Where to Begin with Market Analysis? A Guide to STEP Analysis

In earlier articles, we discussed what a product strategy entails and examined how its creation starts with analyzing the current situation. This article focuses on market analysis, specifically the STEP analysis tool.

STEP Analysis: A Comprehensive Guide

STEP analysis (also known as PEST analysis) is a strategic method for examining a company’s external environment. It identifies the factors influencing the business and evaluates their impact on product strategy. STEP stands for Social, Technological, Economic, and Political factors. As a foundational element of situational analysis, it helps companies adapt to dynamic external conditions. Through STEP analysis, companies can quickly understand the "terrain" in which they operate.

"According to the 'Laws of War,' the first is length, the second is volume, the third is number, the fourth is weight, the fifth is victory. Terrain determines length, length determines volume, volume determines number, number determines weight, weight determines victory." (Sun Tzu, The Art of War)

How to Conduct STEP Analysis

STEP analysis begins with gathering and filtering information from credible sources. These may include industry reports, government statistics, trade publications, internal company data (like CRM or sales reports), and analytical articles. Focus on current and relevant data, ensuring its source reliability.

When presenting your findings:

1. Highlight key trends and data points.
2. Draw conclusions and provide actionable recommendations.
3. Use a structured approach: describe the data first, then analyze and propose solutions.

Key Steps to Take After STEP Analysis:

• Identify critical influencing factors.
• Pinpoint opportunities and threats.
• Adapt the product strategy accordingly.
• Plan actions to mitigate risks and leverage advantages.

Breaking Down the STEP Factors

1. Social Factors

These include demographic shifts, cultural trends, lifestyle changes, education levels, and attitudes toward health and wellness. Social factors shape consumer behavior and preferences.

Key considerations:

• Demographic trends (aging populations, youth growth, etc.).
• Consumer behavior changes (interest in eco-friendly or healthy products).
• Urbanization and digitalization trends.
• Cultural influences and regional preferences.

Takeaways: Social factors help identify target consumer segments, preferences, and expectations. For example, a growing interest in sustainable products signals the need for environmentally-friendly practices.

2. Technological Factors

Technological elements cover innovations, advancements in digital ecosystems, new production methods, and data-processing techniques. These create opportunities for product enhancements and process optimizations.

Key considerations:

• Adoption of digital technologies (IoT, AI).
• Industry-specific innovations (new materials, production techniques).
• Trends in automation and robotics.
• Technology's role in customer experiences (e.g., mobile apps).

Takeaways: Analyzing technological factors highlights opportunities for product innovation and operational efficiency. For example, leveraging AI can enable personalized customer experiences or smart product designs.

3. Economic Factors

Economic variables include macroeconomic conditions, such as purchasing power, income levels, and resource accessibility, helping assess risks and opportunities linked to economic shifts.

Key considerations:

• Inflation rates and interest trends.
• Currency exchange rates.
• Unemployment levels and consumer spending power.
• Government subsidies or tax incentives.

Takeaways: Economic factors shape pricing strategies and product affordability. For instance, inflation may increase raw material costs, influencing budgeting and pricing decisions.

4. Political Factors

Political variables include regulations, market rules, taxation policies, and trade relations. These impact market accessibility, business operations, and expansion possibilities.

Key considerations:

• Industry-specific legislative changes (e.g., new quality standards).
• Political stability and its effect on business.
• Policies favoring competition or small businesses.
• International trade agreements or restrictions.

Takeaways: Political analysis identifies potential business risks and prepares companies for regulatory changes. For instance, stricter quality standards might necessitate production process adjustments.

Advanced Tool: PESTEL Analysis

PESTEL analysis expands on STEP by adding Environmental and Legal factors, offering deeper insights into external influences.

1. Environmental Factors

These relate to a company’s environmental impact and vice versa, encompassing climate changes, sustainable development, waste management, and resource usage.

Key considerations:

• Climate’s effect on production and supply chains.
• Consumer and regulator pressure for eco-friendly solutions.
• Trends in biodegradable and sustainable product demand.

2. Legal Factors

Legal elements include laws and regulations governing quality standards, data protection, labor rights, and trade barriers.

Key considerations:

• Changes in product certification requirements.
• Data protection regulations (e.g., GDPR).
• Labor law amendments.
• Import quotas and trade restrictions.

Takeaways: Legal factors ensure compliance with regulations, protecting businesses from penalties or operational disruptions. For example, stricter data protection laws may require companies to revise customer data practices.

Practical Example of STEP Analysis

A home appliance manufacturer conducting STEP analysis identifies:

• Social: Rising demand for eco-friendly products.
• Technological: Advancements in IoT and smart devices.
• Economic: Declining consumer purchasing power due to inflation.
• Political: New energy-efficiency standards.

Conclusions: The company introduces a line of energy-efficient smart appliances, segments its products for affordability, and uses eco-friendly materials while launching a marketing campaign emphasizing sustainability.

Conclusion

STEP and PESTEL analyses are indispensable tools for assessing external factors influencing product strategies. By addressing these factors early in the strategy development process, companies can uncover potential opportunities and threats, ensuring informed decision-making.

In the next article, we will explore market structure analysis and competitor evaluation.

Postscript

If you missed our earlier articles:

1. What is a Product Strategy and Why Does Your Business Need One?
2. Two Key (+5 Additional) Rules for Creating a Product Strategy
3. Current Situation Analysis — The Foundation of a Product Strategy