2. PEST analysis

Routinely scanning your environment enables you to make more informed decisions. No firm is an island. Firms operate in a constantly changing environment buffeted by changes in the political, economic, social and technological landscape. These changes represent both opportunities and threats. This section is about PEST (Political/Policy, Economic, Societal and Technological forces) framework.  PEST analyis is helfpul  for systematically scanning the external environment for opportunities and challenges arising from factors external to a firm.  Strategists use PEST analysis to “look around corners”, to anticipate trends and to construct alternate scenarios that the firm could face in the future.

“I skate to where the puck is going to be, not where it has been” Wayne Gretzky

The ability to anticipate the future provides the biggest competitive advantage.” Daniel Burrus

The thumbnail sketches are mnemonics!

The best CEOs, like accomplished surfers, are constantly scanning the  horizon to catch the next big wave. They have to be attuned to the external environment. As any good surfer knows it is not helpful to be early and is definitely disastrous being late when catching a wave. The same applies to business opportunities.

This section is about tools and formal analytical processes used to scan the external environment. These tools go by the mnemonic PEST analysis, which stands for Policy(P), Economic (E), Societal (S) and Technological (T) analyses. We will examine each of these factors in turn.

PEST Analysis
PEST Analysis
PEST Analysis Framework
PEST Analysis Framework
External Factors to be aware of
External Factors to be aware of

“Business models are designed and operated in a specific environment. Developing a good understanding of this environment helps you conceive better, more informed and likely more competitive business models.

Scan your environment by mapping out four main areas. These are a) market forces, b) industry forces, c) driving trends, and c) macro-economic forces. Each can be divided into sub-areas that allow you to draw a picture of your business model’s environment (see image below).

Continuously scanning your business model’s environment is important because the economic landscape is driven by growing complexity (e.g. networked business models), increasing uncertainty (e.g. technology innovations) and market disruptions (e.g. new disruptive value propositions). Understanding the changes happening in this environment help you more rapidly adapt your model to shifting external forces.

You should apprehend this environment as a sort of design space. It is a context in which you conceive or adapt your business model by taking into account a number of design drivers (e.g. new customer needs, new technologies, etc.) and design constraints (e.g. regulatory trends, dominant competitors, etc.). This environment should in no way limit your creativity or define your business model upfront. However, it should influence your design choices and help you make more informed decisions.” business-model-design blog

Collection of videos envisioning future states (“There”).

Political/Policy changes:

Businesses are impacted by government’s  fiscal, monetary, trade, regulatory, tax, intellectual property and employment policies amonst others. CEOs and their teams have to be monitoring the effect of changes to these policies for opportunities and challenges to their business.

Here are some interesting examples of government policies and the opportunities and challenges they present for businesses:

Solutions are waiting for political will and entrepreneurial solutions to address global warming. Solutions depend on government and business partnerships, and citizen participation. Do you believe that there is an environmental crisis? What do you think your part can be in helping solve the global environmental crisis?

US and China…two peas in a pod US and China economies are so interconnected now that our economic futures are codependent. US and China are reluctant dance partners who are unable to switch partners. Do you think US and China are adversaries? Who needs the other more? Why?

Where does our money come from ? An ATM of course, but what is the Fed’s and Treasury’s role in it and how does it impact each of us, and the environment (inflation, ease of credit) for business. What is your view on the inflationary impact of the current fiscal and monetary policies of the government?

Gov 2.0 web 2.0 tools used by the Federal Government to explain the huge stimulus expenditures, to provide transparency and accountability on these massive outlays of public money. What business opportunities might there be as a result? Can you think of any?

Deficit, Debt and Death , excellent charts and analysis from the Heritage Foundation ( a conservative think tank). Study these well. What is your opinion? Can you offer a counter argument to why the deficit spending might be necessary (perhaps even essential)? Can you paint a different picture of the future? That is, can spending increase government revenues and lower deficits? How?

The rise and fall and re-emergence of economies. Nothing is forever. Prosperity is not to be taken for granted. Or no one is ” Number 1″ for ever. For ever is a long time. Think about implications for businesses in a no growth or declining economy? How should businesses plan for a new reality? Does it need a new management mind set?

Where do your tax dollars go? If you had control over your tax dollars, is this how you would spend it?  This should help you see how government policy effects you directly, and see how it could have significant impact on businesses. And, realize why it is important for businesses to understand the impact of P factors in the PEST analysis.

How the government dealt with past recessions. Any lessons here for dealing with the current crisis? What do you think?

Economic changes:

Economy at a glance are we out of the woods yet? You decide.

The bruised economy will take years before we turn the corner. Eight beautiful graphs depicting the state of the economy as of Sept. 2009.

The formula that killed Wall Street.  Models are not reality. They only mimick it.

Economic indicators and which way are they pointing? What is your read on where the economy is headed. If you were a CEO how would you use this information for planning purposes?

Federal funds rate 1950s to now. When was inflation the highest during this period? What else was going on then? What was the root cause of the inflation then? If you were a CEO then what would you be most concerned about?

GDP data source. Become familiar with this data source. Understand it, and apply it to the cases that you will be analyzing in this course.

Inflation calculator. What would $100 in the year you were born be worth today? In which year since your birth did it lose most value? What happened that year?

Past recessions compare the depth, severity and length of past recessions. Have we reached bottom yet? When is the bottom? Should we be worried? Should we panic?

Bureau of Labor Statistics data. Everything you ever wanted to know about employment, inflation and prices it is here. Very useful resource. See if you can figure out employment trends in the Industry you wish to work for after your MBA. Find industries where employment is growing. Find regions of the country where unemployment is the lowest.

US Income distribution in 2005, can you find comparable data for other years? Can you ascertain whether income disparity is growing or decreasing in the US? Do you have an opinion on what the social impact of income disparity might be? Can you compare this with other developed countries in Europe, or Japan. What can you infer from this? Any correlation with crime? Quality of life?

It\’s the economy stupid 1900 to the present. US economy at a glance. What were the economic times like when your parents were your age? What do you think they were experiencing in terms of cost of college education, job opportunities, cost of housing, buying a car, health care?

Free economic data from free lunch, a service of economy.com. Good source for economic data. Good reference source.

Social and Cultural trends:

Social, Economic and Cultural data for various countries. Check your knowledge about the countries your classmates come from. Understand their socio-economic context. Understand from them why some businesses found in the US may not succeed in their countries and vice-versa, Understand the reasons why. Conversely, find business opportunities in their countries where US businesses could succeed.

American Cultural History 1980-90. Does this resonate with your personal experience growing up in this period. Can you find similar data for a decade in which your parents were growing up. How do you think those social-cultural factors shaped their views differently than yours. Can you see those differences reflected in the products, advertising and other cultural icons from the two periods.

The future is here! A provocative look at the future of social media. Study it. Understand it. And, gauge its impact on industry, businesses that you might be considering joining after graduation.

Future of Marketing is it evolution or revolution? Opportunity or Threat?  For whom? Which industries? Some industries affected now others later. Which ones?

Bicycle built for two at the intersection of culture and technology. A fun example.

The American Dream a decade of debt. How real is this for you? What is your debt burden? What do you  think the implications are for you, society and businesses over the next decade?

Social Media Revolution excellent video with tons of data on social media.

Technology trends:

key technology development timeline. Can you identify which technologies spawned which companies and when? Pick a tech. company that you admire and see if you can spot the technologies that gave birth to that company. Think about how technology trends spawn new industries and give birth to new companies. Conversely, which of these technologies were disruptive, that is, obsoleted existing products and industries.

Gartner's emerging technologies hype cycle
Gartner's emerging technologies hype cycle

Good resource for spotting technology trends. Subscribe to this feed. Explore the blog.Technology trends blog

A look into the future. A high level analysis of emerging technologies. Good future think. It is worth reading as much for the approach of forecasting technology future as for the specific forecast.

Links to data sources for PEST Analysis:

Policy/Regulatory data sources

Economy data sources

Societal/Cultural trends data sources

Technology trends data sources

Lecture Slides

Excellent real world lessons learned from failure of Snaptalent, a start-up, that failed to read its market.

Online resource for trend watching and tips on how to spot meaningful trends This is a good resource for trend spotting….browse it, and bookmark it for use as we progress through the course
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9 thoughts on “2. PEST analysis

    1. sarah, springwise is a great recommendation. It is now bookmarked under PEST trends and sarah. This counts as a useful submission for extra credit. Thank you.

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