One way of planning your business is to undertake a PEST analysis.1 PEST analysis involves looking at the Political, Economic, Socio-cultural and Technological factors that could affect your business.
Every business needs to consider a range of external forces in order to take decisions. For many people imagination is very limited and is coloured solely by their own experience and personal beliefs. This can lead to wish fulfilment or a refusal to see reality or recognise the critical changes that are happening in the world around them. It can also lead to grabbing short-term solutions that, if they do not exacerbate problems, certainly ignore the longer term. In the business world pressure is often applied to take decisions quickly, acting on judgement and instinct rather than careful analysis.
There are many driving forces in the external environment that might impact on your business. These can be categorised as:
- Environmental; and
Social forces include, for example, changing demography and education, etc. The population in Western Europe is relatively static, but the age bands are changing. The number of older people, for example, is growing rapidly.
Technological forces are changing dramatically quickly. What effects will this have on your production, marketing and distribution plans? Depending on your market, technology might either raise or lower entry barriers for competitors - or completely change the industry.
Economic forces include the effects of inflation, interest rates, tax rates, exchange rates and the euro. Even governments have difficulty predicting what is likely to happen to these - and they try to control them! Nevertheless, they will have a major impact on your business, especially if you need to borrow a large proportion of your working capital, or if you are selling overseas.
Environmental forces are becoming increasingly important as more people consider the consequences of continually interfering with the ecological balance of nature. As a result, governments are legislating more to protect the environment and demanding less pollution.
Political forces most obviously include government legislation forcing businesses to comply, for example, with health and safety, or employment, or data protection requirements. These impose costs, but often also provide opportunities.
1 This is sometimes known now as a STEEP analysis, adding an extra E for the Environment. Bob Garratt refers to PPESTT analysis, adding as extras Physical (that is, environment) and Trade forces. Another variation is SLEPT - social, legal, economic, political and technological.
2 John Wybrew, 'Changing Patterns of Employment - Trends Affecting Small Businesses and their Implications', LiveWIRE, 1992.