What Is the PEST Business AnalysisListen to “Entrepreneur Decision Making Tools – Use NOW the PESTEL Analysis for Small Business” on Spreaker.
PEST is an acronym for political, economic, social, and technological. These four factors make up a business’s external environment and can affect a company’s performance. This is especially true for small businesses, which often have limited resources and rely on the local community for their clientele, therefore the PEST Business Analysis is especially useful for aspiring entrepreneurs.
My (Lame) Experience WITHOUT the PEST Business Analysis
I grew up in one of the world’s least business-friendly regions: the countryside of Brazil.
The massive bureaucracy is one cause of this unpleasant reality. So when I arrived in Poland, I hoped I wouldn’t face the same bureaucratic issues that my family’s business had in Brazil.
I underestimated it.
My lofty hopes led to my first setbacks, including a penalty for not signing a very specific permit application. While not as bureaucratic as Brazil, Polish firms must fill out many forms and get multiple permissions.
My example is just one of many stories of entrepreneurs in different cultures. Almost all these stories have a single message: be careful. Yes, Optimism is fine. You wouldn’t leave your home if you were pessimistic. You wouldn’t be an entrepreneur. But first, grasp the local entrepreneurial culture.
Writing this post is my way of giving you some hope. I want to help you to avoid my mistakes. For that, I will share with you a powerful tool that I learned to use while running a business abroad.
First, Stop Worrying and Start Asking Questions
RUN from the nostalgic feeling after facing the first obstacles above.
Maybe you already heard someone saying something like “Oh, I can’t believe it. That would never happen back home!”
This kind of phrase opens the gates to FAILURE.
Repeat them a few times and your brain will consider giving up without not even considering workable solutions.
Nostalgic sorrow leads to irritation and harms your initiative.
If you’re stranded on a desert island, lamenting the lack of a handsaw won’t help. Work with the tools (and circumstances) you have.
The PEST Business Analysis is a first step in understanding the entrepreneurial cultural traits and situations. You do it by asking the RIGHT questions about the things you MUST know.
What Is the PEST Analysis
The PEST Business Analysis is crucial in the planning phase of a new project or renovating an existing venture. It is a tool for analyzing macro, external, and uncontrolled issues. Factors affecting strategic planning, implementation, and future success.
Maybe you’ve heard of the PEST analysis if you studied marketing or a comparable field in college.
During the planning phase of my two businesses, I used the PEST analysis and its concepts. It was useful, yet imperfect. The flaw was those typical PEST models omitted legal and environmental considerations. Legal issues prompted my company to deviate from our early plans.
The sub-analysis of the environment and legal circumstances has been incorporated, creating the PESTEL model, an acronym meaning Political, Economic, Social, Technological, Environmental, and Legal.
To comprehend each aspect, you need to ask the proper questions. Questions and answers that will prevent shocks like mine, and this is what I will give you below through the PEST (EL) analysis.
Business Environment: Internal and External, Controllable and Uncontrollable Variables.
Understanding your business environment is vital, for a few reasons:
- No matter the size or nature of a business, the environment is always interacting with it. You can use these interactions to maximize resources and the knowledge will help you search out additional business chances.
- Identifying business opportunities and threats — the interplay between a firm and its surroundings frequently shows business opportunities and risks.
- To give growth direction — when a company is familiar with its location, it is simpler to find opportunities. Are specific products or services losing favor? Are your rivals providing things you should provide as well? We may answer similar questions when you know your local culture and business environment.
By “business environment” we mean both the macro and macro aspects. As explained by the Marketing Tutor:
- The micro-environment comprises all those factors close to marketing and operations. For example, employees, competitors, partners, customers, the public, etc. They are mostly variables under company control.
- The macro-environment are the external factors that affect every business in the industry and often are out of our direct control.
The PEST (or PESTEL) analysis will give you a framework to understand the macro-environment of your company. The PEST elements are among the essential factors to consider before starting a business.
The PEST Analysis with Examples of Questions to Ask.
Political questions to ask when starting a business in a distant region:
- What are the political risks?
- What are the chances of war, revolution, coup d’état, etc.?
- What do politicians think of your business? What are the approaches taken by the government to your sector?
Economic questions to ask when starting a business in a distant region:
- Is the local economy stable?
- How volatile are interest and exchange rates?
- Is it possible to hedge (protect your treasury) against sharp changes in exchange and interest rates?
- Is the local public able to afford your product?
- Is there a decrease or increase in people’s purchase power?
- How affordable is credit for the firm and its customers?
- How simple is it to hire? How are the unemployment rates?
- What are the social norms? Is it a smart idea to sell miniskirts in Saudi Arabia? How to build a common culture in line with social norms?
- What is the population’s demographic distribution? How has it changed over time?
- How great are the generational gaps?
- Do social paradigms affect the business?
- What lifestyle changes happened? Eg: urbanization trends and rural exodus.
- What is the condition of the local tech infrastructure (eg: internet bandwidth)?
- What are the government restrictions? Eg: Component taxes or import bans.
- What are the local regulations over technology innovation and access?
- How good are the local R&D agents?
- Is the climate suitable for your business? Eg: You don’t want to sell house-heaters in Rio de Janeiro.
- How steady is the weather and how disruptive is it to business?
- How geographically distant are you from your primary stakeholders (people or firms associated with your business)?
- How do labor laws may affect employee relations?
- How consumer legislation affects your customer relations?
- Which laws impact supplier chains, export, and import procedures?
- How to respect both substantive and procedural law (the process, timing, and access to law enforcement). In certain places, procedural rules trump substantive rules.
How the Pest Business Analysis Can Make You a Foreign Successful Entrepreneur
The questions above are some of the things you should ask. Remember to adapt them to your sector and industry by asking broad and detailed questions.
You may think that asking even more things can be excessive after I list in the previous section over two dozen questions.
No, it is not.
You ought to place all your doubts through the PESTEL analysis framework. Later, attempt to answer them as best you can. In this manner, you’ll have a good idea of the uncontrolled variables affecting your company strategy.
Next, ask more specific, micro-level inquiries. Controllable elements that may become opportunities.
Questions to ask (and answers) before transferring your company abroad:
- Are business visas required? How do you get them? What are the other permits you must have to be an entrepreneur? In this article, I answered these questions for multiple European countries.
- Is there a minimum — or suggested — capital requirement?
- Can you be the only shareholder or a local partner is required, like in several Asian countries?
- What export/import permits do you need?
- What safety credentials are required for your job?
- What technological abilities do you expect from prospective employees?
- Do you have local access to all raw materials required for production or will you need to import them?
- How are the neighbors and the locals responding to your business idea? Are they aggressive, neutral, or friendly?
Disadvantages of the PEST Business Analysis
Because it is so simple to use inadequate data in a PEST (or PESTEL) analysis, some entrepreneurs oversimplify the amount of data they use for judgments.
There is also the danger of acquiring an excessive amount of data, resulting in ‘paralysis by analysis,’ which is a situation where people spend too much time analyzing and overthinking and do not execute their plan.
Another risk is when the data utilized derives from assumptions that were shown to be incorrect. Eg: assuming stable interest rates without considering the possibility of new government policies.
Conclusions about the Use of the PEST Business Analysis to Grasp the Local Entrepreneurial Culture
Because of the rapid changes, it is becoming more difficult to predict changes that may impact an organization in the future.
Ask questions regarding the political, economic, social, technological, environmental, and legal variables that may affect your business. Some of these questions I gave you above.
Organize your understanding of macro (uncontrollable) and micro (controllable) variables.
Compile everything in a single document, or as part of your general business plan.
This document will impress most government offices, potential investors, and financing rounds. Few individuals know their own industry and geography so well, so you already have an edge.
Enjoyed this article about the PEST Business Analysis? If you are an entrepreneur or is planning to start a business, here are some other articles that may be useful to you:
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Levi Borba is the founder of expatriateconsultancy.com, creator of the channel Small Business Hacks and the same website for Small Business Owners, and best-selling author. Subscribe to my articles (for free) and receive (also for free) the ebook “The Blueprint for First-Time Business Owners”.