4. ENVIRONMENTAL ANALYSIS (PEST)

OBJECTIVE

Identify external key trends and their impacts on an organization, company, or department.

DESCRIPTION

PEST analysis and all its variations (PESTEL, PESTLIED, STEEPLE, etc.) are used to analyze the key trends that affect the surrounding environment of an organization but on which the organization has no influence. The key idea is to identify the trends that can most affect the company, organization, or department in several areas:

-          POLITICAL

-          ENVIRONMENTAL

-          ECONOMIC

-          SOCIO-CULTURAL

-          TECHNOLOGICAL

-          …

Examples of key trends are an increase in interest rates, a new law, and the increasing use of mobile devices. Many more examples can be found quite easily, but the main idea that I want to transmit is that the division by area is just a way to facilitate the identification of the key trends, as the decision on whether to include a trend in one area or another has little or no effect on the model. This model is commonly used with other tools that complement the analysis of the business environment (competitive analysis, Porter’s five forces analysis, etc.), and it is usually used for SWOT analysis (strengths, weaknesses, opportunities, threats), in which it represents the external factors, namely opportunities and threats.

PEST Model (Political Trends)

To avoid using this model as a mere theoretical tool, once the key trends have been identified, it is necessary to define the impacts of each one using cause–effect reasoning and to try to quantify the positive or negative effect that each trend can have on the organization in terms of revenues or costs. Some trends could have an almost direct impact, but others require several hypotheses, estimations, and calculations. Often it is necessary to determine the impact on intermediary indicators before calculating the monetary impact. For example, the growing sensibility for recycling can influence the company’s packaging. In this case we can estimate the loss of reputation first, then the decrease in demand, and finally the impact on revenues. Another important element to be identified is the timing of the impact, since it will affect the actions that will be taken and when they will be implemented.

There are two main methods for gathering data for this model. The first one is to exploit experts’ knowledge of several sectors and areas to identify the key trends affecting the future of the organization. Several techniques can be applied, such as the Delphi method, brainstorming, and think tanks. The second method is more “DIY” and it concerns gathering published forecasts of experts, futurists, organizations, governments, and so on. A common error with both methods is that people tend to jump directly to possible solutions, but doing so worsens the performance of the model. In this phase the focus just needs to be on the trends and on quantifying the impact that they will have on the organization.

TEMPLATE

Download the Environmental Analysis Excel Template