We live in a rapidly evolving ecosystem of connections and dependencies. Something that might be happening in one part of the world could have a significant impact on businesses and people in other parts of the world. Macro events happening at a global scale can potentially change customer demand and drive changes in your business model and product offerings.
Change, when embraced, can help you level up your business. But change can also be disruptive, terrifying, and really difficult to manage. So, how can you stay ahead of potential change and plan for the best, most efficient strategy to mitigate risk? Leverage the PEST analysis framework. Let’s learn more about it.
PEST stands for political, economic, social, and technological factors that can have a significant impact on your business. PEST analysis is often used as a strategic market research framework to understand how you can make your business successful, considering the environment surrounding it. This kind of assessment helps you understand external factors that are out of your control, but can potentially affect your business strategies, in turn enabling you to make informed decisions and stay competitive in the market.
Let’s look at the four elements of PEST analysis in more detail:
The political environment of all the locations where your business operates can have a potential impact on your business. This includes government regulations, labor laws, trade restrictions and tariffs, as well as environmental regulations, taxation policies, and more. These can impact your supply chain, your revenue system, and even how you’re able to conduct business.
No matter what the size of your business, the current economic conditions can impact the business directly, often leaving long-lasting effects. These include economic growth or recession, inflation rates, interest rates, exchange rates, customer purchasing power, and overall economic stability. Revenue and profits are often calculated taking economic factors into consideration.
Societal and cultural factors can drive the success of your business. These include the demographics of your target audience, their lifestyles, cultural norms and expectations, social values, education levels, career aspirations, consumer behavior and buying trends, health and safety awareness, sustainability demand, and more. Understanding these social factors will help you customize your products, services, and marketing strategies to align well with your target audience.
Growth trends and innovations in technology can impact your business significantly. These include digitalization, automation, emerging technologies like machine learning and generative AI, research and development, pace of technology growth, etc. If your business can leverage new technology trends, it’s important to keep up with them to stay relevant. The sooner you can adapt to changes, the faster you’re able to upscale your products and services.
PEST analysis is a useful tool in product management to identify business opportunities that are provided by the changing external environment. On the flip side, it also provides advance warning of likely threats that can be mitigated early on. It can help drive the direction of the business and help products adapt quickly to the evolving market environment.
The framework can help product managers make better decisions, allocate resources appropriately, and align product vision with business goals more effectively.
Some of the key benefits of PEST analysis are:
Businesses can gather competitive intelligence by monitoring market trends and understanding the impact on competitor products. This information can give you the competitive edge needed to differentiate your products and make them more compelling in the market. You can also leverage this information to enhance marketing efforts and develop a better value proposition for your customers.
As technology evolves, products — both digital and physical — have to adhere to certain government rules and regulations. These vary depending on the industry and the geographic locations your products serve. Being aware of the changing political and economical factors can give you a longer runway to prepare proactively for the regulatory compliance that your business will need to comply with.
Monitoring market factors like political regulations, economic fluctuations, shifts in customer behavior and demand, and technology growth, helps identify potential risks and threats early. This enables product managers to anticipate business challenges and develop mitigation strategies accordingly. Early risk assessment also gives product managers the ability to effectively communicate not just with business stakeholders and management, but also with customers if needed.
PEST analysis helps product managers gain a comprehensive understanding of the market factors and its impact on products, enabling informed decision making that is timely and effective. This includes decisions related to go-to-market strategy, product pricing, product development, and sales strategies. It also helps in setting the product vision, goals, and objectives, as well as budgeting and resource allocation.
In dynamic and evolving markets, being adaptable is crucial to survive and thrive. Businesses can align their product, marketing, and sales efforts to align with the changing circumstances, ensuring long-term relevance and market share. You can pivot strategically when necessary, and do it proactively with enough time, instead of reacting to an adverse situation and causing a lot of chaos in the process.
SWOT and PEST analysis frameworks are both strategic tools leveraged by businesses, but they serve different purposes and focus on separate factors that affect the business.
SWOT stands for strengths, weaknesses, opportunities, and threats. This analysis framework focuses primarily on the micro-environment and internal aspects of a business. Most of these factors are within the control of the business.
External threats and opportunities that may not be in direct control of the business, are analyzed from the perspective of how a business can respond to them. SWOT analysis is used to assess a business’s current position in the immediate market, to develop strategies to achieve competitive advantage, and live up to its revenue potential.
Because SWOT analysis is more specific and actionable, focusing on the business’s unique value proposition and challenges, it helps in critical decision-making with regards to product, services, marketing, and resource/budget allocation.
PEST analysis on the other hand focuses primarily on the macro-environment and the external aspects of a business. Most of these factors are not something that the business can control.
The purpose of the PEST analysis is to help the business learn about upcoming changes/threats and prepare to adapt to them quickly and as efficiently as possible. It is a much broader and high-level strategic overview of the market and how it could potentially impact the business. It doesn’t provide specific, actionable items but provides a general direction for the product vision.
Ideally, businesses should conduct both SWOT analysis and PEST analysis to gain a holistic perspective of the business, both in terms of internal and external factors. Combined with high-level direction and specific, actionable strategy, you can set up your business for success.
To conduct PEST analysis, utilize the following steps:
First define the scope and purpose of the analysis. Identify what you want to achieve from this exercise — do you want to analyze a specific project, a specific product or service, the entire business, or a particular market? Are there any important decisions or strategies you want to leverage based on this information?
Once you’ve defined the goals, create a template similar to this one. Separate out the four categories — political, economic, social, and technological factors — and then determine all the factors relevant to each category.
Conduct market research to gather data on each of the factors you’ve identified. You can obtain a lot of relevant information by commissioning and/or reading market reports, conducting surveys, consulting experts, and monitoring the news for the latest market trends. Social media has also become a big source of influence.
Once you’ve obtained enough data to give you a clear idea of the macro-environment, analyze each factor and prioritize them in terms of their significance and impact on your business. Some factors might have more immediate and far reaching consequences than others.
You can complete the analysis by summarizing your findings, focusing on the most important factors, including immediate threats and revenue opportunities. Make recommendations based on the analysis and determine next steps.
Let’s take a look at a few PEST analysis examples of some popular businesses:
Amazon is one of the largest global ecommerce and technology businesses in recent years.
Amazon operates in different parts of the world and has to comply with the various trade tariffs, policies relating to customs and supply chain, environmental regulations, taxation laws, and more. Change in any of these regulations and policies will impact Amazon’s business and its ability to deliver products and services to its customers.
Shifts in exchange rates can significantly impact Amazon’s revenue numbers since payments are made in local currencies. Changes in disposable income levels of customers due to the current economic conditions can also impact business growth for Amazon.
The demographics and lifestyle trends of Amazon’s target audience can drive the strategy of the types of products and services Amazon invests in. A strong demand for sustainable and eco-friendly products can also push Amazon to leverage specific types of vendors.
Rapid advancements in robotic technology can be leveraged to cut costs in Amazon’s large warehouses. Automation can help make processes like packing and shipping much more efficient. Increased awareness about data privacy and security can lead to stricter regulations and impact how Amazon handles data today.
Nike is one of the most popular shoe and athletic apparel companies in the world.
Nike’s products are designed in one part of the world, but are manufactured in other countries. The labor laws, environmental regulations, and government policies impact Nike’s global supply chain. Nike needs to comply with each country’s rules and ensure favorable working conditions for the employees that are hired in each of these countries.
Policies regarding employee wages and benefits can impact Nike’s cost of sale. Economic situations like the COVID pandemic can greatly affect Nike’s revenue, since it still does rely on retail stores being open for business. When customers can’t afford to buy premium Nike products, they choose to buy a cheaper option, tanking Nike’s revenue.
As more and more people become more health conscious, customer demand for sports shoes and athletic apparel will continue to rise, giving Nike the opportunity to capitalize on it. Fashion trends and lifestyle choices will impact Nike’s design and supply chain for certain raw materials.
Nike’s heavy reliance on retail stores was a sore point during the pandemic, thus driving the company to invest more in online shopping options for its consumers. Technology trends like virtual reality can significantly help Nike in enabling customers to try on their products virtually before actually buying them, reducing product returns and shipping costs.
Starbucks is a global coffee chain, serving a variety of food and beverages.
Health and safety regulations can vary country-to-country, including packaging and labeling of food and beverage products. Starbucks needs to accommodate these regulations when designing its menu offerings. Starbucks uses coffee beans from all round the world, international trade tariffs can impact supply chain, affecting inventory, and in turn revenue.
High inflation rates and cost of living can dissuade customers from buying Starbucks products. Employees working from home, who prefer sitting at a Starbucks instead, are now mandated back to the office. This reduces footfall, and in turn revenue. Economic upturns and downturns can have a significant impact on the company’s growth.
Starbucks offers different items on its menu based on the country it operates in, based on what customers expect and are willing to pay for. The company also frequently updates its menu offerings based on seasonality and customer feedback, bringing in creative twists and healthy options to provide more diversity to its target audience.
Starbucks has created a loyalty program with its mobile app, often providing new offers and discounts to keep its customers coming back for more. The company makes use of QR codes to enable customers to order ahead and pick up from stores instead of having to wait in long queues, streamlining the user experience.
Netflix is a digital entertainment streaming platform that disrupted the world of cable TV.
Netflix operates in multiple countries, but its content is restricted by censorship regulations of each country. Distribution and streaming of various types of content is regulated and this impacts Netflix’s global growth. Contracting different shows in different languages can be also governed by the local laws.
The pricing of Netflix’s subscriptions are influenced by the economic conditions of the market and the consumers’ willingness to pay for the streaming services. Exchange rates and bundled pricing with local cable networks can also impact the company’s overall revenue figures.
Understanding customers’ viewer preferences in terms of content and genres help Netflix drive strategic decisions on content production and acquisition. Netflix also needs to adapt to various cultural sensitivities and ensure that certain cultures aren’t disrespected unintentionally.
Customers today consume content on different devices but expect the same quality and speed of entertainment, Netflix needs to keep up with the changing trends of different devices and provide a consistent user experience. Netflix also has to battle technology advancements in data piracy.
As a business, the more time you have to understand the market and macro- environment around you, the better you can prepare yourself to address challenges and adapt to changes. By leveraging PEST analysis, you can capitalize on opportunities and customer demand, while minimizing the risk of unforeseen threats and adverse situations.
Change is always constant. Figuring out the best, most effective, cost-efficient ways to respond to change can set your business apart from your competitors. Better yet, you want to be proactive instead of being reactive. This will enable you to make product and go-to-market decisions that can give your business competitive advantage, driving growth and sustainability.
Featured image source: IconScout
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