Understand your environment,
with James Manktelow & Amy Carlson.
Changes in your business environment can create great opportunities for your organization – and cause significant threats.
For example, opportunities can come from new technologies that help you reach new customers, from new funding streams that allow you to invest in better equipment, and from changed government policies that open up new markets.
Threats can include deregulation that exposes you to intensified competition; a shrinking market; or increases to interest rates, which can cause problems if your company is burdened by debt.
PEST Analysis is a simple and widely used tool that helps you analyze the Political, Economic, Socio-Cultural, and Technological changes in your business environment. This helps you understand the "big picture" forces of change that you're exposed to, and, from this, take advantage of the opportunities that they present.
In this article, we'll look at how you can use PEST Analysis to understand and adapt to your future business environment.
Harvard professor Francis Aguilar is thought to be the creator of PEST Analysis. He included a scanning tool called ETPS in his 1967 book, "Scanning the Business Environment." The name was later tweaked to create the current acronym.
PEST Analysis is useful for four main reasons:
PEST Analysis is often linked with SWOT Analysis , however, the two tools have different areas of focus. PEST Analysis looks at "big picture" factors that might influence a decision, a market, or a potential new business. SWOT Analysis explores these factors at a business, product-line or product level.
These tools complement one another and are often used together.
Follow these steps to analyze your business environment, and the opportunities and threats that it presents.
Our worksheet guides you through these steps.
Use Porter's Diamond to align your strategy with your country's business conditions.
There are variations of PEST Analysis that bring other factors into consideration. These include:
Choose the version that best suits your situation.
Once you've identified the changes that are taking place in your business environment, it's time to look at each change, and brainstorm the opportunities that this could open up for you. For example, could it help you develop new products, open up new markets, or help you make processes more efficient?
It's also important to think about how these changes could undermine your business. If you understand this early enough, you may be able to avoid these problems, or minimize their impact.
For example, if a core part of your market is in demographic decline, could you open up other areas of the market? Or if technology is threatening a key product, can you master that technology and improve the product? (Risk Analysis can help you to assess these threats and devise strategies to manage them.)
Where you have identified significant opportunities, build the actions you'll take to exploit them into your Business Plan . Where you've identified significant risks, take appropriate action to manage or eliminate them.
PEST Analysis helps you understand the Political, Economic, Social, and Technological changes that will shape your business environment.
You can use these headings to brainstorm the "big picture" characteristics of a business environment (this could be a country, a region, or a new or existing market), and, from this, draw conclusions about the significant forces of change operating within it.
This provides a context for more detailed planning, within which you will be able to minimize risk and take full advantage of the opportunities that present themselves.
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