PEST Analysis

Definition

Political Factors

Political Stability
Risk of Military Invasion
Legal framework for contract enforcement
Intellectual property protection
Trade regulations & tariffs
Favored trading partners
Anti-trust laws
Pricing regulations
Taxation - tax rates and incentives
Wage legislation - minimum wage and overtime
Work week
Mandatory employee benefits
Industrial safety regulations
Product labeling requirements

Economic Factors

Type of economic system in countries of operation
Government intervention in the free market
Comparative advantages of host country
Exchange rates & stability of host country currency
Efficiency of financial markets
Infrastructure quality
Skill level of workforce
Labor costs
Business cycle stage (e.g. prosperity, recession, recovery)
Economic growth rate
Discretionary Income
Unemployment rate
Inflation rate
Interest rates

Social Factors

Demographics
Class structure
Education
Culture (gender roles)
Entrepreneurial spirit
Attitudes (health, environmental consciousness, etc)
Leisure interests

Technological Factors

Recent technological developments
Technology's impact on product offering
Impact on cost structure
Impact on value chain structure
Rate of technological diffusion


Definition

PEST analysis stands for "Political, Economic, Social, and Technological analysis" and describes a framework of macro environmental factors used in environmental scanning.

It is also referred to as the STEP, STEEP or Political, Economic, Socio-cultural, Technological, Legal, Environmental). Recently it was even further extended to STEEPLED, including ethics and demographics.

It is a part of the external analysis when doing market research and gives a certain overview of the different macro environmental factors that the company has to take into consideration.

Political Factors
Political factors include areas such as tax policy, employment laws, environmental regulations, trade restrictions and tariffs and political stability.

Political Stability
Political stability is a key factor in economy development. Political uncertainty, no doubt, is an investor’s nightmare.

It does disturb the flow of foreign direct investment plans both into the private sector as well as the government owned public sector units and that surely affects economic growth. However, this argument is good only to a limited extent.

Political stability is not necessarily an essential pre-requisite item for good economic growth. In actual practice, it is the other way around as it can be argued, that it is good economic growth that essentially leads to political stability.

Measuring Political Stability

The Political Stability Index measures awareness of the likelihood that the government in power will be destabilized or overthrown by possibly unconstitutional and/or violent means, including terrorism.

This index captures the idea that the quality of governance in a country is compromised by the likelihood of wrenching changes in government, which not only has a direct effect on the continuity of policies, but also at a deeper level undermines the ability of all citizens to peacefully select and replace those in power.

The choice of units for governance ensures that the estimates of governance have a mean of zero, a standard deviation of one, and range from around –2.5 to around 2.5. Higher or positive values indicate greater political stability.

(Source - http://humandevelopment.bu.edu/dev_indicators/show_info.cfm?index_id=117&data_type=1)

Risk of Military Invasion
The most dangerous to economy of any country is threat and risk of military invasion. Israel ’s military invasion of the Gaza Strip has always been risk to Palestinian economy. This completely depends on one’s country’s relationships with its neighbor countries. Least the risk; greater the heights of country’s economy!!

Legal framework for contract enforcement
Today minor contract violations are often ignored, either due to the loss in trust that would arise between the contracting parties, or due to the small compensation the wronged party would receive when compared to the overhead of enforcing the contract.

Even major violations might not result in the wronged party being (fully) compensated, or the guilty party being penalized as the cost of proving the violation might exceed the compensation which would have been obtained by the victim, resulting in them not attempting to enforce the contract.

Contract enforcement is necessary when agents are able to break a promise on their obligations. Thus country’s legal framework on contract enforcement is required.

Intellectual property protection
In law, intellectual property (IP) is an umbrella term for various legal entitlements which attach to certain names, written and recorded media, and inventions. The holders of these legal entitlements are generally entitled to exercise various exclusive rights in relation to the subject matter of the IP.

The term intellectual property reflects the idea that this subject matter is the product of the mind or the intellect, though the term is a matter of some controversy.

Intellectual property laws and enforcement vary widely from jurisdiction to jurisdiction. There are inter-governmental efforts to harmonies them through international treaties such as the 1994 World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), while other treaties may facilitate registration in more than one jurisdiction at a time.

Enforcement of copyright, as well as disagreements over medical and software patents, have so far prevented the emergence of a cohesive international system.

Trade regulations & tariffs
The tax, tariff and trade laws of a political region, state or trade bloc determine which forms of consumption and production tend to be encouraged or discouraged. All three are often changed by a trade pact.

Critics of these movements and defenders of free trade and global investment liberalization respond that the older ideas of independent trade policy, investment policy and industrial policy assumed that a higher degree of control by governments over business was possible.

Favored trading partners
US being a favored trading partner to Norway , apart from opportunities in trade, Norwegian offshore petroleum developments have continued to provide the bulk of opportunities to U.S. investors.

Anti-trust laws
Antitrust laws, or competition laws, are laws which prohibit anti-competitive behavior and unfair business practices. The laws make illegal certain practices deemed to hurt businesses or consumers or both, or generally to violate standards of ethical behavior.

Government agencies known as competition regulators regulate antitrust laws, and may also be responsible for regulating related laws dealing with consumer protection.

The term "antitrust" derives from the U.S. law which was originally formulated to combat "business trusts", now more commonly known as cartels. Other countries use the term "competition law". Many countries including most of the Western world have antitrust laws of some form. For example the European Union has its own competition law.

Pricing regulations
Under govt. laws and regulations, the system is of regional price differentials is maintained and arbitrage is successfully restricted, though not without considerable regional strife within the industry. Sometimes such regulations help domestic producers against anti-dumping cases.

Taxation - tax rates and incentives
Taxation in terms of tax rates and incentives are crucial factors to be noticed in terms of political decisions.

Wage legislation - minimum wage and overtime
A minimum wage is the lowest hourly, daily or monthly wage that employers may legally pay to employees or workers. The costs and benefits of minimum wage laws are not fully understood, and are debated. First enacted in Australia and New Zealand in the late 19th century, minimum wage laws are now in more than 90% of all countries. Visit http://en.wikipedia.org/wiki/List_of_minimum_wage_laws for details.

Work week
Mandatory employee benefits
Govt. imposes mandatory employee benefits relevant laws. Mostly employer who hires employees is required to provide three mandated benefits:

Social Security/Medicare
Unemployment Insurance
Workers’ Compensation
Industrial safety regulations
Occupational Safety and Health (OSH) is a cross-disciplinary area concerned with protecting the safety, health and welfare of people engaged in work or employment.

As a secondary effect OSH may also protect co-workers, family members, employers, customers, suppliers, nearby communities, and other members of the public who may experience an impact from the workplace environment.

In the European Union, Member States have enforcing authorities to ensure that the basic legal requirements relating to occupational safety and health are met.

Product labeling requirements
For example - The Made in USA mark is a country of origin label indicating the product is "all or virtually all" made in the U.S. The label is regulated by the Federal Trade Commission. This is to make customers aware of product’s origin.

Economic Factors
The economic factors are the economic growth, interest rates, exchange rates and inflation rate.

Type of economic system in countries of operation

Market economy

An economic system in which individuals own and operate the factors of production
Associated terms - Free enterprise and Capitalism
Examples in Practice - United States and Great Britain, Japan

Command economy

An economic system in which the government owns and operates the factors of production
Associated terms - Socialism
Examples in Practice - Communism, Cuba , China and Laos

Traditional economy

An economic system based upon customs and traditions. Economy is based upon agriculture and hunting.
Associated terms - Non-Industrialized
Examples in Practice - Agrarian societies, Chad , Haiti and Rwanda

Mixed economy

An economic system that has features of both market and command economies
Government intervention in the free market
A free market is a market where the price of each item or service is arranged by the mutual consent of sellers and buyers. The opposite is a controlled market, where supply and price are set by a government. Govt.’s intervention is higher in controlled market.

Comparative advantages of host country
Each nation has economic comparative advantages (the ability to produce at lower costs than other countries) in certain goods.

Normally, industrialized countries enjoy comparative advantages in high technology goods, and developing countries have comparative advantages in labor intensive goods.

The United States, for example, has definite comparative advantages in higher education, medicine, and aircraft manufacturing so that the country is the major exporter of these products

China’s major "imports" from the EU are capital, technology, semi-finished products for processing trade, and so on. Based on their respective comparative advantages, China and the EU have brought about trade growth, investment returns, technology advancement, job increase and economic prosperity.

Exchange rates & stability of host country currency
FDI looks for the strength of the exchange rate host country’s currency, measured by exchange rates.

Exchange rate refers to the price at which one country's currency trades for another, typically on the exchange market.

Exchange market refers to –

The market on which national currencies are exchanged for one another.
The actual exchange market, which exists primarily among large international banks. Others who wish to exchange currencies do it through these banks.
The theoretical representation of the exchange market as either the interaction of supply and demand arising from exchange-market transactions or as asset market equilibrium between currencies.
A depreciation of the host country currency might attract FDI for two reasons.

A depreciation of the host country currency renders the shares of host country firms relatively cheap, motivating M&A from foreign firms.
Where the FDI is invested for re-export to markets at home or in third countries, a depreciation of the host country’s currently will enhance the competitiveness of producing in the host country, thereby raising the investors’ wealth.
When FDI is invested for the sale in the host market, a depreciation of the currency might hold back inflows. There are two reasons for the same.

As FDI is projected over the long-run horizon, the stream of return on investments might fall in terms of the home currency.
A depreciation of the currency lowers the relative purchasing power of consumers in the host country.
Efficiency of financial markets
Clearing & settlement infrastructure, broad institutional investor base, benchmark yield curve and liquidity are factors that define efficiency of financial markets.

Infrastructure quality
Employee training and technology adoption enhance productivity, access to markets through improvements in transport infrastructure linking urban areas have important productivity effects and thus improving economy.

Skill level of workforce
As discussed in earlier point, employee training and skill level of workforce enhance economical output.

Labor costs
At reasonable & cheap labor costs; possibility of higher production at affordable cost can be carried out. Asian countries have advantage of cheap labor costs in production & service sectors.

Business cycle stage (e.g. prosperity, recession, recovery)
Business cycle refers to the recurring and fluctuating levels of economic activity that an economy experiences over a long period of time.

The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough and recovery. At one time, business cycles were thought to be extremely regular, with predictable durations. But today business cycles are widely known to be irregular - varying in frequency, magnitude and duration. Since the Second World War, most business cycles have lasted three to five years from peak to peak.

Economic growth rate
Economic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," which is caused by growth in aggregate demand or observed output.

An economic growth is measured as the annual percent change of National Income.

Discretionary Income
It refers to the amount of an individual's income available for spending after the essentials (such as food, clothing, and shelter) have been taken care of.

Unemployment rate
In economics, unemployment refers to the condition and extent of joblessness within an economy, and is measured in terms of the unemployment rate, which is the number of unemployed workers divided by the total civilian labor force.

Refer - http://upload.wikimedia.org/wikipedia/commons/thumb/5/5e/Unemployment_rate_world_from_CIA_figures.PNG/350px-Unemployment_rate_world_from_CIA_figures.PNG to see CIA figures on world unemployment rates.

Inflation rate
In economics, the inflation rate is the rate of increase of the average price level (a measure of inflation), usually some form of consumer price index. Alternatively, the inflation rate is the rate of decrease in the purchasing power of money.

Interest rates
Interest rates are the main determinant of investment on a macroeconomic scale. If interest rates increase then investment decreases due to the higher cost of borrowing. Interest rates are generally determined by the market, but government intervention - usually by a central bank- may strongly influence short-term interest rates, and is used as the main tool of monetary policy.

The central bank offers to buy or sell money at the desired rate and, due to their control of certain tools (such as, in many countries, the ability to print money) they are able to influence overall market interest rates. Investment can change rapidly to changes in interest rates, affecting national income, and, through Okun's Law, changes in output affect unemployment.

Social Factors
Social factors often look at the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety.

Demographics
Marketers and other social scientists often group populations into categories based on demographic variables. The most frequently used demographic variables are:

· Age

· Sex / Gender

· Race/ Ethnicity

· Location of residence

· Socioeconomic status (SES)

· Religion

· Marital status

· Ownership

· Language

· Mobility

· Life cycles (fertility, mortality, migration)

Class structure
Social class refers to the hierarchical distinctions between individuals or groups in societies or cultures. Even within a society, different people or groups may have very different ideas about what makes one "high" or "low" considering upper or lower class in the hierarchy. This refers to study social class structure of a country.

Education
It refers to % of educated people and quality of education of country. For example BPO industry looks for highly literate and well English spoken people available in country.

Culture (gender roles)
Culture denotes whole product of an individual, group or society of intelligent beings. It includes technology, art, science, as well as moral systems and characteristic behaviors and habits of the selected intelligent entities. It also refers to gender roles. In other way it refers to civilianization.

A common way of understanding culture sees it as consisting of four elements that are "passed on from generation to generation by learning alone":

Values - ideas about what in life seems important
Norms - expectations of how people will behave in various situations.
Institutions - are the structures of a society within which values and norms are transmitted.
Artifacts consist of things, or aspects of material culture—derive from a culture's values and norms.
Entrepreneurial spirit
There are people who are born with innate skills and understanding that equip them with nearly everything they need to get started as entrepreneurs, recognize what is good in their works, and fix those elements in which they are weak.

Kemmons Wilson, the legendary founder of Holiday Inns, was an example, although Bill Gates of Microsoft or Pierre Omidyar of eBay are often mentioned these days.

Sometimes the resulting fights between a natural entrepreneur's intuitive sense of what is the "right way" to do something and the academic approach can result in stunting the entrepreneurial spirit.

Does country provide facilities and provision to improve on entrepreneurial spirit?

Attitudes (health, environmental consciousness, etc)
How seriously the Govt. and people of society take health & environmental consciousness? It is seen that in underdevelopment countries and developing countries; such attitudes are not yet cultivated. Industrialization is expanded for the price of health & environment’s loss.

Leisure interests
Eleven interest areas encompassed 68 specific leisure interests. It mainly includes reading, television watching, computer & internet usage, community involvement, music, sports, creative arts and games.

Technological Factors
Recent technological developments
Technology does matter whatever field is. Rapid change in technology makes entrepreneur run with advancements.

When latest technologies made machineries generate higher outputs; customers expects more advance product from you. Study and adoption of recent technological developments make an entrepreneur win.

Technology's impact on product offering
B&W TV to Color TV, Flat TV or today’s LCD TVs or Personal Theaters customer looks for varieties of product. It does not only limit to production but also varieties of marketing tricks are available today due to advancement of technology. An online sale is catching up market share in comparison of brick & mortar sales.

Impact on cost structure
Internet & Telecommunication industry has cut cost of communication. Outsourcing has been possible today due to recent developments in telecom & internet facilities. GE is best example of successful cost saver adopting outsourcing model.

Impact on value chain structure
A value chain is sent as “ladders” or “stairs” where each core function represents an upward step.

In order for sustainable value chains to operate an enabling environment must be built, maintained and improved. Operation of value chains within enabling environments is facilitated by tools that include information technology (IT); legal documents; communication and transport systems; analytical services; and engineering design services. Apple & Amazon are successful role models in gaining benefits out of technical advancements in value chain. Emerging enabling technologies provide tools such as information technology; communication & transport systems; alliance management systems; and process control systems.

Rate of technological diffusion
Economists have frequently examined the role human capital plays in technology diffusion.

Economies progress by adopting new technologies and using them both to produce existing goods more efficiently and to produce new goods. As economies become more efficient, the average wages of the economies also increase.

Technologies that have transformed the economy in significant ways include the steam engine, the internal combustion engine, and electrification. Economies with highly educated workers may be more adept at learning about new technologies and may also be better able to put those technologies to productive use

Technological diffusion implies a form of 'conditional convergence' as lagging countries catch up with technological leaders.

The technological factors also include ecological and environmental aspects and can determine the barriers to entry, minimum efficient production level and influence outsourcing decisions.

It looks at elements such as R&D activity, automation, technology incentives and the rate of technological change.

The PEST factors combined with external micro environmental factors can be classified as opportunities and threats in a SWOT analysis.