PEST Analysis

Strategic planning is affected not only by internal and external variables but also by the macro environment. A framework that serves to scan external macro environment factors in which business or organizations operate is grouped into the four factors of Political, Economic, Social and Technological and referred to as PEST analysis. These macro environment factors affect business and organizations in their operations so that they have to be incorporated into the strategic planning framework.

Political Factors

Political Factors are government regulations and government legal issues that define formal and informal rules under which the firm must operate. Business and organizations whether they like it or not are affected by government regulations and the accompanying legal issues. Regulation has a way of limiting certain business expansion moves and legal issues may place business and organizations in legal battles that may slow if not bring business operations to a standstill.

Government regulations and legal issues like tax policy is a factor that affects tremendously business or organizations. An increase in the tax rate will immediately have a rippling effect, affecting the cost structure and the cash position. Employment regulations like automatic wage increase and entry-level minimum wages also affect decisions that relate to the strategic plan. They dictate the allowable number of people that business or organizations can hire for a particular operation.

In a world where everyone is concerned about environment issues, environmental regulation do affect the way business or organizations operate. An industry that produces a lot of waste as a by-product of the production process may discover that environmental issues will cause a steep increase in its waste treatment and disposal expenditure due to certain regulations.

Trade restriction and tariffs are things that oftentimes prevent business and organizations from entering a particular nation or a particular market segment. National governments often practice protectionism as a way of assuring the survival of local business or organizations. Strategic plans that may miss analyzing this factor may discover too late that they can be immobilized due to government trade restrictions and tariffs.

Economic Factors

Economic factors affect the purchasing power of the customer. It also affects business or organizations cost of capital. Economic factors and variables are indicators of some sweeping movements in the customer base. A rise in the unemployment rate may indicate that a segment in the customer base has practically lost purchasing power. A rise in employment rate on the other hand, may indicate that a segment in the market has gained purchasing power and has something to fuel disposable spending.

Economic factors such as the economic growth rate, the interest rates, the currency exchange rates and the inflation rate are factors that strategic planning should never overlook. The economic growth rate is an overall indicator of government performance and a positive figure will provide a positive outlook for business or organizations. This will indicate that government in general has done its job well affecting the business and other sectors of the nation.

Business or organizational spending and expansion are tied to the interest rate. A high rate may prove too costly and may discourage many from implementing particular strategic plans and moves. A lower rate may encourage business to expand and to reposition itself. A lower rate may also encourage the purchase of items of greater value on credit due to the advantages of the lower interest rates.

The inflation rate directly affects the purchasing power of the customer and is a factor that strategic planning consider. A substantial drop in the purchasing will mean fewer goods sold for the same amount of currency. High inflation rates may cause sales figures to stagnate if not drop precipitously into dangerous levels.