PEST Analysis, Industry Analysis, and Leadership
PEST Analysis refers to a macro-environmental factors’ framework applied in the environmental scanning component of strategic management. Typically, PEST is an acronym of Political, Economic, Social, and Technological. The tool is used to analyze the external factors – political, economic, social, and technological – that could affect a company’s profitability. Consequently, PESTEL analysis is critical for every organization because of its ability to facilitate more effective strategic planning. Additionally, a comprehensive assessment of the components contained in the framework and the systematic analysis of the company environment are vital for identifying its sources of competitive advantage and evaluating its profit potential.
According to Grant & Jordan (2015), both PEST and industry analysis are complementary. Since extensive environmental analysis may require high cost and generate too much information, leaders must be keen to identify and only use the vital, rather than the merely important, environmental factors that impact a company’s operations and performance. In other words, leaders need to conduct PEST analysis by exercising good judgment while keeping in mind the exercise’s purpose of determining all the vital factors that can potentially shape the industry conditions.
Competitors, suppliers, and customers are at the core of the industry environment. Therefore, they form the basis for industry analysis. Principally, industry analysis assesses the industry profitability as determined in the input markets and product markets. The Porter’s five forces – the threat of new entrants, threat of substitutes, bargaining power of suppliers, bargaining power of buyers, and rivalry between established competitors – are vital for industry analysis since it connects the industry’s structure to its competitive intensity, and ultimately, profitability (Grant & Jordan, 2015). In a nutshell, once leaders can develop the company strategies after understanding the industry structure’s impact on competition, and then determining the industry profitability.
Reference
Grant, R. M., & Jordan, J. (2015). Industry Analysis. In Foundations of Strategy (2 ed., pp. 27-45). The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom: John Wiley & Sons.