The PEST Model
PEST is the acronym for Political, Economic, Social and Technological factors. The environment in which an entity, lets say an organization operates is made up of external and internal environment. The internal environment is composed of the internal customers, which are the employees of the organization, the internal policies, mission and vision.
PEST Analysis can be defined as,
"A framework which describes the arrayed inter-dependence of macro-environmental factors used in the environmental scanning component of strategic management”.
Let us have a look at each of the six factors and learn their importance in strategic management.
Political Factors
Political factors refer to the degree of intervention of government in the economy. There are certain formal and informal rules laid down by the government which every organization has to abide by in order to sustain its operations in a particular country. Important political factors include:
Political stability
Taxation laws
Entry mode regulations
Trade regulations such as NAFTA
Pricing regulations
Economic Factors
Economic factors are those which have a direct impact on the capital loss of organizations and purchasing power of customers. These include:
Inflation
Exchange Rates
Rate of unemployment
Literacy Rate
Effectiveness of financial institutions
Efficiency of free market
Quality of infrastructure
Interest Rates
Social Factors
Social factors are cultural aspects and demographic variables which are closely linked to the market potential and customers needs. These include:
Age distribution
Attitude towards health and environment
Education
Leisure activities
Attitude towards career
Changing lifestyle
Gender Role
In developed countries such as UK and USA, the labour pool is growing. This means the costs for firms, who are paying pension to their employees have increased because the staff are living longer.
Technological Factors
Technology is what drives the phenomena of globalization. It provides competitive advantage to firms. Major technological factors include:
Rate of technological innovation
Rate of obsolesce of technology
Technological development
New technological platforms
Environmental Factors
Industries such as tourism, insurance and farming are being affected by environmental and ecological aspects. Environmental factors include:
Environmental protection laws
Waste disposal laws
Energy consumption regulation
Global warming
Due to the growing awareness of climate change, organizations are moving towards making products and processes which are environment friendly thus, creating new business opportunities.
Legal Factors
These are related to the legal environment of an organization and impact its demand and cost. Major legal factors include:
Health and safety law
Consumer law
Competition law
Employment law
Discrimination law
This article has been contributed by Feisty Ash. Visit www.writeawriting.com to find more about PEST analysis.
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