PEST Analysis: Essential Small Business Contingency Planning Tool

In Entrepreneur Advice by Abel Nunez0 Comments

Don’t get caught with your pants down;
plan for the unforeseen with a PEST Analysis!

As a small business owner, you know there’s no way to account for the unforeseen, or is there? Granted, there are all kinds of things that can happen that can affect your bottom line and put your small business at risk. However, what if there was a way to identify and act upon certain events or trends (like the recent and drastic drop in oil prices), in order to trigger a proactive plan that protects your business against things unaccounted and unplanned for. Well, there is such a tool and it’s called the PEST analysis.

The PEST analysis is meant to define the current and future impacts of Political, Economical, Socio-cultural and Technological changes on your small business.

This planning tool allows you to account for emerging trends within your market by identifying possible threats and putting forth sound and reasonable solutions in the event these threats take hold.

The PEST analysis becomes your contingency plan, one that enacts ready-made solutions so your small business can mitigate or reduce the impact of any of these aforementioned threats. First, we’ll define the analysis itself. Second, we’ll summarize some of the potential threats or emerging trends that can have an impact on a small business. Third, we’ll provide some examples of triggers and the resulting plans that could be put in place. Finally, we’ll explain why it’s so important to review how well your plan was put together in order to assess what needs to change should similar threats occur in the future.

1. The PEST Analysis- The analysis involves placing each individual category within a square. The focus is to occupy each heading with those issues you’ve identified as the biggest potential threats facing your small business. It’s important to keep information clean and uncluttered. Therefore, use bullet points and quick notes instead of long run-on sentences.

2. Potential Threats- Don’t be intimidated by this portion of the analysis. Keep it simple and to the point. Focus on those issues most likely to affect your small business. For instance, is there a political party in power that tends to favor lower taxes, while adopting more business-friendly policies? In terms of economic variables, what would a sudden recession or dip in customer demand mean to your small business and how would you weather the storm?

When thinking about socio-cultural trends and threats, think about changing preferences amongst your customer base. For instance, are their likes and dislikes changing? Do you service an older customer base, one where the upcoming generation doesn’t share the same appreciation for your products and services? Finally, are there any new technologies or competing offerings that could literally do away with demand for your products and services?

3. Identifying Triggers- After you’ve identified those issues and potential problems that concern you the most, take the time to define triggers to enact your contingency plans. After all, if you have a plan in place to account for a newly elected political party, who is guaranteed to raise taxes and increase the minimum wage, then you’ll know exactly when to enact that plan should that party come to power. Here are some examples of the types of things your small business can do to protect itself against outside threats, ones you can’t control, but must account for:

  • Political Trigger: A new mayor could be elected. He or she wants to grant a work permit to a construction company in order to build condos right in front of your business, a decision that will surely divert customers away from your establishment for six months to one year.
  • Solution: A solution to the above could include opening earlier and closing later, providing short-term discounts and rebates, reducing hours, or even starting a short-term delivery service for those inconvenienced customers. If you know your customers well, then they may be able to provide insight into how you can better service them during this period.
  • Economical Trigger: Rumors abound that the biggest automotive plant in your town is closing down, and while it’s not a complete loss, you know it will have an impact on your business.
  • Solution: Instead of cutting back on your business, you’ve decided to expand. You located low-cost warehousing and distribution centers in adjacent towns and have made plans to compensate for the loss in sales with additional revenue streams.
  • Socio-cultural Trigger: You slowly begin to notice that your customer base is aging and the younger generation doesn’t seem to be as interested in your specialty candy and chocolate store.
  • Solution: You’ve realized you can’t turn back time so you’ve decided to appeal to the younger audience by offering specialty coffee, Wi-Fi and have opened a whole new section where people can buy books and magazines. You’ve retained your products for the older generation, while appealing to the next.
  • Technological Trigger: You’ve owned and operated a used book store for decades. However, with today’s constantly mobile customer base, you understand that you can no longer afford to ignore the impact of streaming video, the internet and e-readers like Kindle. Ultimately, is your product offering at its end of life or can you embrace this new technology and use it to your advantage?
  • Solution: You’ve tapped into social media by connecting directly to your most loyal customers. Instead of abandoning your offering, you’ve coupled it with a social media outreach strategy that updates your customers on all the latest used books available. You’ve created a “wish list” for each customer and use an email list to notify each of them every time a used book on the wish list appears.

4. Assess and Review- It’s always important to perform an assessment after a given period of time. Some of these threats may be short-term, while others may be more long-term. How your small business reacts to these threats will ultimately dictate success or failure. The PEST analysis isn’t a one-time analysis. It’s something you revisit from time-to-time in order to make sure you’re up-to-date with the latest trends and possible threats. A final assessment is a necessity.

In reviewing the results of your plan, focus on answering the following questions:

  1. Did your plan achieve the desired results, and if not, why?
  2. Is there any way you could have improved upon your plan?
  3. What did you learn from implementing your plan and can you improve upon these strategies in the future?
  4. Did your plan help you save money, reduce or maintain costs, retain existing customers, and or better help you deal with the changes you encountered?

It’s wrong to assume that only the largest, most established enterprises and corporations should enact strategic plans. Any business, regardless of its size, must have quantifiable goals and objectives, ones that clearly define a path forward, while also clarifying benchmarks on performance. The PEST analysis is a small business contingency planning tool that allows you to define those threats and trends that may impact your overall goals and objectives. It helps you define the potential impact of these threats and be proactive in removing them as going concerns.

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