A PEST analysis is an acronym for Political, Economic, Socio-Cultural and Technological variables or factors that directly impact a company’s operations. Most assume that the analysis is a strategic planning tool intended for larger, more established enterprises. However, these variables are just as impactful on small businesses, if not more so. So, how can you use this simple and extremely effective tool to prepare your small business for the unforeseen?
The analysis is fairly easy to understand. However, it’s the individual plans that result from this business tool that can become quite involved. In this case, the PEST analysis could be considered a contingency planning tool, one where companies can set triggers or markers that enact certain plans to deal with the unexpected.
Ultimately, the goal is to be proactive instead of reactive. In this case, companies must identify the potential threat long before it arrives. This allows companies to put contingency plans together in order to deal with those threats should they materialize. After all, would you rather try to manage, plan and deal with a disaster in real-time, or would you prefer to have a plan for that disaster well in advance?
The tool allows you to put together readymade strategies you can enact should one of your triggers be set. Therefore, it’s up to you to define what triggers are needed and why. Once you've done that, it's simply a question of tracking indicators.
The PEST Analysis
So, what are some of the variables within the analysis that might impact your small business? In answering this question, we’ll review each one of these individual variables in detail. After each description, we’ll review the types of things your small business should pay attention to.
Political: When thinking of political factors, think of how some political parties have an affinity for lowering or raising taxes. Think about how some are seen as being pro-labor. This is ultimately why the economy seems to stand still during an election cycle. Businesses are all waiting to decide what actions to take once the election has run its course. Will they increase research and development expenditures? Will they hire more? Will they make that all-important capital expenditure? If they do, what impact will raising or lowering taxes have on these decisions?
Small Business Impact: While each of the aforementioned variables are important, they often pale in comparison to much smaller events. For instance, a small business that has an ideal location can be suddenly impacted by a decision to divert traffic due to construction.
Imagine how much business could be lost if your town or city decided to enact a longstanding plan to construct a new bypass. Now, if you have a plan in place to deal with such an event, you’ll be much better able to mitigate its impacts on your operations.
Economic: Inflation rates and interest rates are often the main concern with the PEST analysis, as is the current economic climate. Companies that operate in multiple countries often deal with the uncertainty of fluctuating exchange rates. Understanding the impact of these variables on your business is critical to reducing their effects.
Small Business Impact: The costs to borrow money are fairly low in today’s economy. That is of course if you are able to borrow money. Despite low interest rates, companies are still dealing with high financing because customers don’t buy as much and don’t pay as fast.
Ultimately, less demand for finished goods means your company finances inventory longer. Delayed payments for those goods means your company finances receivables longer.
A lack of available credit altogether makes it nearly impossible to run operations. Your plan should be to pursue alternative financing options during periods where credit is hard to come by.
Socio-Cultural: When thinking of these factors, think of the impact of an aging populace. Think about how a changing demographic means changing preferences and an adjustment in lifestyle choices. While the healthcare industry may benefit from longer life expectancy, a company that focuses solely on an aging customer base is one that is often left scrambling to pick up the pieces.
Small Business Impact: An aging customer base is a serious issue for small businesses if they do nothing to appeal to a younger demographic. For instance, if you owned a restaurant where the menu was appealing to a certain clientele, then how would you adjust your approach once those clients aged? How would you appeal to younger patrons once your original demographic retired?
For inspiration, think about how McDonald's is always appealing to a changing dynamic. Think about how they are always adjusting their marketing, advertising and offering to a new audience. This is ultimately why they’ve been able to maintain a position of dominance for so long.
Technological: Companies must always be aware of the impact of emerging technologies. This includes tracking technological advancements on the part of a competitor’s product offering and competing technologies from external market threats.
For instance, downloads have all but destroyed Optical Media as today’s consumer is less and less interested in buying physical media. Other issues include the importance of tracking research and development expenditures and trends in product advancements.
Small Business Impact: Focus on identifying how your company can use technology to increase the speed of your response. Today’s mobile devices, handheld computers and enterprise hardware solutions allow companies to reconcile inventory counts in a fraction of the time compared to manual approaches.
No longer do salespeople have to call into the office to get an idea of stock levels. No longer do salespeople have to go back and forth with customer service, shipping and accounting to monitor the status of a customer’s account. This is a perfect example of how increased data transfer can distinguish your company’s offering.
Again, the analysis itself is fairly straightforward. However, your company should use the tool with the idea of setting up those aforementioned triggers in order to enact a specific plan or strategy to deal with any unwanted occurrence.
You might track interest rates and available credit in order to enact a plan to deal with higher financing. You might have a plan set aside to deal with that aforementioned issue of your town enacting that construction plan, one that might divert traffic away from your business. Or, you might finally decide to upgrade your sales team with up-to-date mobile devices.
Ultimately, you must define the potential threat and then have separate contingency plans to deal with each one.
To read about other tools please go to:
Strategic Business Planning: Top 5 SWOT Analysis Applications
Strategic Business Planning: Use TOWS to Move SWOT to an Action Plan
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