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Carrying out a PEST analysis.

[check] This checklist is designed to help those responsible for carrying out a PEST analysis for an organisation. It also provides guidance for students required to produce a PEST analysis as part of a marketing or strategic management assignment.

Definition

PEST analysis is a technique used to identify, assess and evaluate external factors affecting the performance of an organisation. A PEST analysis is undertaken to help an organisation gain an understanding of the wider business environment and may be carried out as part of an ongoing process of environmental analysis or scanning. The aim is to provide information to assist those responsible for strategy development and decision making. PEST analysis may be used in the context of overall organisational strategy or more specifically to evaluate the feasibility of a new product or service, or expansion into a new market.

Advantages of PEST analysis

PEST analysis:

* provides an understanding of the wider business environment

* encourages the development of strategic thinking

* may raise awareness of threats to an organisation's ongoing profitability

* can help an organisation to anticipate future difficulties and take action to avoid or minimise their effect

* can help an organisation to spot business opportunities and exploit them successfully.

Disadvantages of PEST analysis

* The rapid pace of change in society makes it increasingly difficult to anticipate developments that may affect an organisation in the future.

* Collecting large amounts of information may make it difficult to see the wood for the trees and lead to "paralysis by analysis."

* The analysis may be based on assumptions that prove to be unfounded.

* PEST analysis only covers the remote environment and the results need to be considered in conjunction with other factors, such as the organisation itself, competitors and the industry in which it is operating. Additional tools and techniques will be needed to cover these areas.

Framework for the analysis

To facilitate the analysis, environmental scanning has traditionally focused on four types of factors which may have an impact on the success of an organisation: political, economic, social (or sociological) and technological factors. These four areas form a simple framework for the analysis, although it should be borne in mind that there will be varying degrees of overlap and interrelation between them.

Political factors

This part of the analysis is concerned with how the policies and actions of government affect the conduct of business. Legislation may restrict or protect commercial operations in a number of ways. Issues to be considered under this heading include:

* the level of political stability

* the legislative and regulatory framework for business, employment and trade

* the tax regime and fiscal policy

* programmes of forthcoming legislation

* the dominant political ideology.

Questions to ask:

* When is the next election due?

* How likely is a change of government?

* Does the government incline to interventionist or laissez-faire policies?

* What is the government's approach to issues such as competition, corporate social responsibility and environmental issues?

Economic factors

This part of the analysis is concerned with overall prospects for the economy. Key measures would include:

* GDP/GNP

* inflation

* interest rates

* exchange rates

* unemployment figures

* wage and price controls

* fiscal and monetary policy.

Issues such as the availability of raw materials and energy resources and the state of infrastructure and distribution networks may also be relevant.

Questions to ask include:

* Is the economy in a period of growth, stagnation or recession?

* How stable is the currency?

* Are changes in disposable income to be expected?

* How easily is credit available?

Social factors

These are probably the most difficult factors to quantify and predict, as personal attitudes, values and beliefs are involved. Demographic factors such as birth rates, population growth, regional population shifts, life expectancy or a change in the age distribution of the population are also important.

Factors that may be relevant include:

* levels of education

* employment patterns

* career expectations

* family relationships

* lifestyle preferences

* trends in fashion and taste

* spending patterns

* mobility

* religious beliefs

* consumer activism.

Questions to ask:

* How much leisure time is available to customers?

* How is wealth distributed throughout the population?

* How important are environmental issues?

* What moral or ethical concerns are reflected in the media?

Technological factors

Rapid technological change has had far-reaching effects on business in past decades. Factors to be considered here include:

* investment in research and development

* new technologies and inventions

* Internet and e-commerce developments

* developments in production technology

* rates of obsolescence.

Questions to ask:

* Which new technological developments will have implications for my business?

* Where are research and developments efforts focused?

* How are communication and distribution operations affected by new technologies?

Some theorists have expanded this framework to reflect increasing complexity in the business environment and the growing importance of legal and environmental factors. The SPECTACLES analysis described by Roger Cartwright in "Mastering the Business Environment" (2001) is a further development which also encompasses cultural, aesthetic, customers and sectoral factors.

Action checklist

1. Identify the most important issues

The usefulness of the analysis will depend not so much on the quantity of information collected, but on its relevance. Consider which factors are most likely to have an impact on the performance of the organisation, taking into account the business it is in and the fields where it is active or may be active in the future. Local and national factors will be most important for small businesses but larger companies will need to consider the environment in any countries in which they do business, as well as the global scene. Information on current and potential changes in the environment should be included.

2. Decide how the information is to be collected and by whom

Check first how much of the information needed has already been collected or is available within the organisation in reports, memos and planning documents. In the context of a large organisation it may be wise to consult those with expertise in specific areas and delegate the collection of some categories of information to them.

3. Identify appropriate sources of information

Hard factual information, such as employment figures, inflation and interest rates, and demographics, is often easily available from official statistical sources and reference books. A wide range of additional sources, such as newspapers, magazines, trade journals, research reports, web sites, discussion boards and email newsletters, will be needed for softer information such as consumer attitudes and public perceptions. You may also wish to consult consultants, researchers and known experts in the relevant fields to supplement published material.

4. Gather the information

Decide in advance how the information is to be organised and stored, whether in a paper-based filing system or a computer database. This will depend on the resources available and who will need to access the information.

5. Analyse the findings

Assess the rate of change in each area--which changes are of minor and major importance; which are likely to have positive or negative implications. It is possible that some trends will have both positive and negative effects and it will be necessary to weigh these against each other. Avoid an over-emphasis on events with a negative effect and try to identify positive opportunities which may open up. Although a PEST analysis often focuses on anticipating changes in the environment, it is also important to consider areas where little or no change is expected.

6. Identify strategic options

Consider which strategies have the best chances of success and what actions could or should be taken to minimise the threats and maximise the opportunities which have been identified.

7. Write a report

Summarise your findings, setting out the threats and opportunities identified and the policy choices which should be considered. Preliminary recommendations for action should also be included.

8. Disseminate your findings

The results of a PEST analysis will be useful to those in the organisation who are responsible for decision making and strategy formulation.

9. Decide which trends should be monitored on an ongoing basis

Trends and patterns will have emerged from the research and it may be clear that an ongoing review of developments in these areas will be needed. Alternatively, further evidence may be required to support hunches or hypotheses which have been formed in the course of the analysis.

Dos and don'ts for carrying out a PEST analysis

Do

* Make sure that any expertise and resources that are already available within the organisation are exploited.

* Use PEST analysis in conjunction with other techniques, such as SWOT analysis, Porter's five forces, competitor analysis or scenario planning.

* Incorporate your analysis within an ongoing process for monitoring changes in the business environment.

Don't

* Make assumptions about the future based on the past or the present.

* Get bogged down in collecting vast amounts of detailed information without analysing your findings.

Useful reading

Strategic management: awareness and change, 5th ed, John L Thompson and Frank Martin London: Thomson Learning, 2005 Chapter 4 Environmental analysis and strategic positioning, pp157-206

Exploring corporate strategy text and cases, 7th ed Gerry Johnson, Kevan Scholes and Richard Whittington London: Financial Times Prentice Hall, 2005 Chapter 2 The Environment, pp63-107

Guide to business planning, Graham Friend and Stefan Zehle London: Economist in association with Profile Books, 2004 Chapter 5 Analysing the environment, pp31-40

Corporate strategy textbook, 3rd ed, Richard Lynch Harlow: Financial Times Prentice Hall, 2003 chapter 2 Analysis of the environment, pp81-158

Mastering marketing management, Roger Cartwright Basingstoke: Palgrave, 2002 Chapter 2 Understanding the organisation, pp29-48

The portable MBA in strategy, 2nd ed, Liam Fahey and Robert M Randall New York: John Wiley, 2001 Chapter 9 Macroenvironmental analysis: understanding the environment outside the industry, pp189-214

Thought starters

* Which factors have made the greatest impact on your organisation's performance in the last few years?

* What are the latest trends emerging in your industry?
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Title Annotation:Checklist 196; political, economical, social and technological
Publication:Chartered Management Institute: Checklists: Marketing Strategy
Geographic Code:4EUUK
Date:Oct 1, 2005
Words:1600
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