What is PEST analysis and how to apply it in your business? – WAU
PEST analysis is an analytical model that facilitates the understanding of external factors that can impact your company’s operations. Widely used for business expansion, PESTEL analysis, as it is also known, can be very useful for companies of all sizes.
To properly invest a company’s resources, it is necessary to understand its particularities and the scenario in which it is inserted. It is a task that, without a direction, can be quite complex. To accomplish it, it is a good idea to follow techniques and methods already known and proven.
Analytical tools such as SWOT analysis and Porter’s 5 forces are used to highlight the strengths and weaknesses of the business, in addition to identifying its opportunities and threats. Understanding these factors is critical to making efficient decisions.
One of the most used methodologies in this sense, often in collaboration with those already mentioned, is the PEST analysis. How about knowing more about her? In this article, you will discover:
What is PEST analysis?
PEST analysis is an analytical model whose main function is to provide a more macro view of the company. The idea is based on the understanding that external factors, such as the country’s political and economic situation, cause significant impacts on the company’s operations.
The idea, then, is to separate these factors into topics and, in an exercise in research and reasoning, list the trends related to them that may have some impact on the business. For this, it is necessary to understand which are the external elements considered relevant for this analysis.
PEST is an acronym that unites the words Politics (P), Economy (E), Social (S) and Technology (T). Some experts, however, believe it is important to add two factors: Environmental (A) and Legal (L).
Therefore, the nomenclature may vary. It is common to refer to the tool as a PESTAL matrix, with the addition of the two extra letters. Besides that, environment is the word used in English to refer to the environment, which, with the replacement of “a” by “e” generates the name Análise PESTEL.
When and why to perform the PEST analysis?
Do you think about launching a new business or expanding your activities to other markets? If the answer is yes, the realization of a PEST matrix can be fundamental for the future of the enterprise. The simplicity of the tool and the knowledge it provides make it a frequent request in the market study.
Naturally, it is not only new ventures that can benefit from this model. Keeping up to date with the external factors of the company is the basic role of a manager, since without it, it is impossible to make really effective decisions.
Therefore, the understanding made possible by the matrix can be pointed out as its main benefit. From the information generated by conducting the study, it is possible to assemble and optimize strategies capable of increasing the company’s performance and, consequently, profit. Check out the main reasons for this!
Since it provides a complete mapping of external factors, the PEST matrix is an excellent ally in the search for new opportunities. When viewing the company in a more macro scenario, managers can see little-explored paths or markets with good growth potential.
The interesting thing here is that the effectiveness of the analysis is not diminished according to the sector in which it is implemented. This is because, due to the model that covers several factors, it is possible to give more or less weight to certain elements.
For example, if your business is related to the IT area, the data collected on technology will be more relevant than that on politics. Then, from an understanding of your own company, you can target PEST analysis to increase the effectiveness of the insights gained.
So, by applying greater focus on the technological factor, you can anticipate trends and innovations with the potential to impact the market in the near future. In other words, it is an excellent way to gain a competitive advantage.
If opportunities need to be identified in advance to be taken advantage of, threats must be anticipated and avoided. The scope promoted by the PESTEL matrix facilitates the identification, on all fronts, of situations that may harm the company’s plans.
Once again, it is necessary to understand the factors most relevant to your operations and focus on their development. That way, you can more efficiently prepare to make the changes needed to overcome such threats.
A very common example is related to companies dealing with customer data processing. Unsuspecting people may be taken by surprise by the General Data Protection Act, which in 2020 will change the way this procedure should be conducted. Whoever performed a PESTEL analysis, however, was able to prepare with ease.
What are the differences between PEST and SWOT analysis?
As we are talking a lot about identifying threats, opportunities and analyzing external factors, you may have remembered the SWOT analysis. Although it is similar to the PEST analysis and has similar objectives, the methodology, also known as the FOFA matrix, presents notable differences.
The main one concerns the elements observed in each method. While PEST focuses on external factors and seeks to maximize the vision of what surrounds the company, SWOT takes into account internal aspects, such as the organizational climate and the productivity of employees.
That is why the use of the two models together is highly recommended. It is true that the FOFA analysis also involves external elements. Even so, the depth reached by her in this regard does not match the results made possible by the PEST matrix.
How to do a PEST analysis?
Well, at this point the reasons why you should perform the PEST analysis are already clear, do you agree? Even if you already use other models, adding this tool to your strategy will maximize your understanding of the scenario in which your company operates and increase your ability to make efficient decisions.
To start your study, you need to define the factors that will be worked on and then brainstorm with the threats and opportunities for each of them. To facilitate your understanding, we will delve into each of the elements and quote questions that can be asked to enrich the analysis. Keep reading to get to know them!
The situation on the political scene has a direct impact on the private sector. After all, a government that interferes a lot in the economy can create challenges for a business to maintain the profitability of its operations. Likewise, a policy that creates import tariffs can impact the raw material used in certain sectors.
The examples are many. The important thing is to keep in mind which political factors can influence your company and try to understand and anticipate them. A government with measures to boost tourism, for example, can generate great opportunities for agencies specializing in the service.
Some questions that can be addressed in the political factors are:
- When will the next elections be held and what impacts will they have?
- How does the government deal with consumer protection issues?
- What restrictions does the government impose on your sector?
- Who are the likely winners of the upcoming elections and how can they influence trade?
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Economic factors can be divided into two categories: macroeconomic and microeconomic conditions. The first are those that contemplate the general conditions of supply and demand in the economy. The lack of interest in an item, for example, may mean that it is no longer as relevant to the market.
Microeconomic elements are more focused on the individuality of consumers. For example, a prosperous economic situation, in which the public has an increase in monthly income, may indicate an opening to more selected services and more robust prices.
Some examples of questions to address the economy factor in PESTAL analysis are:
- Is the economy stagnant, growing or declining?
- Is the persona’s income level rising or falling?
- Is the unemployment rate high or low?
- Are exchange rates stable or do they vary widely?
- Do consumers have easy access to credit?
If you know good marketing practices, you know that demographic segmentation of the public is essential for the development of the company’s strategy. Understanding the social context in which the persona is inserted allows the creation of campaigns that can engage him and turn him into a customer.
As well as opening up possibilities, this understanding can be valuable in avoiding mistakes. It is necessary to know the beliefs, norms, customs and cultures that involve your audience in order not to create materials that are considered offensive or inappropriate.
Understanding the social factors of the company’s audience can also highlight opportunities. In cities that suffer from violence, for example, security products and services can find a more receptive audience. Below are some sample questions for this step:
- How is population growth and what is the average age?
- Which regions have the largest population?
- How does the culture of the population influence your purchasing decisions?
- Is there any demand being generated by the social situation?
With the consolidated digital transformation, all areas of the company are affected by technology, from production to distribution. Therefore, understanding this factor is crucial. Understanding the main technological trends can generate opportunities to enter markets that are still little explored.
Likewise, this understanding can prevent your company from investing in the development of products that can become obsolete in a short time. In addition, it is an excellent way to map the market in search of the most efficient solutions for your operational challenges.
Check out some relevant questions that can be addressed:
- Are there technologies available to automate your company’s processes?
- What technological innovations can directly affect your industry?
- Do your competitors have more advanced technology than yours?
If you are working with PEST analysis, this is the last factor to be analyzed. However, if you want to include the extra two letters and apply PESTAL analysis, two more elements need to be considered.
The relationship with the environment is, more than ever, extremely important for business management. One of the main reasons for this was the change in the relationship between brands and consumers.
In the era of marketing 4.0, a concept introduced by Philip Kotler, the public hopes that the companies with which they relate are a reflection of their own ideals. This, together with the growing global alert for the scarcity of natural resources, forces companies to pay attention to the environmental factor.
So, in a PESTAL analysis, it is important to list the elements related to ecology. Companies that adopt policies that are harmful to nature can suffer from public rejection and even receive legal penalties. So, check out some questions related to this factor:
- Do our customers prefer sustainable products?
- How do our operations affect the environment?
- Is it possible to reduce damage to nature?
- Are there renewable energy sources that can be implemented?
- How is the ecological regulation of the market?
Understanding the legislation of the environment in which it operates is essential for the company not to suffer from legal problems that, in addition to representing financial damage, can damage credibility with the public. Therefore, it is necessary to pay attention not only to the current law, but also to the changes that are to come.
During a PESTAL matrix, legal factors are closely linked to consumer rights and the regulation of labor relations. Here are some questions that can guide your analysis:
- Is there any pending legislation that could impact the company?
- Does the company operate in accordance with current legislation?
- Are consumer law standards met?
- Do we act in accordance with labor laws?
So, did you understand how each of the factors of this model of analysis should be worked on? Read on to discover a successful case related to one of the most valuable companies today!
How did Amazon use PEST analysis to increase its success?
Nothing better to illustrate a new concept learned than to observe examples of success, do you agree? And it is impossible to deny that Amazon is successful in virtually every respect. How did the American giant reach that level? This has to do with performing a PESTEL analysis.
Amazon was one of the pioneers in e-commerce, starting its activities in the United States. Today, however, Jeff Bezos’ company is famous on a global scale, operating in several countries. Of course, this is excellent for your results, but at the same time, it creates an ever greater challenge.
When operating in different countries and cultures, the company needs to keep up to date with the different customs and the different external factors that influence it in each territory. For you to understand better, let’s talk about the most relevant elements in Amazon’s PEST analysis.
The main political factors that influence the operations of Amazon and similar companies are:
- government cyber security efforts;
- product regulation;
- political stability of the countries in which it operates;
- government support for e-commerce;
- tariffs related to export and import.
The economic elements that must be considered by Amazon executives in a PEST matrix are:
- economic stability of the markets in which it operates;
- variation in per capita income in the countries in which it operates;
- boom Chinese investments in digital commerce;
- exchange rate variation.
Like any other company, Amazon must consider social factors in its PEST analysis. Check out the main ones:
- widening wealth gap;
- level of purchasing power of the population;
- growth in online shopping habits.
Because your operations depend on technology, this is one of the most important parts of an Amazon PEST analysis. The main elements are:
- level of obsolescence of technological articles;
- increased IT efficiency;
- development of artificial intelligence technologies;
- increase in the rate of cyber crimes;
- increased concern about user data;
- trends such as the use of drones for deliveries.
What are the best tips for applying this framework?
In order to reach the maximum potential of PESTEL analysis, some practices are important. To start, before analyzing the external factors that influence your company, do your homework. Observe your company’s internal processes and make sure you understand them perfectly.
After all, it is useless to anticipate external threats if your company’s daily work does not reach satisfactory levels of productivity. Therefore, use tools such as SWOT analysis to map your operations and identify points that can be improved.
In addition, to optimize the realization of the PESTEL matrix, ensure prior knowledge of your audience. Creating a persona to represent your ideal customer is an important procedure for you to better understand how social factors related to your target audience can impact your business.
Also choose investments in technology that facilitate storage and data analysis. A well-made matrix will generate an enormous amount of information that needs to be kept in a safe place so that it can be accessed when you find it pertinent.
As it is a process that involves brainstormings, seek to involve the whole team. After all, the more heads strive to find relevant information, the richer the analysis. It is necessary, however, that all involved are educated and know exactly the type of insight they seek.
Then it’s just identify the most important factors that have been raised and get to work. More important than the analysis process is the implementation of measures considered adequate to deal with the threats and opportunities encountered.
Conducting a PEST analysis may be what you need to optimize your company’s results, expand your operations to new markets or open a new business. The wide scope provided by the matrix generates a complete understanding of everything that can influence the enterprise.
After understanding how the macro environment PEST analysis works, learn even more about the current technological scenario and find out how Digital Transformation can influence your business!