There are many factors that can affect the success of your business and determine which direction you will have to take next. According to research conducted by the Small Business Administration (SBA), one of the reasons 22% of start-ups fail within the first five years of launching is due to poor management.[1]

While there are many management skills for us to acquire, the ability to foresee the future is unquestionably the number one ability everyone longs to possess. Fortunately, it’s not some inherent talent only available to an elite few. With the right tools and resources, you too can make accurate business projections.

What Is PEST Analysis and How It Can Help You Predict the Future

One of the best tools to use is the PEST analysis. A PEST analysis is centered around the political, economic, social and technological factors of a business. These are part of the macro environment. The macro environment is about external influences and factors that can heavily influence a business whether they choose it or not. We will break down the PEST analysis into 4 major factors so you have a better understanding before applying it to your business:

Political Factor

What it means: This is about regulations and laws that are put in place in your place of residence/ town/ country that have a significant on your business. The issues around politics are, tax, political stability, trade regulations, affirmative actions and so forth.

Why it is important: This is important when planning your finances, hiring policies and training of staff. Some companies have quotas around hiring minorities and previously disadvantaged groups. Some industries require you to train staff on first aid and healthy safety.

How to use it: When you are planning the overall growth it’s important to keep in mind what these requirements are when you reach a certain turnover or head count of staff. This puts you ahead of the curve and you have no surprises when you do reach a certain threshold as implementation and planning can be very costly.

Economic Factor

What it means: This include factors such as inflation, currency strength, interest rates, trading power and foreign investments to name a few.

Why it is important: This helps if you want to get funding for your business, financing, loans from the banks. The economic environment also gives you insight regarding un-employment rates, pay rates and other financial aspect re your business.

How to use it: This is great for when you’re making financial projections. For example, if you have a long term loan out against your company, factoring in interest rates of the bank ensures that you do not come short on your budgeting. If you wish to hire someone with certain experience and expertise, knowing what the market rate is for such professional can help you in terms of your hiring plan and how to factor in that salary when you’re budgeting

Social Factor

What it means: The social environment deals with demographics, location, culture, lifestyle and the likes. Having a know how about your environment is paramount to how you establish your business. For example, there is not use going to sell feminine products in an industrial area dominated by men. Or selling fur coats in a place where animal rights are of high importance to the culture. Different cultures like different things so you need to know how to accommodate them.

Why it is important: When the community feel that the business caters to their needs and understands them, you gain more loyal customers and that gives you competitive advantage.

How to use it: It is also very important for organizations to be involved in Corporate Social Responsibility (CSR) – most people think CSR is expensive and is only applicable to big corporations but it’s a social responsibility every company has. You can choose to devote your time to helping repair roofs in a school. You can get employees involved in helping at charities or you can give contribution to a cause. It doesn’t have to be millions but the little can go a long way.

Technological Factor

What it means: The technological aspect of the PEST is something that is new to this analysis. But in today’s world, it is almost detrimental to your business to ignore technology.

Why it is important: How does technology affect the business you do? The world of retail was transformed significantly when e-commerce was introduced. If your organization deals with everyday mundane and monotonous tasks, how does technology affect your growth. There are some systems that are automated to help eradicate the human error. There are computers that can do a job that easily required 4 people.

How to use it: Knowing what kind of technology is out there and how it either threatens/assists your business, will help you derive a better vision and makes your more flexible and you won’t be so susceptible to change.

The PEST analysis can also be extended to a PESTEL Analysis, which deals with the environment issues like animal rights, carbon footprints, pollution and the likes as well as legal matters such as discriminations laws, harassment, minimum wages and other compliance issues.

If you have the desire to grow and expand your business to be sustainable, the PEST analysis is a tool that can best give you a guideline to take the necessary steps.

Reference

[1] Office of Advocacy: Frequently Asked Questions

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