When thinking of the term ‘business owner’, what do you picture? You won’t be faulted for conceptualising an image of someone who’s a little older and experienced running the show — and the statistics back it up. According to NBCS, roughly 60 per cent of people who start small businesses are between 40 and 60 years old, but the entrepreneurship landscape of today is seeing change.
Despite this, youth entrepreneurship is now increasingly prevalent, with the younger demographic becoming steadily more open to venturing into business, even at a young age. Research from Ernst & Young found that 41 per cent of teens would consider entrepreneurship over working a traditional job.
These potential young founders are driven by their ideas and passion for starting businesses, but many embark on this journey through an inward-looking lens, not weighing the external factors affecting a business, with it being understandable due to their general lack of experience.
This lack of structure and an external outlook often leads to struggles in validating their ideas and proving their worth to potential partners and investors. In a highly connected world where geo-political events are complex and volatile, this is where the strategic tool of PEST analysis comes into play.
Although generally used by larger organisations to help them become more competitive, I personally feel that it can help these young entrepreneurs identify the political, economic, social, and technological factors, offering them a structure which can positively affect their ideas and passions in becoming a reality.
Identify external factors with PEST
As mentioned, PEST analysis comprises four key components: political, economic, social, and technological factors. Each of these components plays a crucial role in shaping the business environment and can have a significant impact on the success or failure of a young business in convincing investors and first funders that their vision is worth pursuing.
Political factors
Political factors refer to the influence of the government and its policies on businesses. These factors encompass regulations, laws, and political stability. Understanding political factors helps young business owners navigate the legal landscape and comply with regulations relevant to their industry.
Warren Buffett once said: “Predicting rain doesn’t count. Building arks does.” This quote underscores the importance of businesses being proactive and adaptable in response to foreseeable changes in the political and regulatory landscape.
Economic factors
Economic factors encompass overall economic conditions — including inflation, interest rates, exchange rates, and consumer spending patterns. These factors directly impact the demand for products or services and affect the purchasing power of consumers, which can conclude the direction in which the economy might move. In today’s world, where capital becomes very expensive due to high inflation, startups face even more challenges raising the money they need.
Social factors
Next, social factors refer to the cultural, demographic, and societal influences that shape consumer behaviour and preferences. They include population demographics, lifestyle trends, attitudes, and social norms. Other factors are educational levels and distribution of wealth. These social factors might ultimately affect the sales of products and services provided and can help young business founders plan their pitches and course of action accordingly.
For example, nations like Japan, South Korea, and Singapore face a rapidly ageing population, which has translated to increasing amounts of the nations’ budgets being skewed to support the elderly. In turn, more opportunities and money will be available in sectors that provide active ageing services.
Technological factors
Lastly, technological factors factor in technological advancements, innovation, and the impact of digitalisation on industries. Apart from those pointers, it also considers the rate of technological obsolescence. These factors can disrupt traditional business models and create new opportunities, which, for young business owners, presents undiscovered pathways to success.
Artificial intelligence has been all the rage today since the launch of ChatGPT. It will create a lot of disruption to existing businesses (and jobs) and present new opportunities if a startup can tap into the trend.
Importance of PEST analysis for young business owners
PEST analysis is used together with SWOT analysis to present a better picture of operations and is an especially significant tool for young business owners due to several reasons.
First off, it allows for anticipating opportunities and threats. Instead of solely focusing on the product, service, and inward-looking components of the business, conducting a PEST analysis allows young business owners to identify the how, the why and the what that will impact their business plan (or SWOT). In turn, this will alert or make them more sensitive in their planning and execution.
For example, if a young business owner identifies a political decision where the country’s strategic plan is to embark on the Green Economy and new investments are made in this sector, they can position their business idea to take advantage of it.
Also Read: Rise of the social entrepreneur: can doing good be good for business?
On the other hand, if a country is more conservative and has a large low-cost labour manufacturing base, the introduction of disruptive technology like industrial 4.0 automation and robotics means the company may face huge challenges for anyone to adopt it due to the social upheaval it will bring.
Building on the ability to anticipate opportunities and threats would, in turn, allow young founders to stay ahead of the competition. PEST analysis helps them identify emerging trends and changes in the external environment that can impact their industry, thus gaining a competitive edge.
The Russia-Ukraine war comes to mind, which has caused disruption to the global supply of grain and fertilisers. It caused production costs to spiral and had a huge economic impact with spikes in inflation globally. If a young business owner is starting a new agri-food business, he or she must factor this into their SWOT analysis and even change course if needed.
In turn, PEST analysis gives business owners the clarity to make a more informed business decision. By understanding the external factors that can impact their business, they can assess the potential risks and rewards associated with different strategies.
I once invested in a Taiwanese hardware firm making VoIP routers (Voice over Internet Protocol) in the late 90s, when the internet was in its infancy. It was adopted by a Taiwanese telco which sold them to their customers, becoming a hit for businesses and families who had members located overseas. One set would be installed locally, and the other would be sent to the other side of the world, where they could then call for free using the internet.
Unfortunately, the company did not understand that the internet had brought about the passion of young software developers who wanted to change the world. The launch of Skype doomed the hardware-based product! Given its entrenched position, if the company had analysed the situation using PEST of the external environment and moved towards a software-based solution, it would have thrived.
Circling back to the importance of PEST for young business owners, partners and investors seek assurances that the ventures they support are well thought out and equipped to navigate the complexities of the market. PEST analysis plays a pivotal role in providing this assurance by presenting a holistic view of the external factors that could impact the business.
By demonstrating a clear understanding of the political, economic, social, and technological landscape, entrepreneurs can instil confidence in potential investors, thereby increasing the likelihood of securing funding for their ventures.
Incorporating PEST analysis into their business strategies gives young founders the ability to perform an in-depth evaluation that goes beyond the typical SWOT assessments. This comprehensive approach enables them to convince potential funders that their ideas are well thought out and have the options ready in the event of unforeseen circumstances that may disrupt the implementation of their business plan.
Also Read: Breaking the myth: The reality of social entrepreneurs and their business approach
Moreover, by adding PEST analysis as part of their pitch, young business owners can assure the investors that every aspect — including opportunities and risks, has been meticulously considered. This gives them a one-up over other startup pitches.
Final thoughts
In the realm of entrepreneurship, the ability to balance the showcase of both negatives and positives is crucial in bringing ideas to fruition. A structured approach, such as PEST analysis, facilitates this balance by providing a comprehensive understanding of the external factors that can shape the success of a business.
By leveraging PEST analysis, entrepreneurs can not only validate their ideas effectively but also demonstrate a thorough consideration of the opportunities and risks involved. Ultimately, embracing a structured approach empowers young founders to transform their visionary ideas into tangible and sustainable business ventures.
PEST analysis does not need to be the domain of larger companies, and founders should be encouraged to adopt it early in their business plans.
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