In order to start off with an entrepreneurial activity, it is utmost required to analyze the external environment from all aspects possible, as this analysis will tell the entrepreneur not only about the viability of the activity, but also the possible predicaments those can come in the way of implementing that activity. If all the aspects of the external environment to an entrepreneurial activity are considered, then they can be categorized into four major components, and those are namely political, economic, social, and technological. These four broad aspects constitute the building blocks of PEST analysis. Following are the brief descriptions of these four aspects:
- In order to have a control over the competition in the market, to have a control over pricing, quality of products, revenue, interest of human resource etc., government comes up with several rules and regulations to regulate the market. The rules and regulations can also be in terms of putting barriers on import of several goods and services, providing subsidy for production and development of special kinds of goods and services, setting the labor laws, and setting the emission standards. An entrepreneur must be aware of all these aspects before entering the market, as these government policies, which are politically driven, can change the market behavior to a great extent.
- Demand scenarios in a market largely depend on the economic conditions, which determine the level of disposable income in the hands of consumers. If being looked at the supply side scenario, rate of interest and exchange rate dynamics can play crucial roles for a business, as they determine the cost of capital of the firm. This will be reflected in the cost of debt and cost of equity to be borne by the firm. Therefore, economic aspects can influence both demand and supply considerations.
- Social aspects can influence both the internal and external environments of a firm. The organizational culture is largely influenced by the cultural setting of the market, in which the firm is operating. People try to see the reflection of their cultural attributes in the products or services they use, and the entrepreneur must capture this aspect in the very process of development.
- Developments in the technological domain must be observed by the entrepreneur, as employment of latest technologies can result in lowering of the production or development cost to a great extent, and it can as well enhance the quality of design.
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