PEST Analysis stands for Political, Economic, Social and Technological Analysis. It is a broad analysis of a macro-economic framework and factors that influence business. This analysis is essential because in the present scenarios where companies entering into foreign markets has become a very common practice. Companies have to analyze a potential markets before investing millions of dollars. This analysis helps them understand what kind of market they are in.
As the name itself suggests it is the study of political, economic, social and technological factors which have an undeniable relation with business. This practice is not only for companies from foreign origin but also for new and existing companies as well. With the changing tastes and preferences and increasing standards of life, consumers want new and sophisticated products both physical goods and services.
For companies of foreign origin and new domestic companies, the analysis will let them know their potential customers a lot better and help them serve better. Going through the important points, we have:
Political: Political factors are broadly those factors which include the legal system, tax structures, labor laws, environmental regulations, trade restrictions, statutes and bureaucracy as well. The level of governmental influence on business is an important factor. If in a country if the corporate tax level is very high, for example at 40% of the net income, then not many companies will be inclined towards investing in that particular country. Similarly, high level bureaucratic influence.
Economic: Economic factors include economic growth, interest rates, exchange rates and the rate of inflation. The amount of investment in a country is influenced by the interest rates. Interest rates will influence the cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the cost of importing raw material and machinery.
Social: Social factors include cultural factors and other factors like health consciousness, population growth rate, life expectancy, standard of living, level of education, hierarchy prevalent in the society, cultural taboos and prejudices, overall tastes and preferences of people, demographic distribution, language of the general population, gender differences, religious factors, etc. All these factors influence people’s perception about products.
Technological: Technological factors include the productivity of machinery, research and development facilities, automation, technology incentives, tax incentives and the average time taken for improvements in technology to take place. These factors have an influence on the quality, quantity and cost, the economies to scale, barriers to entry, outsourcing decisions, etc.
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