I’ve been receiving a lot of attention to my articles on strategic planning tools such as SWOT Analysis, Fishbone Analysis and DACI To Get Things Done.
Here’s another one: PEST Analysis (by the way, there are many variations of PEST Analysis and so I’ve listed all of the ones at the bottom of this article with their definitions).
What is a PEST Analysis?
PEST is an acronym that stands for the following four Macro-Economic factors:
- Political — These include factors related to how a government intervenes in your business. It may include taxes, law, political stability, regulation and de-regulation.
- Economic — These include factors such as interest rates, inflation rates, unemployment rates, income rates/distribution and tariff rates.
- Social — These include cultural aspects such as population growth, age distribution, career trends (attitudes towards work), lifestyle trends, etc.
- Technological — These include trends such as remote working (see my article called A Virtual Workplace), mobile computing, the Internet and other research and development innovation.
PEST analyses are best used to measure a market situation (this differs from SWOT Analysis as SWOT is best used to measure a company or business unit situation). A good time to do a PEST Analysis is right before a SWOT Analysis. More PEST Analysis definitions and history can be found at PEST Analysis Wikipedia
The best uses for PEST Analysis are:
- Strategic Planning
- Business Planning
- Acquisitions
- Business Development/Joint Ventures
- Product Development
- Marketing Planning
PEST Analysis Example/Template
- Identify the key trends related to Political, Economic, Social and Technological factors
- Rank them on a scale of 1 to 10 in terms of what type of impact they could have on your business
- Pick the highest ranked items and dig into those using whatever tool you prefer (I recommend SWOT Analysis or Fishbone Analysis)
Here’s a good sample PEST Analysis of Yahoo
And, as promised here are those other variations of PEST with their definitions:
- PESTEL Analysis (sometimes misspelled “PESTAL” Analysis)stand for: Political, Economic, Social, Technological, Environmental and Law
- PESTLE Analysis is just spelled different than PESTEL (it stands for: Political, Economic, Social, Technological, Law and Environment
- STEEPLE Analysis stands for: Social, Technological, Economic, Environmental, Political, Law and Education
- STEEPLED Analysis stands for: Social, Technological, Economic, Environmental, Political, Law and Education and Demographics
- PESTLIED Analysis stands for Political, Economic, Social, Technological, Legal, International, Environmental, Demographic
- SLEPT Analysis stands for: Social, Legal, Economic, Political, Technological
- PESTELI Analysis stands for: Political, Economic, Social, Technological, Environmental, Law and International
- STEEP Analysis stands for: Social, Technological, Economic, Ecological and Political
You can tell that some people are really into these things!
If you like my articles on SWOT, PEST, etc. then you might want to check out my posting on DOS Exercise.
I often get asked the following questions from business owners and leaders:
- How much is my business worth?
- How do I go about maximizing shareholder value for my business?
- How do I look at revenue versus profit to determine how to maximize value?
- What are other keys to selling a company?
- What should I look for when buying a company?
Well, I’ve got my own thoughts but there’s a guy you’d much rather hear from — he’s been doing mergers and acquisition (M&A) deals for 20 years.
M&A Adviser Doug Hubert
His name is Doug Hubert (pictured) and he leads the M&A work as a Managing Director at CBIZ Inc.
He and I graduated high school together and even though I haven’t done a good job staying in touch, he was kind enough to share seven tips for you to use to maximize value in your business. Here they are!
1. Build a deep management team
One of the most difficult challenges for an entrepreneur, and one of the critical differences between a good company and a great company, is the depth and quality of the senior managerial team.
Too many entrepreneurs make the mistake of trying to run and grow their businesses with only one or two people capable of making critical decisions.
As a result, most businesses will plateau in their growth. If your company can’t function efficiently without your direct daily involvement, then you need to immediately begin to hire and develop talent or the future of your business is in jeopardy.
Jack Welch, the former CEO of General Electric, considered talent development and succession planning one of his greatest accomplishments in his tenure. Treat this issue with the same importance.
2. Diversify your customer base
Your largest customer should ideally be no more than 15%-20% of your revenues and/or profitability. While it’s often efficient and easy to allow a major customer to develop into a substantial portion of your sales, nothing could be more dangerous to the future health and value of a business.
Once a customer becomes a critical portion of your revenues and/or profits, then they own you. They can begin to dictate the
financial terms of the relationship and any change in their business, be it financial, personnel or otherwise, has a direct effect on the health and value of your business.
While it might require extra effort and possibly some short-term sacrifices to your bottom line as you build other accounts, the long-term benefit of a diversified customer base is a significant reduction in your financial risk profile.
3. Maintain quality financial information
A consistent area of weakness with most small and middle-sized companies is the lack of strong financial documentation. Most business
owners don’t want to spend the extra money to obtain an audit, believing a review or a compilation is just as good-it’s not.
Audited financials provide credibility with bankers, commercial financing sources, insurance companies, and most importantly, potential buyers.
The extra money spent will be recovered in a higher premium when the business is eventually sold.
4. Develop a proprietary product or service
To truly thrive as a company, you must distinguish yourself in the marketplace by offering a unique product or service that can’t easily be replicated by competitors. While this seems obvious, very few companies are dedicated to creating this distinction.
Ask yourself if your customers, employees and competitors can all quickly describe what differentiates your company. A superior product or service will create the opportunity for a pricing advantage in good times and customer loyalty in difficult periods.
5. Focus on profitability
Too many business owners measure the success of their business on top-line revenues rather than pre-tax profitability. Value is created through maximizing profit, not maximizing revenue growth-a $25 million company earning $5 million pre-tax is worth more than a $40 million company earning $2 million pre-tax.
Another common mistake is desire to limit profitability to limit taxes. While fast growing businesses often need the extra cash to fund growth, this approach loses money for business owners, as the focus becomes tax avoidance rather than operational efficiency and profit maximization.
There are legal ways to minimize your taxes through the use of an S-Corporation or LLC rather than a C-Corporation.
6. Prepare and execute a business plan
Establish operational and financial plans and goals for your business in one, three and five year increments and share them with your employees. The plans should take into account various economic, industry and company specific scenarios and how management would react to each.
In addition to creating a road map for your future growth, this will focus your business and your employees around quantifiable goals and will allow you to make better business decisions as you grow your business.
7. Seek the help of outside professional advisors
Seek the assistance of outside professionals, especially a full service accounting firm, who can provide valuable advice as you grow your business.
Not only can they provide objective counsel as you grow your business, they can help you avoid disastrous legal, financial and operational mistakes that may have significant financial consequences down the road.
Similarly, if you plan on selling your business or are approached by a buyer, an investment banker can ensure that you obtain the best possible transaction by re-stating your financials, preparing a memorandum that highlights the intrinsic value of your business (including off-balance sheet items) and quietly approaching other buyers to ensure a competitive process.
CBIZ Mergers & Acquisitions Group, Inc. (“CM&A”) is the investment-banking arm of CBIZ, Inc. (NYSE:CBZ). CM&A predominantly represents owners of businesses with revenues between $15-300 Million in mergers & acquisitions transactions. CM&A offers a comprehensive and customized approach and welcomes all inquiries, which are treated in confidence.
To learn more about valuing a company and other mergers and acquisitions information, and to learn more about Doug, visit the CBIZ Website.
©2009, CBIZ, Inc.