Broad Factors Analysis
Broad Factors Analysis, commonly called the PEST Analysis, is a key component of external analysis. A Broad Factors Analysis assesses and summarizes the four macro-environmental factors — political, economic, socio-demographic (social) and technological. These factors have significant impacts on a business’s operating environment, posing opportunities and threats to the company and all of its competitors. Broad Factors Analysis is widely used in strategic analysis and planning because it helps companies determine the risks and opportunities in the market, and that in turn becomes an important consideration when companies are developing corporate and business strategies.
Political factors are factors within the regulatory environment of a particular industry or business.
Examples of political factors include:
- Barriers to international trade
- Changes in government regulation
- Tax policy
- Employment laws
- Country-specific political risk
Political factors in the macro-environment can constraint the operations of organizations and introduce opportunities and threats to the companies. When a company chooses which industries to enter or which countries to expand its operations into, it might want to consider the complication of government regulatory policies in that specific industry or country and other risks associated.
Economic factors are things that influence the macro economy such as:
- Interest rates
- Foreign exchange rates
- Gross Domestic Product (GDP) growth rates
Each of these factors can have various impacts on businesses. For example, interest rates affect the cost of capital and a company’s ability to raise funds or invest in new assets. Low exchange rates reduce threats from foreign competitors and create overseas opportunities. When inflation happens it destabilizes the economy and makes the future less predictable for companies. Lastly, high growth rate of an economy increases customer expenditures and eases competitive pressures.
Socio-Demographic (Social) Factors
Socio-demographic factors is short for social and demographic factors, which look at the population demographics and the characteristics of a company’s target customers.
Examples of social-demographic factors include:
- Population growth
- Education level
- Health consciousness and trends
- Nature and the environment
- Age cohort changes
Changing social mores and values can impact the business of an entire industry, because it shifts consumer preferences and demand for products/services. For example, if majority of the popularity perceives smoking as activity that is harmful for physical health, demand for cigarettes and tobaccos could significantly decline and thus impact the profitability of those businesses.
Technological factors have became increasingly important for many businesses in recent years due to prevalence of information technology and mobile devices.
Some examples of technological factors include:
- Research & development (R&D) investment
- Scientific advances
- emerging technologies
- Diffusion of technologies
These technological factors affects the height of barrier to entry of an industry and reshapes the industry structure.
The Broad Factors Analysis helps company summarize the PEST factors and arrive at an understanding of the net impact of these factors on the business, as well as the overall attractiveness, opportunities and threats that exist for the company.
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