How PEST Analysis is Useful in Business Decision-Making Process
Using PEST Analysis in Business Decision-Making Process
Businesses indeed require an endless amount of planning and strategies. There are millions of self-help books, podcasts, YouTube videos, Instagram and Facebook pages posting business-related content every day. Businesses’ success and failure are very uncertain as it highly depends on PEST, i.e., political, economic, social, and technological factors. PEST analysis was developed by Harvard professor Francis Aguilar which helps business organisations identify the opportunities and threats to their business. Thus, PEST analysis before starting a business as well as while currently running one becomes essential.
Major Determinants of PEST Analysis:
It is noteworthy that PEST analysis becomes all the more significant if you want to establish your business globally. All these four factors and their impact on a business are discussed below one by one.
All the policies of the government, which affect your business, come under political factors. One of the factors is the tax policies, which the government changes according to the state of the market and its budget requirement. Another important factor is the environmental laws. We all know that the earth’s climate system is deteriorating at a rapid rate. Thus, the United Nations’ ensures that all the developed and developing countries, which are its members, have environmental laws to stop the earth’s destruction. The government of different countries modifies these laws frequently according to the instructions given by the UN. Thus, the business organisations must be well aware of all these laws so that they do not have to pay any fine or penalty by breaking the law.
Furthermore, there are consumer and employee protection policies which also put some checks on your business. Sometimes, the government bans certain products if their quality is not up to the standards. This is because the government comprises of our representatives. Hence, they work for the welfare of the citizens. They cannot put the health of the general public at risk. In fact, the member of which political party is elected in your target region also impacts your business. This is because different political parties hold different ideologies. Indeed, the central government’s decisions regarding the country’s economic policies play a greater role in determining your business’s functioning. However, one cannot afford to ignore the specific policies of the state your business is operating in.
When it comes to international businesses, the kind of relations your country shares with the country your business is running in becomes extremely important. If they share hostile relations like China and India, their government might even ban your country’s products. Hence, your business will lose its potential market and suffer a huge loss. Thus, a businessman should always be aware of the political situation of their country. Therefore, all the decisions regarding your business must be taken after considering the political factors.
A business’s profits and losses are highly determined by the economic state of the country. If the country’s economy is in recession or depression, your business is also bound to suffer. However, if it is in the state of boon, even your business will thrive. The economic condition of a country then further influences other economic determinants. For example- the export-import regulations and the whole functioning of the banking system, including interest rates, are influenced by the overall financial state of the country.
A business sells a product or a service to customers. Thus, the information related to the target buyers becomes crucial. The products purchased by the people in their 20s will be very different from the ones consumed by the people in their 50s. Hence, depending on the age-group one is targeting, the product and the services have to accommodate certain ingredients or features that attract the target group. Thus, demographic information must be considered before setting up a business in a specific state or country.
Furthermore, people’s economic status will also determine whether a particular industry can thrive in a particular location or not. If the product or service is costly, targeting the people who can barely manage their basic needs would not help. People’s tastes, preferences, choices, basically most of the aspects which come under social factors are determined by the culture. Hence, indeed, a business organisation would easily decide whether their product will sell somewhere or not if they study the culture of that place.
In the 21st century, when a technology becomes obsolete just within one year, it becomes essential for a business organisation to keep track of it. The example of a very popular brand, ‘Apple,’ can be taken here. Brand-conscious consumers usually do not make rational decisions. Hence, every-time Apple’s new model is launched, it is purchased by these people no matter whether their current mobile-phone needs any replacement or not. Apple’s latest models mostly resemble the previous ones, with just one or two additional features. However, to survive in the market, it becomes imperative for other competitor brands to come up with similar technological advancements in their future models.
End note to PEST analysis:
Thus, undoubtedly, it is an extremely challenging task to run a business successfully. Even the CEOs of some of the greatest brands face new obstacles every day that require novel solutions. Hence, they never stop learning because the market is always unpredictable. However, definitely after putting in some effort, you can become smart enough to understand the market patterns. Every business running in the same area faces similar challenges. However, only those businesses survive during the country’s poor economic state, who are prepared beforehand for the unprecedented challenges.
PEST analysis comes under this preparation. The political, economic, social, and technological factors are all undoubtedly the major determinants of how well your business functions. You must frequently do the PEST analysis as this activity is indeed very useful in business decision-making process. It is bound to benefit your business by reducing the losses and increasing its profits by a significant margin.
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