PEST analysis examines political, economic, social, and technological factors that can impact a company’s operations. Political factors include regulations, taxes, labor laws, and political stability. Environmental and competition regulations, fiscal policies, labor laws, and political stability are all important factors to consider.
PEST analysis stands for political, economic, social and technological analysis. Items that fall under the “politics” section include, among others, regulations, tax policies, labor laws, and political stability. Companies use these PEST analysis policy factors to determine how external government forces can change operational plans. While it may be impossible to list every single political factor in the analysis, companies should attempt to define the most important ones. International companies also need to deal with import and export laws.
Regulations are often far-reaching in the business environment, but some of the more common ones concern the environment and competition. Environmental regulations in terms of PEST analysis include all laws that limit the use of natural resources, such as water, air, timber and similar objects. Competition laws prevent companies from colluding with others, attempting to monopolize a market, engaging in price scruples or other tactics to reduce competition. These regulations can effectively prevent a company from entering a new market both domestically and internationally.
Fiscal policies are among the most common and difficult policy factors. Highly taxed economies can make it difficult for companies to use resources efficiently. Any taxed business tends to reduce a company’s profits, so taxes on various businesses often cause company leaders to think twice about entering a market. The company must weigh the pros and cons of government taxation against the potential returns from any business.
Labor laws are another important factor in terms of PEST analysis. Government agencies can make laws or regulations regarding an employee’s working hours, minimum wages paid per hour, benefits offered, and a number of other issues. Businesses must comply with these laws to the fullest extent or pay significant fines. Labor laws and regulations can also change very frequently, which makes it more difficult for a company to simply implement programs and policies and not have to worry about any future maintenance.
Political stability is necessary for a company to remain in business for an extended period of time. Frequent changes or abrupt adjustments in a country’s political environment can result in a very unstable business environment. Companies that exist in these environments tend to underperform and invest less in unsafe markets. The political factors of a PEST analysis can often uncover these issues and make companies aware of the potential drawbacks in a politically charged market.
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