Why You Shouldn’t Neglect PEST Analysis When Starting a New Business

The number one goal for any startup is to prevent failure. With Google at our fingertips, we have the tools to learn as much as we can, as quickly as possible. From manufacturing to guerrilla marketing strategies, it’s possible to learn from the experts to see where they failed and skip that step.

And while most available readings go into the internal details of starting, managing, and transforming a business idea into a profitable company, you should never forget the external factors.

These are the things you can’t change. But it can still affect you.

That’s why we recommend PEST analysis when you start a new business idea. This way you can plan for surprises long before they strike.

Political factors

The ‘P’ in PEST stands for political. These factors affect business regionally and nationally. Consider, what are the pricing rules in your state? What are the trade regulations and tariffs if your resources come from another country? And you can’t forget about taxes — when are they due? How much must you pay?

Political factors must be abided. Not abiding them can lead to legal consequences and, depending on the severity, even bankruptcy. The point is to avoid failure, so you must know these factors inside and out:

• What are mandatory benefits for employees in your state?
• What are the requirements for product labels?
• What are the antitrust laws?
• Is there a risk of a military invasion?
• What is the minimum wage in the state, and what are the rules for overtime pay?

Not all of these affect you at the moment. You may not have employees now. But you’ll eventually need to know what is the expected work week, minimum wage, and overtime regulations for the state. But if you should start paying attention now. These regulations aren’t set in stone and can update annually.

Economic factors

Economic factors affect expenses and profit margins. You shouldn’t avoid understanding economic factors as they affect your bottom line.

For example, what’s the current economic growth rate? Or what are the interests rates in the state? What’s the unemployment rate? Because the higher it is, the less likely consumers are splurging on luxury items. If that’s your industry, you may be significantly affected.

Consider the following:

• What are the inflation rates?
• Is the country in economic recovery or heading towards another recession?
• What are current exchange rates for the resources/products you need?
• What discretionary income is available?

Rates fluctuate. But you can see whether a certain industry is on the rise. And you know if there has been a steady decline because economic information is based on data.

Social factors, however, can be much harder to grasp.

Social factors

When you develop a product, the first thing to consider is whether there’s a need for it or not. Do people want it? Sure. But will they buy it? You must thoroughly learn about your consumers, including:

• Where are they physically located?
• Where do they hang out online?
• What is their educational background?
• What are their leisure interests?
• What is their culture and how can it affect buying potential?
• What type of marketing works best for them?

Social factors are prone to change with political and economic factors being an influence. Additionally, rising competition affect their buying options. To sell any product, you must know who you’re targeting and what affects their decision-making. You should be aware of this long before developing a product.

Technological factors

Technology is crucial for any company’s development. Not only manufacturing technology, but specific advancements affect how you reach customers and market to them. Keeping up with the evolutions can set you apart from the competition. Customers want products faster than ever before, meaning if you’re not able to quickly deliver their expectations, someone else will. But also consider:

• How will technology affect how you develop products?
• What is the impact on cost structure?
• What is the impact on value chain structure?
• How will technology help you reach your target audience?
• What technology do you need to get them?

PEST introduces macro-environmental factors that can cause costly surprises. It’s best to do PEST analysis early to detect these major influences. Being aware allows you to understand potential threats and make a plan of action. This way you can stop failure before it sneaks up on you.

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