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Why is PEST Analysis Important for a Business?


PEST stands for Political, Economic, Social and Technological impact on a company. There are people who will roll their eyes and believe that a PEST analysis is just another exercise in data for geeks. It isn’t. What the PEST analysis is intended to do is give decision-makers an understanding of changes that may be occurring within a given market. These can influence marketing and relationships that a company has worked hard to develop. Knowing ahead of time that a change may be occurring will help in making better business decisions.

Putting Meaning behind the Acronym 

Political changes are the kind of news that gets major attention. Elections can remove a pro-business, government and replace it with one that is in favor of regulations. A company that has extensive government contracts has to be aware of possible shifts that could result in either new business, or decisions not to renew agreements. Business must be very in tune with any economic changes that occur. The market may serve up bitter medicine or handout superior rewards depending on the circumstances. Interest rates, cost of labor, and danger of possible inflation are going to have an impact on any corporate budget. The social factors may be something as simple as changes in popular trends in spending. Age demographics might also come into play and the social changes concentrate attention on the consumers. Our global economy is heavily influenced by technology and developments in electronic communication and mobile applications can play a role in business decisions. The latest technology could even cause a needed revision in blue prints or product design. 

Importance in a Global Market 

The PEST analysis is concerned with the outside environment. Within each criterion are some elements such as the law, physical environment, and perhaps even the mores and ethics of the population. Those who are doing business in a foreign country would find the results of the analysis extremely valuable. Information can determine whether there should be an expansion, or just consolidation of business within the borders. As regulatory restrictions collapse around the world, companies are looking for new markets that have not been probed before. The PEST analysis can help make the decision whether or not a particular country or region holds any potential for profitable business. Any market has the potential for good or bad, and the analysis helps weigh things in a very objective balance. It goes without saying that PEST analysis encourages strategic planning and provides the necessary data.

A Few Caveats 

A significant amount of information has to be collected to make this worthwhile. Decision-makers should plan ahead of time from what areas information is going to be extracted. PEST concerns itself with only the external environment. It is therefore a tool to be used in collaboration with other data sources such as the internal capabilities of the company. The data may be entirely interesting, but may lead to considering factors that are important. That can result in a paralysis by analysis which a company does not want to have happen.

With the caution is at stake in consideration the value of PEST for assessing the outside environment cannot be denied. It too often happens that managers will deal with guesses or assumptions in making very important decisions. Data supplied by this form of analysis allows better focus on what needs to be done. Companies definitely want optimize their presence in any foreign market. That requires knowing more than just what a geography textbook will supply. Properly done, a PEST analysis gives strangers a better view of where they wish to do business. It is the kind of clarity that leads to more cost-effective decisions and better allocation of funds. It also improves the ability of doing successful business.

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