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PEST analysis

Chapter · January 2015 DOI: 10.1002/9781118785317.weom120113

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The user has requested enhancement of the downloaded file. PEST analysis of suppliers, consumer demand, new entrants, substitute product, and competitive rivalry). Tanya Sammut-Bonnici and David Galea A PEST analysis comprises components that could be of great fundamental value to a firm. DEFINITION AND SCOPE The analysis can be conducted for the entire firm, for its business units, for the respective PEST is an acronym for four sources of change: products, or for a new venture or partnership. political, economic, social, and technological. Figure 1 summarizes the components of a PEST analysis is a powerful and widely used PEST analysis, when it is used, and the strategic tool for understanding strategic risk. It identifies tools which are employed in conjunction with it the changes and the effects of the external macro during the process. environment on a firm’s competitive position. The external environment consists of variables Political factors. The extent to which policy that are beyond the control of a firm, but require makers are likely to intervene in the commercial analysis to realign corporate to shifting environment is a crucial factor in a PEST anal- business environments. Firms operate as part ysis. Trade, taxation, labor, and environmental of a larger ecosystem. They are vulnerable to legislation are factors to be taken into account. a variety of exogenous factors, which can have Commercial restrictions and political stability a major impact on the firm’s competitive posi- are also imperative factors that could determine tioning. seek to understand external the success or failure of a business. The banning factors and evaluate how business models will of tobacco advertising in the European Union, have to evolve to adapt to their environment. for instance, had spelt disaster for the Formula The impacts of external factors are mitigated One Industry, which in turn sought refuge in through preemptive strategy, and opportunities other parts of the world including Dubai and are exploited in the wake of new competitive Abu Dhabi. Google had to pull out of China positions that may be created in the process. because of censorship restrictions. The Arab Spring culminating in a widespread revolution CONCEPTUAL OVERVIEW has caused many firms to rethink their strategy to Variations of the PEST analysis tool are penetrate markets in the Middle East and North PESTEL or PESTLE (which adds envi- Africa. The British prime minister’s proposal ronmental and legal components), STEEPLE to hold a referendum on retaining or exiting the (which takes on a corporate social responsibility European Union has significant implications perspective by adding on the ethics dimension) on investors who in the past have relied on the and STEEPLED (which adds the analysis of freedom of movement principles on which their demographic factors). The increase in aware- investment decisions had been made. ness of environmental or ecological issues has Political factors are categorized at three main encouraged the implementation of another levels: the supranational, the national, and the version of the PEST framework, particularly subnational strata. As the business activities the STEER analytical tool, which incorporates become more globalized, the supranational level regulatory factors. is gaining more importance. In recent years, the PEST analysis and its variations form part of world has seen an evolution of countries orga- the “evaluation stage” in the strategic manage- nizing themselves into economic blocks, moving ment process. The process starts with an progressively toward becoming a political union in-depth analysis of the firm’s environments. partly at the expense of their sovereignty. The The external environmental analysis constitutes United States of America is a case in point. the “OT” part of SWOT analysis (internal To a lesser extent, the European Union has strengths and weaknesses, external opportu- progressively sought to take on more powers nities and threats). The benefits of combining and decision-making authority from its member PEST and SWOT are enhanced further when states. The ASEAN block is seeking to gain using them in conjunction with Porter’s five a more sound footing by courting South East forces model (encompassing the external effects Asian giants, Japan and China, to join. As

Wiley Encyclopedia of Management, edited by Professor Sir Cary L Cooper. Copyright © 2014 John Wiley & Sons, Ltd. 2PESTanalysis

PEST: Political, Economic, Social, Technological PEST Analysis PESTLE: adds Environmental and Legal factors External Macro Environment STEEPLE: adds Ethical dimension of the Firm STEEPLED: includes Demographics STEER: includes Regulatory factors

Level of the corporation Divisions and business units PEST Analysis Products and brands Application New ventures, new Acquisitions, partnerships

SWOT analysis: internal strengths and Complementary weaknesses, external opportunities and threats Porter’s five forces model - suppliers, consumer Strategic Tools demand, new entrants, substitute product and competitive rivalry

Figure 1 Summary of PEST components, application, and complementary strategic tools. geo-political forces are consolidating into major political interventions in the market are most political blocks, a political analysis of the country likely to happen in branches that affect certain in which a firm is operating provides, at best, aspects of the economy. A country’s infrastruc- a myopic view. Business firms may need to ture is still provided by the government directly expand their horizons and look beyond their or through public-private partnerships. While shores to remain vigilant at what is happening a number of operators traditionally owned at a supranational level. In the first instance, by governments have been privatized, they business firms may join lobby groups to influ- continue to operate in highly regulated markets. ence policy making to their advantage. Even Telecoms, utilities, and financial institutions are if limited influence may be exerted, political good examples. surveillance at a supranational level provides When the above political factors are consid- the required business intelligence to develop ered, it becomes evident that firms would benefit the right for adapting to changes in from scrutinizing and evaluating the political the political environment that are faced in the environment in which they are or will be oper- foreseeable future. ating in the future. Constant monitoring of Areas of national policy that may have a some or all of the above factors becomes vital in significant impact on the strategy of a firm ensuring that a firm’s strategy is in tune with the include fiscal policy, national incentives for policy environment. Major changes in the polit- enterprise, planning and permitting, procedures ical climate may bring about major changes in the for licensing and approval of new products, structure and operations of a market or industry. processes and services, perceived level of corrup- tion and transparency, government priorities Economic factors. Economic factors have the for supporting defined sectors in the economy most obvious impact on the profitability and amongst others (see Figure 2). overall attractiveness of a market or industry Although most of the world economies have (see Figure 3). embraced the free market model, significant The most popular indicator of economic interventions are made by national governments performance for a national economy or a in areas with market imperfections. Specific specific industry sector that is used is the Gross PEST analysis 3

Government policies Government term and change Trading policies Local legislation, current and future International legislation PEST Analysis Regulatory bodies and processes Political Factors Funding, grants and initiatives (examples) Lobbying and pressure groups Fiscal policy National incentives for enterprise Planning, permits, licensing Transparency and control of corruption Government policy on supporting specific industries

Figure 2 Political factors in PEST analysis.

Local economy International economy Economic trends, Corporate taxation Product taxation and duties PEST Analysis Seasonality of economic cycles Economic Factors Market and trade cycles (examples) Channels of distributions and access to markets GDP, consumer purchasing power Interest and exchange rates

Figure 3 Economic factors in PEST analysis.

Domestic Product (GDP) per capita. This various luxury items amongst others. In some is frequently measured at Purchasing Power other industries, demand remains more resilient Parity (PPP) to enable equitable comparisons to fluctuations in GDP. These would typically amongst various countries. Typically, time series include staple foods, health services, and basic and multilinear regression analysis techniques commodities. Although being a useful indicator, GDP are applied to project expected developments per capita provides only a partial view of the in performance over a defined period in the economic factors that might have a bearing on future. GDP per capita is a particularly useful a firm. Inflation not only erodes the purchasing indicator especially for those industries, which power of consumer but it also has an adverse are highly income elastic. Examples of such impact on the prices of raw materials and industries would include jewelry, construction, other inputs that need to be used by a firm entertainment, tourism, betting, cosmetics, and in providing products or services. Conversely, 4PESTanalysis fluctuations in rates of exchange may translate shockwaves across the transport and logis- into higher or lower prices for the purchase or tics sector. Problems in the financial services sale of products and services. Higher taxes have sector are likely to have a ripple effect on most a negative impact on the disposable income of industries and economies around the world. consumers. A high unemployment rate from an The effects were evident in the recession, investor’s perspective is a double-edged sword which culminated in 2008. The recession was as on the one hand, it erodes disposable income intricately linked to the bursting of the US of families but on the other hand, it provides housing bubble as housing prices plummeted access to a cheaper labor market. Moreover, to unprecedented levels damaging financial increases in bank interest rates have an impact institutions around the world. on both consumers and investors alike. In the All these economic factors demonstrate the former case, consumers are more likely to save importance of the need for continuous surveil- part of their discretionary income than to spend lance of the key economic factors that have a it on consumer goods when bank interest rates bearing on an industry. It is not an easy task to increase. They are also likely to borrow less from walk through the economic maze and to make banks and financial institutions to buy capital sense of how events are likely to unfold. In this goods such as cars, immovable property, and context, firms may wish to restrict themselves appliances. Investors are also likely to borrow to analyze only those factors, which have a less and redirect part of their speculative income critical bearing on their operation rather than into guilt-edged securities rather than in further the broader spectrum. growth of their firm. This is mainly because of an increase in their cost of capital. Social factors. Social trends dictate work Changes in economic factors will affect patterns and attitudes, consumer tastes and different industries in different ways. It is preferences, and the particular type, form, and imperative for firms to discern a clear behav- volume of demand for a product or service. ioral pattern between economic and industry The monitoring of social trends enables a firm dynamics. In some cases, there are clear interde- to reposition its products or services to fit the pendencies not only between industries but also changing expectations of customers. Figure 4 between the economic performances of different provides a list of examples of social factors, which countries. In recent years, the European Union have an effect on a firm’s competitive position. has faced a series of ailing economies queuing In the previous century, air travel was typically up for bail outs, as a viral recession progressively associated with high-income consumers who spread across all European shores with Cyprus, value comfort and premium service. Today, air Greece, Ireland, Portugal, and Spain being travel has become a commodity openly acces- the main victims. The domino effect has also sible to all social classes. Ryanair has challenged left its marks on other countries. For instance, the traditional view and has repackaged air following the news that Cyprus has become travel into a no frills offering, reflecting the basic the fifth Eurozone country to seek assistance, need of customers to safely and conveniently the London FTSE 100 index, French CAC, travel from one point to another. Meanwhile, and German Dax lost 63, 64, and 112 points by monitoring changes in their customers’ respectively. In Milan and Madrid, the drop was tastes, Plasmon have modified their products significantly steeper with the former losing 549 and produced a variant of the Plasmon Biscuits points and the latter 252 points. targeting adults. Increased health consciousness Some industries also exhibit positive corre- of customers across the developed world has lations in performance between each other and created a market for healthy food. would therefore need to be monitored concur- Higher levels of have, on the one rently. For example, a decline in the tourist hand, provided employers with a healthier industry would typically have an immediate pipeline of potential employees; however, impact on the entertainment industry and a they now also have a pool of more demanding long-term impact on the construction industry. customers. Telecom and banking firms have real- An ailing manufacturing sector would send ized that customer preferences and needs have PEST analysis 5

Demographics Psychographics and lifestyle Consumer perception of brands, products PEST Analysis Consumer purchasing behavior Social Factors Effect of advertising and public relations (examples) Influencers, role models Racial, ethnic, religious influences

Figure 4 Social factors in PEST analysis. become more diversified. Firms have restruc- advantage is short-lived. Technological break- tured their from a product throughs can either spell the demise of some orientation to a consumer orientation. Indeed, industries or create opportunities for new ones. customer centricity is progressively diffusing Figure 5 provides a list of examples of techno- across a range of industries. Market segmenta- logical factors, which have an effect on a firm’s tion is progressively moving away from tradi- competitive position. tional demographics to focus more on lifestyle. The proliferation of the Internet and e- Insurance companies are developing seg- commerce has done away with many inter- mented products for the busy professional, mediaries. This has been referred to as disin- for the small business owner, and for families. termediation. In the travel industry, consumers Banks have customized products for students, have become their own travel agents. They plan employees, self-employed, and the high net and book their travel online, using business-to- worth individuals. consumer platforms that had been previously Changes in the demographic characteristics of restricted to business-to-business members of a population can have an impact on many parts the supply chain. Moreover, many retailers have of the economy. Most developed countries are found an increased intensity in competition as facing the challenges of an ageing population as they are facing rivalry from online stores. On baby boomers are now 60 years of age and over. the other hand, technology has given birth to An ageing population creates additional demand new forms of intermediaries. This is referred for medicines, healthcare, and support services to as re-intermediation. Examples of new forms and lowers demand for products associated with of intermediaries include Amazon, eBay, and the younger generation (such as education). The Expedia to name just a few. They have the older generation, generally,has more leisure time advantage of being effectively integrated within and is more financially stable thereby providing social networks, which provide new channels the right mix for consumer spending. of marketing a product or service. Through An evaluation of social factors enables a firm these channels, consumers are able to publish to predict what pressures are likely to be made their unbiased opinions on defined products byvariousstakeholdersonpolicydecisions or services. The opinions provide added value of government, which would in turn have an in the supply chain. They are highly valued by impact on the firm. other potential customers and influence their decision-making process. Technological factors. The rapid pace of tech- In some cases, a new technology has nological change is driven through , completely replaced an old one, sending its which is in turn created through entrepreneurs demand in free fall toward its demise. In other who seek to push the boundaries of present cases, technologies wage wars against each other limitations. As new frontiers are broken, tech- in an effort to become the recognized standard. nology becomes obsolete and any competitive Microsoft is the standard for office software. 6PESTanalysis

New materials, machinery, software and business process support in electronic processes Innovations in mechanical processes PEST Analysis Innovation in product design Technological New distribution channels (e.g. Factors internet retailing) (examples) Innovations in pricing (e.g. eBay actions) Effect of technology on product design, production, distribution, pricing and consumption

Figure 5 Technological factors in PEST analysis.

Blu-ray is the benchmark quality standard used To thrive in a fast-paced technological change, for modern audiovisual home entertainment, a firm must remain vigilant. It has to be although iPad is the current standard for tablets constantly updated on any technological devel- and currently under threat from Samsung. opments in the industry, and aware of how they From a business perspective, technology are likely to influence its future attractiveness can be used to exploit a competitive advan- and profitability. tage through a variety of factors. These could include cheaper production, improved access PROCESS OF PEST ANALYSIS to customers, improved branding, product The process involved in exploring a firm’s quality, and higher levels of business intelligence external macro environment involves five main amongst others. stages listed as under (see Figure 6):

Prioritise factors

Analyze possible Develop corrective or effects on the firm re-emptive strategic action Categorize factors into Opportunities and Threats (OT factors in SWOT)

Identify PEST factors

Figure 6 Process and stages of PEST analysis. PEST analysis 7 1. Identification of the current and future A PEST analysis seeks to provide strategists factors in the firm’s external political, with a framework through which to increase economic, social, and technological environ- their awareness of the external environment. ments. However, it is not intended to constrain the 2. Analysis of the possible effects on the firm’s analysis in a straitjacket. There are clear inter- competitive position of each factor. dependencies amongst the various elements of 3. Categorization of each factor into opportu- the framework. For example, an increase in taxes nities or threats for the firm. by government is likely to erode the disposable 4. Prioritization of the strategic importance of income of consumers. On the other hand, the each set of PEST opportunities and threats. introduction of new incentives for industry is Ranking is based on the extent and the likely to attract further investment in a country period of the impact on the firm. thereby increasing employment and wealth. 5. Development of strategic action to correct Moreover, a growing environmental awareness or preempt negative effects and build on from citizens is likely to push governments to positive effects. legislate in favor of environmental conservation. Users of the framework are advised that if not It is recommended that the environmental used judiciously, a PEST analysis may become factors would be analyzed with respect to their an endless evaluation of Political, Economic, effect on the firm’s resources, capabilities, and Social, and Technological, which may result in core competences: an inconclusive analysis. The fundamental prin- ciple of the framework is that only those factors • Resources are the inputs required to produce that have a direct bearing on the attractiveness a product or service. Examples of tangible of the industry and which are likely to change resources are raw materials, premises, in the foreseeable future should be included. machinery, and equipment. Examples of This would enable a firm to focus its effort intangible resources are financing, tech- solely on the factors that are pivotal for a firm’s nology, human capital, supplier networks, competitive position. sales force structure, distribution networks, patents, trademarks, established customer base, brand equity, and firm reputation. See also R&D strategy; SWOT analysis Resources can be combined and developed into capabilities, which in turn create core competences. Bibliography • Capabilities are the firm’s capacity to make efficient use of its internal resources and Campbell, D. and Craig, T. (2005) Organizations and the ability to combine them into compet- the Business Environment, 2nd edn, Butterworth- itive products and processes. Examples of Heinemann, Oxford. strategic capabilities are: developing innova- Cheverton, P. (2004) Key Marketing Skills, 2nd edn, tive technology products, reducing the time Kogan Page Ltd., London. to market, creating more efficient distribu- Gillespie, A. (2007) Foundations of Economics, Oxford tion channels and retail outlets, capturing University Press, Oxford. the consumer’s attention through marketing, McGee, J., Thomas, H. and Wilson, D. (2010) Strategy: and managing customer relationships for Analysis and Practice, McGraw-Hill, Maidenhead. long-term brand loyalty. Capabilities are Sirmon, D.G., Hitt, M.A., Arregle, J.L. and Camp- bell, J.T. (2010) The dynamic interplay of capability developed from a complex set of internal strengths and weaknesses: investigating the bases of resources and become embedded in a tacit temporary . Strategic Manage- manner into the firm’s internal processes. ment Journal, 31 (13), 1386–1409. They are difficult to document as procedures and therefore difficult to copy. Intangible resources tend to be the main source of inimitable strategic capabilities.

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