Environmental Analysis in Business and PEST Analysis as an Example

Before focusing to PEST that is also known as far environmental analyses, we must define the environment in business administration. The environment term is used for the items or the actors that are out of the company. These outside factors sometimes give opportunities to the company but also create negativities in company activities.

Therefore the analysts need to make the environmental analyses and they state the reasons like the following:[1]

·         Since the environmental changes are happened rapidly the managers try to analyze theses happenings systematically. Due to these changes sometimes the company has the opportunities to grow but sometimes to shrink.

·         The companies that are making these systematic analyses are more effective than the others that are not paying attentions to these analyses.

·         The managers of companies that are not making these analyses will be forced to give reactive decisions that are not accepted to be logical in the recent business environment.

PEST analysis is the external environment analysis of the company according to the below stated factors:[2]

• Political: Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate.
• Environmental: Economic factors affect the purchasing power of potential customers and the firm's cost of capital
• Social: Social factors include the demographic and cultural aspects of the external macro environment. These factors affect customer needs and the size of potential markets.
• Technological: Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions.

Besides the above happenings, the pace of these happenings will be also important in the activities of the companies. To explain the importance of this there is a very famous story of a frog. A frog was put in warm water. It couldn’t understand that the bowl has been heated slowly. It relaxed, didn’t understand the negativity on itself. After a while the frog lost its consciousness and the bowl started to boil. And the frog died. This a very good tale for showing what is waiting for the companies that are not reacting efficiently and analyzing the market activities very well.

These changes can be classified into two different items:

·         Fast change: The change can be seen from the majority of the people and the companies. For example the consumer needs, legal regulations and political issues are changing very fast. Since the public is aware of these changes the effects of these are limited.

·         Slow change: The minority of the public understands the changes in the market. These changes are very dangerous for the public since most of them suppose that the previous terms are also applicable in the recent periods. The frog tale is the example of this.

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[1] Erol Eren, Stratejik Yönetim ve İşletme Politikası, İstanbul, Beta, 2000, pp. 131-132

[2] Quickmba, “PEST”, http://www.quickmba.com/strategy/pest/