PEST Analysis: Finding the Macroeconomic Factors That Affect Your Business
Imagine you’re stuck choosing between expanding your SaaS business into another country or developing a new product. Which opportunity would be more strategic?
To even begin answering that question, there are several factors to consider. You would have to perform a lot of research and analyses on the things that could affect your business.
And one of those is the PEST analysis.
No, it has nothing to do with insects or rodents. That’s pest risk analysis.
PEST analysis is a tool that gives you a view of macroeconomic factors that can affect your business. Specifically, these are political, economic, social, and technological (PEST) factors.
It gives you deeper insight into these external factors and how they can change over time. With that kind of insight, you can make more strategic decisions when it comes to expansion or growth.
The Business Environment: PEST Analysis In Context
Every business is surrounded by a wide environment with interconnecting factors affecting it. PEST analysis lets you put into perspective the external macroeconomic factors.
And if there is a macro, then there is a micro. If there is an external, then there is an internal.
To better understand PEST analysis, let’s determine where macroeconomic factors lie from your company’s perspective.
There are internal and external factors that affect any business or organization. The external ones are divided into microeconomic and macroeconomic environments.
Let’s talk about them one by one.
Internal factors are things inside your business that you can control. These include your organizational structure, company culture, employees, management, shareholders, and reward systems.
You may be familiar with the SWOT (strengths, weaknesses, opportunities, threats) analysis. It is one of the best tools for analyzing internal factors that affect a business.
Things that you can consider for this analysis is your own performance.
Now let’s talk about the external environment. These are entities outside of your business that have direct contact with your company. Among these would be your customers, competitors, suppliers, distributors, and partners.
The most popular tool for studying these factors is Porter’s Five Forces Framework. It analyzes your company’s competitive environment to help you come up with a corporate strategy.
As for the external macroeconomic factors, these are powerful forces that are well beyond the control of any business. These include politics, legislation, economy, culture, technology, ecology, and more.
And this is where PEST Analysis comes in.
What Is PEST Analysis?
PEST analysis started out as ETPS, introduced by Harvard Business School professor Francis J. Aguilar. In one of his publications, he pointed out that economic, technological, political, and social factors are crucial influences on the business environment.
ETPS has since been rearranged to PEST so that it would be easier to say and remember.
Now, let’s talk about each of the factors:
This is how the government affects the economy of a certain industry. And I’m not just talking about the country where your business is registered in.
You also need to look into the countries where you want to expand to.
Generally, political factors include government policies, political stability, corruption, foreign trade, tax policies, and more. Government can also have a heavy influence on its education system, healthcare, and infrastructure.
When it comes to political factors, PEST analysis in SaaS has a more specific scope compared to traditional businesses. The most pressing political influence on SaaS is data protection laws.
A good example is the EU’s General Data Protection Regulation (GDPR). Although GDPR compliance is practically a seal of quality among SaaS solutions nowadays, it is a requirement if you are entering markets within the EU.
This is an important external factor to consider as it determines the purchasing power of your prospects and customers.
- Is the economic environment conducive for an expansion or a new product?
- Is there a demand for your product in the first place?
- Do your prospective customers have the ability to afford it?
Factors like exchange rates, inflation rates, and unemployment rates also come into play when you are entering a new market, especially a foreign one.
These factors affect supply and demand, as well as the purchasing power of consumers. As a result, it also affects the pricing of products.
This is why SaaS providers working on international markets have different prices for different countries and territories. Their pricing for their US market may not necessarily mirror the price they offer to their Asian audiences.
Social factors that affect a business include:
- Population growth
- Age distribution
- Income levels
- Education levels
- Cultural barriers
All of these mostly affect the local workforce and their willingness to work under certain conditions and salary ranges.
If you are expanding into a new country, you need to know their labor cultures and traditions.
For example, in China, it is customary for businesses to give their employees a raise every year. Another example is France, which affords its workers two-hour lunch breaks.
Corporate structures like these are important considerations when you want to enter new markets.
But looking into social factors isn’t just for considering your potential workforce. It’s also scoping out your target market. This is important, especially if you have a business-to-consumer (B2C) product.
You need to consider how tech-savvy the local population is. Will it be easy for them to adopt your product? Is your SaaS solution in a language that they can understand?
Just a side note. Knowing all these social factors about your target market will help you know how to engage them. Having all that data will make personalized and behavioral marketing campaigns easier.
Traditional businesses need to look at various technological factors in a market. The level of innovations, automation, and research and development activities are just some of these elements.
But SaaS has a special relationship with technology as it’s operating in that sector. The quality of your product on the user’s end is heavily influenced by their computer hardware and internet access.
If you’re entering a new market, one technological factor to consider is access to devices capable of running your product.
Consider these questions:
- Can your users run your SaaS solution smoothly?
- What kind of hardware would they need to run your software?
- How much bandwidth would they need to use it without any hiccups?
- Are these technological requirements accessible to them?
As a SaaS company, you also need to look out for big shifts in technological advances. One of them would be 5G.
5G is poised to bring cloud computing to a whole new level. It would allow higher bandwidths, faster loading speeds, and, ultimately, a more flexible cloud computing experience.
But it’s also worth noting that not all of your customers and markets will have access to this technology at the same time.
Another important technological change is the innovation of mobile devices.
More and more users use their phones and tablets for work. This leads to a greater need for SaaS solutions to have mobile-friendly interfaces and mobile-specific features.
PESTEL Analysis & Other Versions
Political, economic, social, and technological factors may be the most prominent macroeconomic elements affecting a business. But they are not the only ones.
PEST analysis has other variations that consider other macroeconomic aspects. One of them is PESTEL analysis (also known as PESTLE analysis).
It considers two additional components: legal and environmental.
Don’t get this confused when we talk about the internal and external environments of a business, as we mentioned earlier. This one pertains to the physical environment and ecological factors, such as geography, climates, weather, and sustainability practices.
I know what you’re thinking. SaaS solutions are not tangible products. How are environmental factors relevant to a SaaS company?
SaaS products may not take physical form, but they run on electricity. And electricity is traditionally produced through burning fossil fuels that release harmful gases into the atmosphere.
I’m not just talking about individual computers that run SaaS software either. I’m referring to data centers and servers operating 24/7. These need a massive power source, which adds a burden to the increasing problem of climate change.
But the good news is that you can run a SaaS business with sustainable energy.
In fact, companies like Facebook and Salesforce have sustainability practices for their power and water consumption.
When you’re entering new markets, it’s possible that you would need sustainability efforts like these. Potential customers or even stakeholders may value this kind of corporate social responsibility.
And with the growing demand of the public about protecting the planet, it’s not far off that environmental factors will start affecting SaaS businesses. If it hasn’t already.
This one may have some overlaps with political factors. However, it focuses more on legislation rather than governments and political events.
If you’re expanding your business into a new country, you may want to take a look at their employment laws, industry-specific regulations, consumer protection laws, and taxation.
Regulations on wages, employee benefits, and workplace safety are some of the things you will need to look into.
Other Variations of PEST Analysis
There are other PEST analysis variations other than the PESTLE analysis. But they are often used in businesses and industries that need to look into specific components that may not be sufficiently covered in a simple PEST analysis.
For example, multinational companies need to consider international circumstances like exchange rates and diplomatic relations.
These can fall under political and economic branches in a PEST analysis. But if you need a thorough look at how they affect interactions between your offices in multiple nations, it could be worth looking into.
Below are a few other versions of the PEST analysis
PESTLIED: Political, economic, social, technological, legal, international, environmental, and demographic factors.
SLEPT: Socio-cultural, legal, economic, political, technological factors.
STEEPLE: Social, technological, economic, environmental, political, legal, ethical factors.
How To Do PEST Analysis
Now you know the different types of branches covered by a PEST analysis, it’s time to implement them.
You can perform a PEST analysis with these steps:
Determine Suitable PEST Factors
You can’t just use a standard set of PEST items and use it across the board. Neither can you just look up PEST analysis examples and follow them to the letter.
Every business is different and there are various factors influencing yours.
There are also a lot of aspects to consider. However, you only need to choose the ones that are most relevant to your company.
Here are some possible PEST components you can choose from.
Just note that these are just some examples. If you could think of others that may be more relevant to your businesses, then even better.
- Labor, tax, and corporate responsibility laws
- Intellectual property laws
- Workplace safety regulations
- Political stability
- How political changes affect your business
- Economic volatility
- Strength of the country’s currency
- Employment rate
- Labor costs
- Access to credit
- Inflation rate
- Level of education
- Access to healthcare
- Social attitudes
- Class structures
- Gender roles
- Prevalent leisure interests
- Internet access
- Availability of computer hardware
- Access to the latest technological trends
- Technological advancements
If you know what data you should be gathering, you should also know how to collect them.
Everything you need for a PEST analysis should be available on the internet. Laws, statistics, social studies, even corruption.
Just make sure that you are getting your data from reliable sources. You can rarely go wrong if you source your information directly from government sites and databases.
If the data you’re looking for cannot be found on such sites, you can refer to third-party sites for reliable non-government organizations.
For example, if you need to assess a country’s level of corruption, Transparency International has a corruption perceptions index (CPI) for each country.
When you have all the data you need, compile them into a table so you can have them in one view.
Here’s an example of a PEST analysis table:
Another way you can accurately analyze your data is to give them weighted averages. This way, you don’t only consider the factors themselves. You would also count how much they affect your business.
Let’s look at this example for weighted averages:
Here, you can see that each factor has a weighting that is relative to the others. As you rate each of them, you can also compute a weighted average that indicates the degree of influence it has on your company.
Analyze The Data
When you have a unified view of the factors that may influence your business, it’s time to determine what you can do about it.
As you analyze your data, you need to find two kinds of things: opportunities and threats.
Opportunities are trends that you can take advantage of.
For example, your data shows that your new target market is fond of using social media platforms. That can be an opportunity if your product has social features or integrations.
Threats are things that can cause harm to your business.
For example, the value of a country’s money is dropping relatively fast compared to other currencies. That may indicate a declining economy. And expanding into that country may pose threats to your company’s growth.
PEST analysis is a good tool for anticipating political, economic, social, and technological changes that can make or break your business.
Ultimately, it is a tool for growth.
Maybe you’re gunning for a T2D3 or any other model for rapid growth. Taking advantage of macroeconomic factors will help you do that.
Still, don’t forget that PEST analysis isn’t a silver bullet. It just covers the external macroeconomic environment of your business.
You still have your internal and microeconomic environments to consider.
For more strategies on growing your SaaS business, check out our blog here.