What is a PEST analysis?

A comprehensive PEST analysis encourages small business owners to critically examine the external marketing environments. These environments surround their firm’s operations. These environments contain forces — all of which can positively or negatively affect their business. The forces we examine, as part of a PEST analysis, are external to the business. This means they are predominantly (but not totally) outside of the small business manager’s control. The COVID-19 virus, for example, is a natural force that influences societal / social forces.

Sadly, unless small businesses are prepared to analyse these external forces, and act appropriately, then they will have little hope of emerging once the pandemic is over.

In order to conduct a PEST analysis, the political, economic, social and technological environments must be evaluated. And of course, this is how the analysis was named. PEST is simply an acronym for:

1. Political and legal forces
2. Economic forces
3. Societal forces (include natural forces, such as COVID-19)
4. Technological forces.

A PEST analysis is not the same as a SWOT analysis. A PEST analysis will only consider the broader macro environment, whereas a SWOT analysis encourages an analysis of both internal and external environmental forces.

Why do a PEST analysis?

If a PEST analysis involves analysing forces we have little or no control over, why bother considering them at all? To answer this question, a PEST analysis encourages management to carefully study what is happening in the environments that encapsulate their business. The underlying function is not to review what has already happened, but rather predict what is likely to happen in the near future. This article also contains a free PEST Analysis Template. This business planning process is nothing short or critical for all businesses. Large enterprise, right the way through to micro-businesses are able to mitigate (reduce) the economic harm the Corona Virus (COVID-19) will cause in coming months. Large enterprise are monitoring these environmental forces daily, so that they have the best chance of maintaining commercial viability, during these tumultuous times.

Make no mistake, a thoroughly executed PEST analysis can mean the difference between an average business and an outstanding one. The business referenced under the next heading is a prime example. It illustrates why we must have foresight. The goal is to identify new opportunities and possible threats. Only then can we take necessary action to protect our business, record growth, or simply reduce the loss of sales revenue during extraordinary times, such as right now.

Where’s my DVD rental store gone?

Let’s take a moment to consider the impact that technology has had on our country’s economy. Most people will agree that technology has made our lives much easier. The Internet, for example, has changed the way we bank, pay our bills, search for goods and services, book holidays, undertake study, and shop.

However, technology has caused serious damage to some businesses. In terms of casualties, the good old-fashioned local DVD rental store has taken a monumental hit. Once thriving chains, such as Video Ezy, no longer have bricks and mortar stores in every suburb. Why? Well, let’s face it, there’s now little need to visit a DVD rental store. Today, most households have access to Apple TV, Foxtel, Fetch TV, Stan, Presto, or Freeview.

Video Ezy, however, hasn’t surrendered in defeat. Using a PEST analysis, they have carefully evaluated the technological environment. And in doing so, they have identified a new marketing opportunity. Video Ezy has introduced Video Ezy Express — vending machine kiosks that are strategically located in suburban shopping centres, including IGA supermarkets.

Have DVD rental chains been sufficiently responsive to changes from within the technological environment?

Conducting a PEST analysis? Here’s what should be analysed

As small business managers we must understand that, although these external forces are largely outside of our control, we still need to carefully consider them. This ensures we are aware of them and highly perceptive to their possible affects on our business.

PEST analysis example considerations

• From a political and legal point of view, management should consider current and emerging laws and regulations. These may have an affect on their business either right now, or in the foreseeable future. For example, looming state or federal elections typically cause business uncertainty. The likelihood of significant changes to government policy, such as taxation, and licensing agreements should be considered. And changes to government funding arrangements can seriously affect some businesses, as will the new changes to Australian food labelling laws.
• In an economic sense, the firm’s management will consider current interest rates, as well as their likelihood of increasing or decreasing in the near future. They might also consider inflation, the buoyancy of the global stock market, as well as business and consumer confidence indicators.
• As far as social (societal) forces are concerned, management should determine if there have been any shifts or noticeable changes in lifestyle patterns and buyer purchasing behaviour. For instance, Australia’s ageing population presents opportunity for certain industries, such as aged care services. Similarly, the high cost of living means that more families need dual incomes, just to survive. As a result, the demand for childcare services will only increase. But, as we’ve seen in 2020, some of these social forces are driven by unexpected natural forces. The COVID-19 virus pandemic is a perfect example.
• Technological considerations, as explained earlier, require careful thought as well, especially in today’s digital age. Here, management will consider ways by which they can become more productive, perhaps by accessing new technology that’s now widely available. Further, the application of new technology is often reviewed on a department-by-department basis. To clarify this, management might consider how technology can improve the performance of the firm’s marketing, accounting, sales, manufacturing and distribution departments.

Download our free PEST analysis template

As with many of our business tips, we have supplied a free PEST analysis template. Feel free to use our PEST analysis template to document your findings in the appropriate category.