In a 2005 book, yoga master BKS Iyengar wrote, “The moment you say, ‘I am satisfied with that,’ that means stagnation has come.” While he was referring to a personal practice, the same advice applies to any organization.
Satisfaction can become complacency. In an ever-changing business environment, this can lead to stagnation and loss of sales, market share and even talent to a competitor. One is easily reminded of the Cadillac brand of the 1980s, which enjoyed record-high customer satisfaction while dramatically losing market share — because the customer demographics were changing and the cars did not appeal to younger customers.
PEST analysis, introduced nearly 50 years ago by Harvard Business School professor Francis Aguilar (with the acronym ESTP), has served as a strong, practical taxonomy for analyzing the macro-environmental factors affecting business.1 The four components of PEST analysis are political, economic, social (including cultural and demographic), and technological. Each of the PEST factors may represent constraints or opportunities, depending on circumstances. This makes it important to analyze the PEST factors periodically in order to be aware of changes in the business climate and ready to respond to any that could impact current product or service offerings.
- Political factors include a government’s ability and willingness to provide services such as health care and transportation and infrastructure such as roads and airports. Influence on business through tax policy, tariffs and regulation are also political factors. In some cases, even the stability of the government could be a factor.
- Economic factors include the business cycle as well as trends in growth rate, interest rates and inflation. Status of the labor market including unemployment rates, and labor costs are economic factors to consider.
- Social factors include demographic influences such as population growth and median workforce age, as well as education levels and cultural norms about work by different strata of the population. Income distribution and presence of an internal market versus dependence on export are key social factors.
- Technological factors include emerging technologies, new communication methods or automation. Presence of strong R&D efforts, speed of technology transfer, and robust partnerships between universities and businesses can also be technological factors.
These four factors provide a big-picture view of the milieu in which any organization is operating. Leveraging trends in them have driven many organizational changes. Understanding how they affect the business environment on a macro level can help a company be more nimble and responsive to the market.
The PEST taxonomy has served well for a long time, but more recently a couple of factors have been added and an acronym has been developed: PESTLE. The “L” stands for legal and the final “E” for ecological. Legal may be fairly redundant with political, but it could include variations in regional laws and reliability of law enforcement and the court system. However, ecological is an entirely different matter.
Ecological factors include all forms of natural resource conservation and management, including water, oil and land. It includes energy availability and consumption, as well as waste disposal. Further, we live and do business in a world of climate change and increasing frequency of adverse weather events. It is tempting to believe these will only affect businesses such as farming, insurance and perhaps tourism. At minimum, it impinges on decisions where any business can be placed, as was learned by businesses near the path of Superstorm Sandy. Ecological factors can also affect the health and morale of the workforce. Ignoring these factors increases uncertainty and risk.
PEST has already served well as a framework to broaden analysis and improve decision-making. PESTLE analysis, especially considering ecological factors, adds additional perspective and improves understanding of the business environment at a macro level — thereby preventing complacency and avoiding stagnation and loss in the future.
1There is more on the PEST model in a post on Strategy Perspective.