Ask SCORE: For businesses, it may be time for a PEST analysis

COURTESY TO THE BELLINGHAM HERALDMarch 23, 2013 

Question: I just heard about a business technique with a peculiar name. It's called a "PEST analysis." Is this for real, or is it just a goofy idea someone cooked up?

Answer: Yes, it's easy to make jokes about this, because of the funny acronym. But a PEST analysis is actually a valid and fairly common business procedure. It works for both existing businesses and startups. Let's talk about this.

The PEST analysis is a structured way to take a look at the Political, Economic, Social and Technological environments surrounding your business. Later on we'll look at each of these factors.

First off, a PEST analysis is a very effective business tool. The reason: it forces you to step back and look at the big picture. In business terms, this is called the "macro-environment" of your business. You will look at the outside factors and forces that your business will operate in - not the internal things like your products, services, marketing methods, or business model. The basic idea of the PEST is to look at the existing external forces around your business, and make some educated guesses about where changes might be coming in the future. The goal is to make your business ready to adapt to those changes, rather than having to fight them.

Here are the four PEST components, and some discussion of each.

Political factors. These are the governmental issues and topics that can impact your business. They typically operate at the local, regional, state and national levels. Some examples:

-- Is the political environment stable?

-- Will taxation policies be predictable?

-- Is there current or upcoming legislation of particular benefit or concern?

-- What local zoning and codes issues impact your business?

-- What employment regulations, like minimum wages and medical coverage, are changing?

Economic factors. Important topics here include financial matters and related issues.

-- Are economic trends and business conditions favorable?

-- What inflation expectations are there, short- and longer-term?

-- Are interest rates stable?

-- Is bank financing available for expansion?

-- Does market growth mesh with your business growth cycle?

-- What competing businesses exist, and how might that change?

Social and cultural factors. These are softer issues, but still important parts of the business environment.

-- Do you follow the demographics of your target markets, like age and wealth trends?

-- Are cultural and ethnic factors important to your business?

-- Will lifestyle trends and social issues impact your business?

-- Are green business practices important?

-- How might generational changes impact your business?

Technological factors. Certainly this is an area of the business environment that has seen massive, game-changing transformation in the last decade.

-- Is your business reasonably current in using available technology?

-- Are you following closely any new technology that could improve your goods and services?

-- Could competitors with lower cost structures force prices down?

-- Is your Intellectual Property protected from theft by others?

There have been numerous suggestions for add-ons to the four general PEST analysis topics. Your business might benefit from adding an evaluation of other business environments. Common add-ons are: the legal and ecological (thus, a "PEST-LE"); international; ethical; legislative; and various other factors. These may have merit in particular situations. However, most business advisors suggest that, for a first-time or typical PEST analysis, a business should stick to the original four categories.

Some businesses use a PEST to evaluate a potential business opportunity, like if you are considering adding a major new product line or service. Another use is for someone looking at adding a location in a different state. It would be very valuable to analyze the business environment there, before making any commitments. Also, a PEST analysis (or a related SWOT Analysis - of Strengths, Weaknesses, Opportunities and Threats) is a valuable component of a financing application package for your banker or a potential investor.

Like any written business plan, a PEST analysis is most valuable when you review it periodically, say every six months. If it needs major revision, that tells you that either 1) the business environment is changing very quickly, or 2) your original analysis was not accurate. Both of these are danger signals.

Think of the PEST analysis as another tool in your business toolkit. It's a low-cost, potentially high-benefit activity. If you're interested, do an Internet search for "pest analysis template." And, here are three helpful websites: mindtools.com (enter "pest" in the search box); businessballs.com (ditto); and pestleanalysis.com.


ABOUT SCORE

To learn more about managing cash flow, and other small business matters, contact SCORE, "Counselors to America's Small Business." SCORE is a nonprofit nationwide organization with more than 13,000 volunteer business counselors who provide free, confidential business counseling and low-cost training workshops to small business owners. Call the local SCORE chapter at 360-685-4259 to schedule an appointment. For details about the organization,visit SCORE.org.

Ask SCORE is prepared for The Bellingham Herald by Bob Dahms, a business counselor with the Bellingham chapter of SCORE. Submit questions for this column to newsroom@bellinghamherald.com.

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