Business Growth Fundamentals – How PEST can set you up for success
How to grow your business? This is a question that is on the mind of many entrepreneurs. Over the next four articles, we are going to make a little tour through four standard economic models that can help you define the strategy for your company. This is essential to build a solid foundation for business growth. Just like a skyscraper, you need a strong fundament on stable ground in order to grow high into the sky.
We will take a detailed look at four models, explain what they are and provide hands-on best practices how you can apply them to your business.
We will start this week with the first model: the PEST model.
What is the PEST model?
The PEST model is a macroeconomic business analysis model that helps you analyze external factors that influence your company. You can use it to evaluate how the overall market situation looks like, where you as a business are positioned inside this overall situation, and which direction the market is developing to. It also helps you to identify if and what your company needs to adapt to.
The PEST model originated from a scanning tool called ETPS. This tool was explained in the book “Scanning the Business Environment” from Harvard professor Francis Aguilar in 1967. The name was later changed to create the better-known acronym, but the components of the model remain the same.
The framework evaluates four main components to scan the environment of a company. It is used as a model in Strategic Management. The acronyms of the core model describe influential factors and stand for:
To better understand the aspects of this model, it is necessary to elaborate each of these factors and possible implication.
This criterion describes the overall political situation and regulations of the country you are operating in. It takes factors into consideration such as political impact of government or parties, all kinds of local laws, international relationships, tariffs, trade sanctions, labor unions, tax policies and others. Are you in a capitalistic country? In a socialistic country? How stable is the overall environment? How often are laws changed or new ones created? How predictable is the government? Is the country involved in any wars? Are there any political tensions with certain countries that you want to do business in? Don’t only consider your own location. Also look at countries that your clients or suppliers are located in. If you operate with suppliers that have production facilities in countries that are subject to trade sanctions, that can also affect you.
How to apply this dimension to your business?
When you just start out, make sure to look at all required regulations that affect your business. Are there any professional restrictions, any licenses that you need? Do you need to be member of any associations? Local commercial chambers or foreign trade chambers can provide you with plenty of information related to this point. Also, most countries’ trade ministry can provide a lot of information.
When you are already in business, stay up to date by reading newspapers and following main developments. It is crucial to know when you have to react. For example, there have been many laws on some of the Spanish islands that make it almost impossible to use houses for AirBnB. It wasn’t always like that. If you observed this development and the legislation related to this aspect, you were able to act early enough, e.g. sell the house at a very good price before the law got into play. Or if there is a war in a country, like in Crimea (Ukraine) some time ago and you have production facilities, you need to understand the impact on your company. If you run a risk that your local employees will be hostage to rebels, what is your strategy? Do you want to take this risk, or do you rather give this facility up to protect your employees lives? Matter of the fact is: You can only act, if you know what is happening. Usually such scenarios don’t just happen out of the blue. Observe them carefully.
Economic criteria include anything related to the cost of capital and the general economic framework. These are factors like exchange rates, inflation rates, supply and demand, economic growth and interest rates. Parts of them are influenced by the political situation, parts by large financial institutions (especially the interest rates), other parts are consequences of the overall country development. This aspect is important, because it influences your cost of capital and important decisions like make-or-buy and import-or-produce yourself.
How to apply it?
If you are just starting out, identify which factors are relevant for your business.
- Do you produce goods or do you provide services?
- Do you run your business internationally or locally? Are you impacted by exchange rates?
- Is your industry rather new or already crowded? (supply and demand)
- Do you need to take loans or are you self-financing?
- How is the economic situation of your target market looking like?
- Do you provide luxury goods or consumer goods?
Once you know, which criteria are important for you, look at each factor and analyze the status quo. How is this factor today? Was there a recent development to consider? Which development would be good or bad for you? Then you start to monitor them.
Also re-consider these factors when making decisions:
- If you want to finance large investments, you may have to look at different financial options. If the interest rates in your own country are too high, you may want to look for opportunities with international investors.
- Regarding make-or-buy decisions, a good example is also the development of the Asian countries: Some years ago, there was almost no alternative but to produce in Asia to sell cheap. Nowadays, their wages also increased, transportation is much more expensive, and some states also want to earn their part with tariffs and taxes. Therefore, you need to calculate the total cost and not only look at the production costs but at all costs involved.
- If any exchange rate is against your favor, you have to evaluate how much risk you are willing to take. If you operate in countries with highly inflating currencies, you can choose to utilize more stable currencies (like US-Dollar) in your contracts. This is especially important if you are selling goods. If you buy goods, it is good for you if the currency deflates.
You see that each of these factors may have a big impact on your business. Consider that many factors are linked to each other, e.g. if the economic growth is weak, financial institutes tend to lower interest rates to increase demand. Or if in a neighboring country the economic growth is massive, people may look for opportunities outside their own country to spend their money.
Socio-Cultural components consist of everything that forms a country in a cultural way. Language, demographics, population growth, level of education, age distribution, social trends and behaviors, environmental and social consciousness and many more. More relevant information – depending on your product – might be: what role does a woman have in society, what marriage models are socially accepted, what role does religion play, how are different religions coexisting inside one country, which historical conflicts exist, are there any tribes or groups in a country that don’t understand each other, which political streams exist, what do people do in their spare time, how many have pets and what pets do they have, which attitude towards foreigners exist etc. Think of anything that makes people different from each other.
What to do with this information?
This is very important information for a business since it directly aims at your target group. Who do you sell to? Are your products targeting teenagers, but the population of your target market is growing older? That would mean a big problem, so this is something you have to keep in mind. Are people risk-averse but your product is totally unknown? Then you need to expect some resistance and have to invest more time in educational marketing. Does your product require a certain educational level, but the country you target has a high illiteracy rate? Maybe you want to consider changing your target market.
This portion can define how many people would actually be interested in your product. It identifies trends that might be beneficial for you or that might show a certain risk in the future that requires adaption from your side. It also says a lot about how you have to address people. If you e.g. have a lot of risk-avoiding behavior patterns, you need to find ways to reduce or reverse risk for your prospects. If you have a very proud country, you need to address their pride. If people love to negotiate, give them something to negotiate. The better you know how the people of your target market function, which words they use, what they are interested in, the easier you can find them and speak to them.
Technological aspects contain information on which technologies, which systems, tools or new inventions exist. This factor also looks at how many people have access to technologies. This is probably the most present factor that influences companies around the world. Technological developments influence and change the way we do things and impact entire generations. Technology has never spread as fast as today and impacted so many lives. The speed of implementation from first idea has increased so much, that you can suffer severe damage before you notice because you missed out on a feature or trend. Just look at NOKIA. What sounded like science-fiction yesterday, may already be outdated today.
What can you do?
Look at trends in your industry and evaluate how new developments or trends might influence the way you do business. For example, if you do manual data entry services with humans executing the job and a machine can do the same job cheaper, it might happen that you are out of business if the machine gets accessible to more people. Or the impact that social media had on many companies during the last decade: Things that nobody used to talk about 40 years ago are now spread over the world in less than a day. Thus, you need to adapt the way you communicate and take much more care what you put out into the world.
The degree of applied technology in your industry might also create or disable entrance barriers for new competitors. Thus, it has a direct influence on your competition as well.
Due to the speed of development, you must stay up to date. Even though one trend might not change your business significantly, it might lead to another one that then might bring huge risks but also opportunities. Many gaming developers saw huge opportunities once Apple launched the AppStore. Developing apps became one of the most lucrative industries almost overnight – if you understood what it can do. Technologies like Blockchain may revolutionize the way we exchange payments. One technology often enables another one. Therefore, try to stay up to date.
Summing up, the PEST model gives you direction regarding which aspects you should consider when analyzing your business environment. It identifies business opportunities for you but also uncovers risks that you must monitor closely and that you should tackle with risk assessment measures. When you just start out, this is what you should look at in the very beginning to validate your business idea. When you are in business successfully, you should revise those aspects regularly to monitor any changes in your environment. This model is also very important as basis for our next model that we will discuss in the next article.