PEST ANALYSIS

Although easy to remember and easily forgotten by firms in developing a long-term strategy, a “PEST analysis” is an acronym for analyzing the external environment (political, economic, sociological/demographic, and technological) and setting the stage for strategic planning. Also known as “environmental scanning,” the PEST analysis reviews the environment of a market—whether emerging or existing—and provides a snapshot of the external situation that may impact an industry or the firms within that industry.

Political Environment

Often considered more relevant when entering a foreign market, the political situation in any new or existing market is invaluable to study and understand. Existing government policies and regulations can deter new entrants into an economy, particularly in underdeveloped or developing areas of the world, or can swiftly affect incumbents in an industry with new regulations and policies that can have both positive and negative results. For example, even though the Graham-Leach-Bliley Act in the 1990s in the United States repealed the New Deal era Glass-Steagall Banking Act and allowed some financial companies to expand their ser- vices, it also impacted those firms because they were not permitted to sell both institutional and investment services. Likewise, the Sarbanes-Oxley Act of 2002 prohibited firms such as those in ac- counting and financial services from providing consulting and auditing services. Additionally, government policies can add extra expense to firms; for example, the HIPAA regulations of the late 1990s required health-care organizations and all related firms to protect patient information, which led to increased costs to these providers.

Economic Environment

The economic health and welfare of a state, nation, or region also impact the firm’s decision-making process. If an area is healthy economically and the consumers in a region have the means or potential means for creating purchasing power, then a company may want to consider selling its product or service in that area.

 

Sociological/Demographic Environment

In this part of an environmental scan, we look at trends and factors of the population of our market—for instance, societal attitudes or population shifts that represent either opportunities or threats to our overall strategy. Included in this portion of the analysis is perhaps the education level of the local market, in terms of creating both a workforce and a customer base for the firm. If the levels are too low, then the cost of creating training programs for potential employees and educational marketing methods for potential customers should be taken into consideration. The aging of the baby boomer demographic has affected the strategies of many organizations; interestingly, AARP has responded recently by be- coming “more hip” in its image as a way to woo boomers who, prior to their arrival into AARP age range, have parodied its existence.

 

Technological

Technology refers not only to technology as it is thought of today with computers and systems to manage business more effectively, but also to the infrastructure necessary to support modern systems and processes. Certainly the diffusion of Web-based technology has affected most organizations, giving even the smallest a global presence and a cost-effective way to reach millions of potential customers. Thus, the strategy of an organization may be affected by technological change, and the velocity of technological change also means this variable must be monitored constantly. Certain areas of the world—even in the United States—cannot support systems without great build-out expense and investment. A firm must look at the condition of the host country or region’s communication, transportation, and power systems, as well as the cost of using those systems. If the condition and costs are adequate, then the quality of the end product or service and the reliability of consistency providing the firm's product or service to the end user/customer must analyzed.