PEST analysis stands for Political, Economic, Social, and Technological analysis. Items that fall under the "political" part include regulations, tax policies, employment laws, and political stability, among others. Companies use these PEST analysis political factors to determine how external government forces may alter operational plans. While it may be impossible to list every single political factor in the analysis, companies should attempt to define those that are most important. International companies also have to deal with import and export laws as well.
Regulations are often wide ranging in the business environment, but a few of the most common are environmental and competition related. Environmental regulations in terms of a PEST analysis include any laws that restrict the use of natural resources, such as water, air, timber, and similar items. Competition regulations restrict companies from colluding with others, attempting to monopolize a market, engaging in price gouging, or other competition-reducing tactics. These regulations may actually prevent a company from entering a new market whether domestic or international.
Tax policies are among the most common and difficult political factors. Heavily taxed economies can make it difficult for companies to use resources efficiently. Any taxed business activities tend to reduce a company’s profit, so taxes on various business activities often make company leaders think twice about entering a market. The company must weigh the pros and cons of government taxation against the potential returns from any activity.
Employment laws are another important factor in terms of a PEST analysis. Government agencies can make laws or regulations on the hours an employee works, minimum wages paid per hour, benefits offered, and a host of other issues. Businesses must comply with these laws to the fullest extent or pay significant fines. Employment laws and regulations may also change very frequently, which makes it harder for a business to simply put programs and policies into place and not have to worry about any future maintenance on them.
Political stability is necessary for a company to remain in business for a long period of time. Frequent changes or sharp adjustments in a country’s political environment can result in a very unstable business environment. Companies that exist in these environments tend not to do well and make less investments in unsecure markets. The political factors of a PEST analysis can often unearth these issues and make companies aware of the potential drawbacks in a politically charged market.
