Problem Solving 14: USP Analysis

USP Analysis

The Unique Selling Proposition: Crafting Your "Competitive Edge"


For years, business trainers have stressed the importance of "USPs" (Unique Selling Propositions). Your USP is the unique thing that you can offer that your competitors can't. It's your "Competitive Edge". It’s the reason that customers buy from you and you alone.

USPs have helped many companies succeed. And they can help you too when you’re marketing yourself (when seeking a promotion, finding a new job or just making sure you get the recognition you deserve.) If you don't have a USP, you're condemned to a struggle for survival - that way lies hard work and little reward.

However, USPs are often extremely difficult to find. And as soon as one company establishes a successful USP in a market, competitors rush to copy it.

This tool helps you find your USP. And it then helps you think about how you’ll defend it.

How to use the tool:

Follow these four steps:

1. Understand the Characteristics that Customers Value:First, brainstorm what customers value about your product or services and those of your competitors. Move beyond the basics common to all suppliers in the industry, and look at the criteria customers use to decide which product or service to buy.

As with all brainstorming, by involving knowledgeable people in the process, you'll improve the range of characteristics you’ll identify. So talk to sales people, customer service teams and, most importantly, talk to customers themselves.

2. Rank Yourself and Your Competitors By These Criteria:Now identify your top competitors. Being as objective as you can, score yourself and each of your competitors out of 10 for each characteristic. Where possible, base your scores on objective data. Where you can’t, do your best to see things from a customer’s perspective and make your best guess.

3. Identify Where You Rank Well:Now, plot these points on a graph. This helps you spot different competitors’ strengths and weaknesses.And from this, develop a simple, easily communicated statement of your USP.

Tip:
When you identify your USP, make sure it’s something that really matters to potential customers. There’s no point in being the best in industry for something they don’t care about.


4. Preserve Your USP (and Use It!):The final step is to make sure you can defend your USP. You can be sure that as soon as you start promote a USP, your competitors will do what they can to neutralize it: If you’ve got the best website, they'll bring in a better web designer. If you’ve got a great new feature in your product, you’ll see it in theirs next year.


If you’ve established a USP, it makes sense to invest to defend it - that way, competitors will struggle to keep up: By the time they’ve improved, you’ve already moved to the next stage.And once you’ve established a USP, make sure the market knows about it!


Example: Dan Jackson, the new CEO of LPC Office Supplies, was worried. He was confused by the situation he'd inherited, and felt that the company was drifting. Part of this, he felt, was that the company had no distinctive market position. He decided to use USP Analysis to find one.After talking to the company's biggest customers, Dan has identified the following criteria as important:


- Price
- Quality of merchandise
- Range
- Catalog quality
- Website appearance and navigation
- Ease of ordering
- Speed of delivery
- Reliability of delivery

.He then ranks LPC and its competitors using the criteria he had identified. Some criteria he assesses objectively, and on others he relies on instinct, market reputation and salespeople's reports.


This gives him the table below:
LPC BAR ROS HTX
- Price 7 9 6 6
- Quality of merchandise 7 7 7 7
- Range 9 6 5 9
- Catalog quality 9 7 6 9
- Website appearance 9 7 6 8
and navigation
- Ease of ordering 7 7 7 6
- Speed of delivery 6 7 9 7
- Reliability of delivery. 7 7 9 7


Using these rankings, Dan plots this graph:

As he does, different industry USPs start to become plain. Barnwick Smith seems to operate a “pile ‘em high and sell ‘em cheap” policy. The Roskan Group seems to focus on fast, reliable delivery, possibly of urgent, essential materials. Looking at these, Dan is sure that LPC can compete effectively against these competitors by emphasizing the breadth of its range and the quality of its catalog. However, HTX Supplies is more problematic: Curves are quite close. Even here, though, LPC seems to have better customer service and a better website. A USP of “The easy way to buy everything you need!” seems to work well.

Dan decides to invest in LPC's website and its customer service systems, with a view to opening up a clear gap between itself and HTX. And he then launches a marketing campaign stressing LPC's USP.

Key points:
USP Analysis is a useful way of understanding how people are competing in your industry. And it's essential for identifying your USP, so that you know what to build upon and emphasize to your prospects.

USP Analysis is a four stage process:

First, you list the decision criteria (explicit and hidden) that customers of your industry use in making purchase decisions;

Second, you rank yourself and your competitors by these criteria;

Third, you look at where you rank well, and craft a USP from this; and

Finally, you look at how you will defend and build your USP as competition evolves

Problem Solving Skills: Part 13 - Core Competence Analysis

Core Competence Analysis
Get Ahead. Stay Ahead.


The idea of the “core competence” is one of the most important business ideas that has shaped our world. It is one of the key ideas that lies behind the current wave of outsourcing, as businesses concentrate their efforts on things they do well, and outsource as much as they can of everything else.

In this article we explain the idea and help you use it, on both corporate and personal levels. And by doing so, we show you how you can get ahead of your competition – and stay ahead.
By using the idea, you can make the very most of the opportunities open to you:
You can focus your efforts so that you develop a unique level of expertise in areas that really matter to your customers. Because of this, you’ll command the rewards that come with this expertise; and

You can learn to develop your own skills in a way that complements your company’s core competences. By building the skills and abilities that your company most values, you’ll win respect and be more likely to get the career advancement that you want.

Explaining Core Competences: The Value of Uniqueness

The starting point for understanding core competences is understanding that businesses must have something that customers uniquely value if they're to make good profits. "Me too" businesses (with nothing unique to distinguish them from their competition) are doomed to compete on price: The only thing they can do to make themselves the customer's top choice is drop price. And as other "me too" businesses do the same, profit margins become thinner and thinner.This is why there's such an emphasis on building and selling USPs (Unique Selling Points) in business: If you're able to offer something uniquely good, customers will want to choose your products and will be willing to pay more for them.The question, though, is where this uniqueness comes from, and how it can be sustained.In their key 1990 paper "The Core Competence of the Corporation", C.K.Prahalad and Gary Hamel argue that "Core Competences" are some of the most important sources of uniqueness: These are the things that a company can do uniquely well, and that no-one else can copy quickly enough to affect competition.Prahalad and Hamel used examples of slow-growing and now-forgotten corporations that failed to recognize and capitalize on their strengths. They compared them with star performers of the 1980s (such as NEC, Canon and Honda), which had a very clear idea of what they were good at, and which grew very fast.

Because these companies were focused on their core competences, and continually worked to build and reinforce them, their products were more advanced than those of their competitors, and customers were prepared to pay more for them. And as they switched effort away from areas where they were weak, and further focused on areas of strength, their products built up more and more of a market lead.

Now you'll probably find this an attractive idea, and it's often easy to think about a whole range of things that a company does that it can do well. However, Hamel and Prahalad give three tests to see whether they are true core competences:


Relevance: Firstly, the competence must give your customer something that strongly influences him or her to choose your product or service. If it does not, then it has no effect on your competitive position and is not a core competence;

Difficulty of Imitation: Secondly, the core competence should be difficult to imitate. This allows you to provide products that are better than those of your competition. And because you're continually working to improve this competence, ir means that you can sustain your competitive position; and

Breadth of Application: Thirdly, it should be something that opens up a good number of potential markets. If it only opens up a few small, niche markets, then success in these markets will not be enough to sustain significant growth.


An example: You might consider strong industry knowledge and expertise to be a core competence in serving your industry. However, if your competitors have equivalent expertise, then this is not a core competence. All it does is make it more difficult for new competitors to enter the market. More than this, it's unlikely to help you much in moving into new markets, which will have established experts already. (Test 1: Yes. Test 2: No. Test 3: Probably not.)

Using This in Your Business and Career:

To identify your core competences, use the following steps:

Brainstorm the factors that are important to your clients.

If you're doing this on behalf of your company, identify the factors that influence people's purchase decisions when they're buying products or services like yours (make sure that you move beyond just product or service features and include all decision-making points.)

If you're doing this for yourself, brainstorm the factors (for example) that people use in assessing you for annual performance reviews or promotion, or for new roles you want.Then dig into these factors, and identify the competences that lie behind them. As a corporate example, if customers value small products (e.g. cell phones), then the competence they value may be "component integration and miniaturization".

Brainstorm your existing competences and the things you do well.
For the list of your own competences, screen them against the tests of Relevance, Difficulty of Imitation and Breadth of Application, and see if any of the competences you've listed are core competences.

For the list of factors that are important to clients, screen them using these tests to see if you could develop these as core competences.

Review the two screened lists, and think about them:

If you've identified core competences that you already have, then great! Work on them and make sure that you build them as far as sensibly possible;

If you have no core competences, then look at ones that you could develop, and work to build those; or

If you have no core competences and it doesn't look as if you can build any that customers would value, then either you need another way of being unique in your market (see our USP Analysis article), or you need to consider finding another environment that better suits your competences.

Think of the most time-consuming and costly things that you do either as an individual or a company.If any of these things do not contribute to a core competence, ask yourself if you can outsource them effectively, clearing down time so that you can focus on core competences.For example, as an individual, are you still doing your own cleaning, ironing and decorating? As a small business, are you doing you own HR and payroll? As a bigger business, are you manufacturing non-core product components, or performing non-core activities?


Tip 1:As with all brainstorming, you'll get better results if you involve other (carefully-chosen) people.

Tip 2:On a personal basis and in the short term, it might be difficult to come up with truly unique core competences. However, keep this idea in mind and work to develop unique core competences.

Tip 3:You may find it quite difficult to find any true core competences in your business. If you've got a successful business that's sustainably outperforming rivals, then maybe something else is fuelling your success.

However, if you're working very hard, and you're still finding it difficult to make a profit, then you need to think carefully about crafting a unique competitive position.This may involve developing core competences that are relevant, real and sustainable.

Tip 4:As ever, if your going to put more effort into some areas, you're going to have to put less effort into others. You only have a finite amount of time, and if you try to do too much, you'll do little really well.

Porter's 5 Forces: Part 12

Porter's Five Forces
Assessing the Balance of Power in a Business Situation


The Porter's 5 Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you're looking to move into.
With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit.


Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be profitable. However it can be very illuminating when used to understand the balance of power in other situations too.
How to Use the Tool:


Five Forces Analysis assumes that there are five important forces that determine competitive power in a situation. These are:


Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are.
Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, they are often able to dictate terms to you.
Competitive Rivalry: What is important here is the number and capability of your competitors – if you have many competitors, and they offer equally attractive products and services, then you’ll most likely have little power in the situation. If suppliers and buyers don’t get a good deal from you, they’ll go elsewhere. On the other hand, if no-one else can do what you do, then you can often have tremendous strength.
Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do – for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power.
Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it.


These forces can be neatly brought together in a diagram like the one below:
To use the tool to understand your situation, look at each of these forces one-by-one.

Brainstorm the relevant factors for your market or situation, and then check against the factors listed for the force in the diagram above.


Then order your free worksheet by sending a blank e-mail to: nyman@consultant.com (subject line: Porter's Worksheet), mark the key factors on the diagram, and summarize the size and scale of the force on the diagram. An easy way of doing this is to use, for example, a single “+” sign for a force moderately in your favor, or “--" for a force strongly against you (you can see this in the example below).


Then look at the situation you find using this analysis and think through how it affects you. Bear in mind that few situations are perfect; however use environmental scanning as a framework for thinking through what you could change to increase your power with respect to each force.
This tool was created by Harvard Business School professor, Michael Porter, to analyze the attractiveness and likely-profitability of an industry. Since publication, it has become one of the most important business strategy tools. The classic article which introduces it is "How Competitive Forces Shape Strategy" in Harvard Business Review 57, March - April 1979, pages 86-93.


Example:
Martin Johnson is deciding whether to switch career and become a farmer - he's always loved the countryside, and wants to switch to a career where he's his own boss. He creates the following Five Forces Analysis as he thinks the situation through:



This worries him:
The threat of new entry is quite high: if anyone looks as if they’re making a sustained profit, new competitors can come into the industry easily, reducing profits;
Competitive rivalry is extremely high: if someone raises prices, they’ll be quickly undercut. Intense competition puts strong downward pressure on prices;
Buyer Power is strong, again implying strong downward pressure on prices; and
There is some threat of substitution.
Unless he is able to find some way of changing this situation, this looks like a very tough industry to survive in. Maybe he'll need to specialize in a sector of the market that's protected from some of these forces, or find a related business that's in a stronger position.


Key points:
Porter's Five Forces Analysis is an important tool for assessing the potential for profitability in an industry. With a little adaptation, it is also useful as a way of assessing the balance of power in more general situations.


It works by looking at the strength of five important forces that affect competition:
Supplier Power: The power of suppliers to drive up the prices of your inputs;
Buyer Power: The power of your customers to drive down your prices;
Competitive Rivalry: The strength of competition in the industry;
The Threat of Substitution: The extent to which different products and services can be used in place of your own; and
The Threat of New Entry: The ease with which new competitors can enter the market if they see that you are making good profits (and then drive your prices down).
By thinking through how each force affects you, and by identifying the strength and direction of each force, you can quickly assess the strength of the position and your ability to make a sustained profit in the industry.
You can then look at how you can affect each of the forces to move the balance of power more in your favor.

Problem Solving - Part 11

The Boston Matrix
(Also called the BCG Matrix, the Growth-ShareMatrix and Portfolio Analysis)Focusing effort to give the greatest returns

If you enjoy visual representations and vivid descriptions of your business then you'll love the Boston Matrix!

Also called the BCG Matrix, it provides a useful way of looking at the opportunities open to you, and helps you analyse which segments of your business are in a good position – and which ones aren’t. That way, you can decide on the most appropriate investment strategy for your business in the future, and where best to allocate your resources.

Understanding the Model
Market Share and Market Growth

To understand the Boston Matrix you need to understand how market share and market growth interrelate.Market share is the percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms. The higher your market share, the higher proportion of the market you control.The Boston Matrix assumes that if you enjoy a high market share you will normally be making money (this assumption is based on the idea that you will have been in the market long enough to have learned how to be profitable, and will be enjoying scale economies that give you an advantage).The question it asks is, "Should you be investing your resources into that product line just because it is making you money?" The answer is, "not necessarily."This is where market growth comes into play. Market growth is used as a measure of a market's attractiveness. Markets experiencing high growth are ones where the total market is expanding, which should provide the opportunity for businesses to make more money, even if their market share remains stable.By contrast, competition in low growth markets is often bitter, and while you might have high market share now, what will the situation look like in a few months or a few years? This makes low growth markets less attractive.

Note:The origin of the Boston Matrix lies with the Boston Consulting Group in the early 1970s. It was devised as a clear and simple method for helping corporations decide which parts of their business they should allocate their available cash to. Today, this is as important as ever because of the limited availability of credit. However, the Boston Matrix is also a good tool for thinking about where to apply other finite resources: people, time and equipment.

The Matrix ItselfThe Boston Matrix categorizes opportunities into four groups, shown on axes of Market Growth and Market Share:

These groups are explained below:

Dogs: Low Market Share / Low Market Growth

In these areas, your market presence is weak, so it's going to take a lot of hard work to get noticed. Also, you won't enjoy the scale economies of the larger players, so it's going to be difficult to make a profit.

Cash Cows:High Market Share / Low Market Growth

Here, you're well-established, so it's easy to get attention and exploit new opportunities. However it's only worth expending a certain amount of effort, because the market isn't growing and your opportunities are limited.

Stars:High Market Share / High Market Growth

Here you're well-established, and growth is exciting! These are fantastic opportunities, and you should work hard to realize them.

Question Marks (Problem Child):Low Market Share / High Market Growth

These are the opportunities no one knows what to do with. They aren't generating much revenue right now because you don't have a large market share. But, they are in high growth markets so the potential to make money is there.Question Marks might become Stars and eventual Cash Cows, but they could just as easily absorb effort with little return. These opportunities need serious thought as to whether increased investment is warranted.

How to Use The Tool:

To use the Boston Matrix to look at your opportunities, then use the following steps:

Step One: Plot your opportunities in terms of their relative market presence, and market growth on the blank matrix provided on the worksheet.

Step Two: Classify them into one of the four categories. If a product seems to fall right on one of the lines, take a real hard look at the situation and rely on past performance to help you decide which side you will place it.

Note:Be careful about these lines - there's nothing magical about them or their position. There may be very little real difference between a "Problem Child" with a market share of 49%, and a "Star" with a market share of 51%. It's also not necessarily true that the line should run through the 50% position. As ever, use your common sense.

Step Three: Determine what you will do with each product/product line. There are typically four different strategies to apply:

Build Market Share: Make further investments (for example, to maintain Star status, or turn a Question Mark into a Star)

Hold: Maintain the status quo (do nothing)

Harvest: Reduce the investment (enjoy positive cash flow and maximize profits from a Star or Cash Cow)

Divest: For example, get rid of the Dogs, and use the capital to invest in Stars and some Question Marks.

Tip 1:From a personal perspective, you can evaluate the opportunities open to you by substituting the dimension of "Market Share" with one of "Professional Skills". Plot the options open to you on the personal version of the BCG Matrix, and take action appropriately.
Tip 2:A similar (and equally powerful) tool is the Action Priority Matrix, which helps you pick projects which legitimately give you the quickest and highest value returns. By using the BCG Matrix and Action Priority Matrix together, you get the best of both worlds!

Key Points

The Boston Matrix is an effective tool for quickly assessing the options open to you, both on a corporate and personal basis.
With its easily understood classification into "Dogs", "Cash Cows", "Question Marks" and "Stars", it helps you quickly and simply screen the opportunities open to you, and helps you think about how you can make the most of them.

The Ansoff Matrix: Part 10

Understanding the risks of different options(Also known as the Product/Market Expansion Grid)

The Marketing Mix and 4 Ps: Part 9

Understanding how to position your market offering


What is marketing? The definition that many marketers learn as they start out in the industry is:


Putting the right product in the right place, at the right price, at the right time.
It's simple! You just need to create a product that a particularly group of people want, put it on sale some place that those same people visit regularly, and price it at a level which matches the value they feel they get out of it; and do all that at a time they want to buy. Then you've got it made!


There's a lot of truth in this idea. However, a lot of hard work needs to go into finding out what customers want, and identifying where they do their shopping. Then you need to figure out how to produce the item at a price that represents value to them, and get it all to come together at the critical time.


But if you get just one element wrong, it can spell disaster. You could be left promoting a car with amazing fuel-economy in a country where fuel is very cheap; or publishing a textbook after the start of the new school year, or selling an item at a price that's too high – or too low – to attract the people you're targeting.


The marketing mix is a good place to start when you are thinking through your plans for a product or service, and it helps you avoid these kinds of mistake.
Understanding the Tool


The marketing mix and the 4 Ps of marketing are often used as synonyms for each other. In fact, they are not necessarily the same thing.


"Marketing mix" is a general phrase used to describe the different kinds of choices organizations have to make in the whole process of bringing a product or service to market. The 4 Ps is one way - probably the best-known way - of defining the marketing mix, and was first expressed in 1960 by E J McCarthy.


The 4Ps are:

Product (or Service)
Place
Price
Promotion


A good way to understand the 4 Ps is by the questions that you need to ask to define you marketing mix. Here are some questions that will help you understand and define each of the four elements:


Product/Service
What does the customer want from the product/service? What needs does it satisfy?
What features does it have to meet these needs?
Are there any features you've missed out?
Are you including costly features that the customer won't actually use?
How and where will the customer use it?
What does it look like? How will customers experience it?
What size(s), color(s), and so on, should it be?
What is it to be called?
How is it branded?
How is it differentiated versus your competitors?
What is the most it can cost to provide, and still be sold sufficiently profitably? (See also Price, below).


Place

Where do buyers look for your product or service?
If they look in a store, what kind? A specialist boutique or in a supermarket, or both? Or online? Or direct, via a catalogue?
How can you access the right distribution channels?
Do you need to use a sales force? Or attend trade fairs? Or make online submissions? Or send samples to catalogue companies?
What do you competitors do, and how can you learn from that and/or differentiate?


Price

What is the value of the product or service to the buyer?
Are there established price points for products or services in this area?
Is the customer price sensitive? Will a small decrease in price gain you extra market share? Or will a small increase be indiscernible, and so gain you extra profit margin?
What discounts should be offered to trade customers, or to other specific segments of your market?
How will your price compare with your competitors?


Promotion


Where and when can you get across your marketing messages to your target market?
Will you reach your audience by advertising in the press, or on TV, or radio, or on billboards? By using direct marketing mailshot? Through PR? On the Internet?
When is the best time to promote? Is there seasonality in the market? Are there any wider environmental issues that suggest or dictate the timing of your market launch, or the timing of subsequent promotions?
How do your competitors do their promotions? And how does that influence your choice of promotional activity?


The 4Ps model is just one of many marketing mix lists that have been developed over the years. And, whilst the questions we have listed above are key, they are just a subset of the detailed probing that may be required to optimize your marketing mix.
Amongst the other marketing mix models have been developed over the years is Boom and Bitner's 7Ps, sometimes called the extended marketing mix, which include the first 4 Ps, plus people, processes and physical layout decisions.


Another marketing mix approach is Lauterborn's 4Cs, which presents the elements of the marketing mix from the buyer's, rather than the seller's, perspective. It is made up of Customer needs and wants (the equivalent of product), Cost (price), Convenience (place) and Communication (promotion). In this article, we focus on the 4Ps model as it is the most well-recognized, and contains the core elements of a good marketing mix.


Using the 4Ps Marketing Mix Model


The marketing mix model can be used to help you decide how to take a new offer to market. It can also be used to test your existing marketing strategy. Whether you are considering a new or existing offer, follow the steps below help you define and improve your marketing mix.
Start by identifying the product or service that you want to analyze.
Now go through and answers the 4Ps questions - as defined in detail above.
Try asking "why" and "what if" questions too, to challenge your offer. For example, ask why your target audience needs a particular feature. What if you drop your price by 5%? What if you offer more colors? Why sell through wholesalers rather than direct channels? What if you improve PR rather than rely on TV advertising?


Tip:

Check through your answers to make sure they are based on sound knowledge and facts. If there are doubts about your assumptions, identify any market research, or facts and figures that you may need to gather.


Once you have a well-defined marketing mix, try "testing" the overall offer from the customer's perspective, by asking customer focused questions:
Does it meet their needs? (product)
Will they find it where they shop? (place)
Will they consider it's priced favorably? (price)
And will the marketing communications reach them? (promotion)
Keep on asking questions and making changes to your mix until you are satisfied that you have optimized your marketing mix, given the information and facts and figures you have available.
Review you marketing mix regularly, as some elements will need to change as the product or service, and its market, grow, mature and adapt in an ever-changing competitive environment.


Key points:


The marketing mix helps you define the marketing elements for successfully positioning your market offer.
One of the best known models is the Four Ps, which helps you define your marketing options in terms of product, place, price and promotion. Use the model when you are planning a new venture, or evaluating an existing offer, to optimize the impact with your target market.

P.E.S.T Analysis - Part 8

Understanding "Big Picture" Forces of Change(Also known as PESTLE, PESTEL, PESTLIED, STEEPLE and SLEPT Analysis)


PEST Analysis is a simple, useful and widely-used tool that helps you understand the "big picture" of your Political, Economic, Socio-Cultural and Technological environment. As such, it is used by business leaders worldwide to build their vision of the future.


It is important for these reasons:

First, by making effective use of PEST Analysis, you ensure that what you are doing is aligned positively with the powerful forces of change that are affecting our world. By taking advantage of change, you are much more likely to be successful than if your activities oppose it;
Second, good use of PEST Analysis helps you avoid taking action that is doomed to failure from the outset, for reasons beyond your control; and
Third, PEST is useful when you start operating in a new country or region. Use of PEST helps you break free of unconscious assumptions, and helps you quickly adapt to the realities of the new environment.


How to use the tool:


PEST is a simple mnemonic standing for Political, Economic, Socio-Cultural and Technological.
To use this tool, follow this three stage process:


Brainstorm the relevant factors that apply to you;
Identify the information that applies to these factors; and
Draw conclusions from this information.

To download our free worksheet to record your analysis, click here!


Tip:The important point is to move from the second step to the third step: it is sterile just to describe factors without thinking through what they mean. However, be careful not to assume that your analysis is perfect: use it as a starting point, and test your conclusions against the reality you experience.

The following factors may help as a starting point for brainstorming (but make sure you include other factors that may be appropriate to your situation):


Political:
Government type and stability
Freedom of press, rule of law and levels of bureaucracy and corruption
Regulation and de-regulation trends
Social and employment legislation
Tax policy, and trade and tariff controls
Environmental and consumer-protection legislation
Likely changes in the political environment


Economic:
Stage of business cycle
Current and project economic growth, inflation and interest rates
Unemployment and labor supply
Labor costs
Levels of disposable income and income distribution
Impact of globalization
Likely impact of technological or other change on the economy
Likely changes in the economic environment


Socio-Cultural:
Population growth rate and age profile
Population health, education and social mobility, and attitudes to these
Population employment patterns, job market freedom and attitudes to work
Press attitudes, public opinion, social attitudes and social taboos
Lifestyle choices and attitudes to these
Socio-Cultural changes


Technological Environment:
Impact of emerging technologies
Impact of Internet, reduction in communications costs and increased remote working
Research and Development activity
Impact of technology transfer

Figure 1 below shows this in diagrammatic format:
Figure 1: PEST Analysis in Diagrammatic Format

Other forms of PEST - PESTLE, PESTLIED, STEEPLE and SLEPT:

Some people prefer to use different flavors of PEST Analysis, using other factors for different situations. The variants are:
PESTLE/PESTEL: Political, Economic, Sociological, Technological, Legal, Environmental;
PESTLIED: Political, Economic, Social, Technological, Legal, International, Environmental, Demographic;
STEEPLE: Social/Demographic, Technological, Economic, Environmental, Political, Legal, Ethical; and
SLEPT: Social, Legal, Economic, Political, Technological
Choose the flavor that most suits you!

Example:

We’re going to avoid giving an example here, because of the huge potential for causing offense: few societies seem perfect to outsiders, and there are few things as irritating as having an outsider criticize one's own country...

However, a broad principle is that things that make activity more difficult for people or organizations raise the cost of doing business: business is either stopped altogether, or costs more as people spend time and money circumventing difficulties. The higher the cost of doing business in a region, the more project profitability is squeezed or eliminated. And given that businesspeople normally have at least some level of intelligence, businesses and projects that could otherwise operate are never launched - meaning that less economic activity takes place. (The lower the amount of economic activity, the poorer and less capable societies tend to be.)
Another broad principle is wherever there is rapid or major change in an area, there are likely to be new opportunities and threats that arise. Smart people and companies will take advantage of the opportunities and manage the threats.

And do remember that few situations are perfect: it is up to us to make the most of the situation in which we find ourselves.

Key Points:
PEST Analysis is a useful tool for understanding the “big picture” of the environment in which you are operating, and the opportunities and threats that lie within it. By understanding your environment, you can take advantage of the opportunities and minimize the threats.PEST is a mnemonic standing for Political, Economic, Social and Technological. These headings are used firstly to brainstorm the characteristics of a country or region and, from this, draw conclusions as to the significant forces of change operating within it.
This provides the context within which more detailed planning can take place to take full advantage of the opportunities that present themselves.