A scan of the external macro-environment in which the firm operates can be expressed in terms of the following factors:
- Political
- Economic
- Social
- Technological
The acronym PEST (or sometimes rearranged as “STEP”) is used to describe a framework for the analysis of these macroenvironmental factors. A PEST analysis fits into an overall environmental scan as shown in the following diagram:
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Political Factors
Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate. Some examples include:
- tax policy
- employment laws
- environmental regulations
- trade restrictions and tariffs
- political stability
Economic Factors
Economic factors affect the purchasing power of potential customers and the firm’s cost of capital. The following are examples of factors in the macroeconomy:
- economic growth
- interest rates
- exchange rates
- inflation rate
Social Factors
Social factors include the demographic and cultural aspects of the external macroenvironment. These factors affect customer needs and the size of potential markets. Some social factors include:
- health consciousness
- population growth rate
- age distribution
- career attitudes
- emphasis on safety
Technological Factors
Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. Some technological factors include:
- R&D activity
- automation
- technology incentives
- rate of technological change
External Opportunities and Threats
The PEST factors combined with external microenvironmental factors can be classified as opportunities and threats in a SWOT analysis.
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