms; for instance, the HIPAA regulations of the late 1990s required health-care organizations and every one related firms to protect patient information, which led to increased costs to those providers.
Economic Environment
The economic health and welfare of a state, nation, or region also impact the firm’s decision-making process. If a neighborhood is healthy economically and the consumers during a region have the means or potential means for creating purchasing power, then an organization might want to think about selling its product or service in this area.
Sociological/Demographic Environment
In this a part of an environmental scan, we glance at trends and factors of the population of our market—for instance, societal attitudes or population shifts that represent either opportunities or threats to our overall strategy. Included during this portion of the analysis is probably the education level of the local market, in terms of making both a workforce and a customer base for the firm. If the degree are too low, then the value of making training programs for potential employees and academic marketing methods for potential customers should be taken into consideration.
The aging of the person demographic has affected the strategies of many organizations; interestingly, AARP has responded recently by becoming “more hip” in its image as the simplest way to woo boomers who, prior to their arrival into AARP age range, have parodied its existence.
Technological
Technology refers not only to technology because it is assumed of today with computers and systems to manage business more effectively, but also to the infrastructure necessary to support modern systems and processes. Certainly the diffusion of Web-based technology has affected most organizations, giving even the tiniest a worldwide presence and a cheap thanks to reach variant potential customers. Thus, the strategy of a corporation could also be laid low with technological change, and also the velocity of technological change also means this variable must be monitored constantly. Certain areas of the world—even in the United States—cannot support systems without great build-out expense and investment. A firm must observe the condition of the host country or region’s communication, transportation, and power systems, as well because the cost of using those systems. If the condition and price are adequate, then the standard of the tip product or service and the reliability of consistently providing the firm’s product or service to the end user/customer must be analyzed.
