Literature Review on PEST analysis as a method of understanding market conditions.

Abstract

In today’s day and age where authorities are encouraging decentralisation of markets in developed
countries and to an extent in developing nations. This has led to freedom of entry and exit of
potential businesses in the industries as a result the market today is very competitive. Whereas, on
the other hand businesses are also dependent on whole lot of other factors affecting it. To protect
the interest of businesses helping plan and moulding them a lot of work is required in conducting
analysis as a result both micro (internal) and macro (external factors) need to be considered. To help
deal with changes in a better way a set of analysis is encouraged namely the SWOT and PEST
analysis. Of course, this is neither the only method nor the method which is sure to give results but
this analysis is certainly the one which brings clarity. Therefore, PEST analysis is a very important tool
to conduct research on market conditions.

Introduction

Political, Economic, Sociological and Technological analysis is the method of estimation of the
external or the macro environment in which a company operates, in simpler terms PEST analysis is
done to study the industry in which the company operates. To help understand better let us assume
to be doing PEST analysis for Marriot Group of Hotels where the market nature and factors affecting
the market nature will be taken into consideration and then based on these factors decisions are
taken to help mould the company to adopt to market conditions.

When we talk about SWOT(strength, weakness, opportunities and threats) analysis we are aware
about the fact that opportunities and threats fall upon the external environment of the company
which is very open and not in anyways limited to the company. Therefore, to understand the
opportunities and threats affecting each business in a broader way in 1967 a Harvard university
professor by the name of Francis Aguilar developed the theory of PEST analysis.

Over the period of time various variations have been made of this theory like PESTLE analysis where
considerations for Legal and Environmental factors has also been made. (Lucidchart content team,
2019)

Literature Synthesis Table.

References Topic Research Methodology used. Data collection Findings and

area/Research question or Aim. Conclusions.
focus.
Lucidchart PEST analysis as  Main The methodology used The method of PEST is a
content a method of purpose in this analysis is data collection very useful
team conducting of this simple yet time in this analysis theory to
(2019) research on analysis is consuming. There are is mostly know about
How to external to certain steps as qualitative. the outside
do a environment of highlight follows- Both, primary influence
a company. how 1. To draw a list and secondary within the
 pest external of PEST data could be organisation
analysi forces factors. useful and how it
s can affect 2. To identify the depending could affect
business opportunities upon the the
and how in the market nature of organisation
these for the business for although it
could company both instance, For has its
create short and long Marriot Group drawbacks or
opportuni term. a newspaper reservations
ties or 3. To calculate article when it
threats in risks regarding new comes to
your associated travel and data and its
business. with the tourism handling.
 How to expected guidelines is as (Fairlie,
work on changes. useful as a first- 2022)
external 4. To plan hand customer
facts corrective or survey.
rather appropriate
than action against
assumpti your findings.
ons. (Lucidchart content
 Identifyin team, 2019)
g future
changes
which
could
take
place.
 How to
come up
with a
plan
suitable
in the
long run.
(Lucidchart
content team,
2019)

Table 1.

The need for conducting PEST analysis

PEST analysis is the need of the hour as there are many business today not doing well not because
they are not managed well but because of not paying heed towards the external environment. Just
imagine a company looking to expand its business in wrong market conditions. For example, Marriot
group planning one 5 star property during the COVID pandemic. This is a sure shot recipe for failure
as the external market condition is not favouring the industry. Therefore, for the sole reasons that
organisations not suffer there is a need to conduct PEST analysis because
  It encourages the understanding of businesses on wider external horizon.
 Promotes formulating course of actions also known as strategies.
 Makes an organisation aware of the threats and helps them to understand to tackle those
threats in an appropriate way.
 Gives advantage to the organisation in the sense that they can identify opportunities early
and make full use of it. (A very good example here is of ITC group when it realised the Indian
Authority was encouraging tourism, it slowly diversified towards the hospitality sector and
today they have more than 1500 properties in India alone) (CIPD, 2021)

How to conduct the PEST analysis.

When conducting PEST analysis it is always advisable to conduct SWOT analysis beforehand.
Research has shown that when SW and OT are broken down SW refer to a company’s internal
environment while OT is the external environment in which it operates. PEST is the extended
form of OT which is why experts believe in conducting SWOT first.

When conducting SWOT a template to customize could be used like

Helpful Harmful

EXTERNAL ENVIRONMENT StrengthENVIRONMENT

INTERNAL Weakness
 Could be loyal  Weak customer
customer base retention.
 Due to rewards  Weak digital
program presence.
 Loyalty bonuses in
airlines.
 Easy to use amazon
websites.

Opportunities Threats
 New favourable  Government
government regulations.
policies.  Emerging
 Diversification due competition.
to scaling.
After the estimation of Opportunities and threats PEST analysis can be done in steps which are as
follows-

1) PEST factors affecting business

The initiating step is to gather Political, Economic, Sociologic and Technology related
influences in the external surrounding. This is more effective when the higher authorities sit
and discuss with the managers. There should be at most transparency in this process and
after rigorous ideas and information use PEST examples to identify your research.

 Political Factors:
Political factors include the legal framework and institution that is responsible for a
particular industry operation. Aspects like freedom, profitability, taxes, elections,
leaders, identities, trade policies, consumer protection, and any other industry
related aspect. (Lucidchart content team, 2019)
 Economic Factors:
“E” in the PEST refers to Economic factors which includes cost of living, condition
of the economy (improving or declining), Labour Cost, Exchange rates, credit
facilities, inflation rate, spending habits and fiscal policies. (Fairlie, 2022)
 Socio-cultural Factors:
The motive of every business is profits and this cannot be achieved without
understanding the needs of customers. Businesses need to understand how the
needs of customers are shaped and what brings them to the market for buying.
“We look at what changes in culture and society are taking place,” Lubrano said.
“The drive to eat healthier, the drive to care for the environment, baby boomers
staying in the workforce longer, adults having fewer children, later in life. All of
these impact how consumers buy houses, cars, etc.” (Donna Lubrano, a lecturer in
the Northeastern University College of Professional Studies)
Things to consider in this are division of wealth, diversity, labour market trends,
and diversity and consumer preferences.
 Technological Factors:
Technology today can make or break the backbone of business today. With the
help of technology businesses can eliminate most of the monotonous and
repetitive tasks and can save a lot in labour costs as well. However, it is very
important to get the balance right to avoid system failure.
Things to consider here are artificial intelligence, robots and automations, soft
wares and security, remote working, and a lot more. (Fairlie, 2022)

2) Identifying opportunities

After looking at what type of things influence the organisation and its functioning within the
external environment. Next step is to look for opportunities in the market conditions. Even a
glimmer of an opportunity should be considered and discussed thoroughly for example, a
government statement opening up new diversification opportunities. (As discussed in the
case of ITC group of companies) It is important to skim out as many opportunities as possible
so as to take advantage of this research. (Lucidchart content team, 2019)
3) Identifying Threats.

It is an inevitable truth that with changes come risk. Whether that could be the change in
political scenario or the COVID pandemic situation. No business is averse to risk and the only
thing a business can do is identify those risks rather than paying no heed. It is important to
be cautious towards risks. If Nokia mobiles would have anticipated the risk of changing
consumers taste and preferences maybe they could have been leading in the market till
today. Failure to recognize a risk could be fatal as a result a well-planned company is one
which is ready to accept risk rather than ignore one. Also, it is better to recognise risks early
to minimize its impact. (Lucidchart content team, 2019)

4) Act on the findings.

With a whole lot of filtered data where opportunities and threats are clearly defined now it’s
the time to make changes if any to make opportunities count and negate threats.
 Figure 1: Strategy Map (Lucidchart content team, 2019)

Research Methodology which can be used

PEST analysis can contain different types of data collection techniques but it would mostly be
qualitative in nature because most of the research conducted needs to be in theoretical form due to
its significance as mentioned in this review.

Within the realm of qualitative research both primary and secondary sources of data could be used
in the process of data collection. Research regarding Political and economic environment generally
tends to be secondary due to the facts that this data is readily available in journals, government
websites, financial reports and tabloids.

While companies prefer primary data collection techniques when it comes to consumers taste and
preferences where surveys, questionnaires could be used by host of companies.

However it is important to get the sources right while conducting this type of research because it
being extensive in nature and the fact that the sources may or may not be diluted. It is also
important to keep in mind the fact that there could also be variations or extensions could be added
by certain companies to PEST analysis like PESTLE analysis.

Shortcomings of PEST analysis

There are some farsighted shortcomings of this analysis as with every theory. A lot of critics argue
that the environment keeps on changing within minutes and it is not possible every time to make
plans. Some people also argue that the research undertaken is mostly guesswork and assumptions.

The data used in PEST is mostly unfiltered as a result most of the time there is a large unfiltered data
which has to be worked upon which could be very tedious. Lastly, the data used may be inaccurate
as these are mostly future or external predictions. (Fairlie, 2022)

Conclusion

Therefore, according to our research in this paper we can cay that PEST analysis is one of the
methods where companies can know about the external environment in which it operates. This
research is very important as discussed in the paper due to the nature of business nowadays due to
the competition increasing and the frail nature of economy. Today, companies are taking risks
beyond their capacities as a result during the pandemic situation a lot of industries witnessed a lot of
exits among the market players. This analysis has the potential to not only eliminate risks but also to
turn them into opportunities for businesses in the long run. This analysis is also useful for making
long term plans. However there are some short comings like inaccuracy in data, unfiltered data and
mostly working with assumptions but I personally believe these are fairly ignorant as the theory is
basically to predict the external environment rather than get stuff factually right. In conclusion, PEST
analysis is a fairly decent method to work with the external environment and adopt according to the
findings.