What Is PEST Analysis?
PEST analysis (political, economic, social, and technological) is a management method whereby an organization can assess major external factors that influence its operation in order to become more competitive in the market. As described by the acronym, those four areas are central to this model.
A popular variation on the PEST analysis format, especially in the U.K., is the PESTLE strategic planning approach, which includes the additional aspects of legal and environmental.
Key Takeaways
- PEST analysis stands for political, economic, social, and technological.
- This type of analysis is used to gauge external factors that could impact the profitability of a company.
- Generally, it is more effective with larger organizations that are more likely to experience the effects of macro events.
- PEST analysis is commonly used in conjunction with SWOT analysis, which stands for strengths, weaknesses, opportunities, and threats.
Understanding PEST Analysis
It is believed that PEST analysis was first introduced under the name ETPS by Harvard professor Francis J. Aguilar. In the 1967 publication "Scanning the Business Environment," Aguilar presented the economic, technical, political, and social factors as being major influences on the business environment. Subsequently, the letters were rearranged to create a convenient and quirky acronym used today.
The core of PEST analysis is the belief that a comprehensive assessment of the major areas of influence that affect the sector in which an organization is positioned, as well as the organization itself, can facilitate more effective strategic planning.
This planning can be undertaken to maximize the organization’s ability to capitalize on conditions as they exist and to be forewarned of and better prepared for imminent changes, allowing the organization to stay ahead of competitors.
Components of PEST Analysis
Political: The political aspect of PEST analysis focuses on the areas in which government policy and/or changes in legislation affect the economy, the specific industry, and the organization in question. Areas of policy that may particularly affect an organization include tax and employment laws. The general political climate of a nation or region, as well as international relations, can also greatly influence the organization.
Economic: The economic portion of the analysis targets the key factors of interest and exchange rates, economic growth, supply and demand, inflation,and recession.
Social: The social factors thatmay be included in a PEST analysis are demographics and age distribution, cultural attitudes, and workplace and lifestyle trends.
Technological: The technological component considers the specific role and development of technologies within the sector and organization, as well as the wider uses, trends,and changes in technology. Government spending on technological research may also be a point of interest in this area.
Applications of PEST Analysis
PEST analysis can assist an organization in recognizing and thereby capitalizing on opportunities offered by existing conditions in the business environment. It can also be used for identifying current or possible future challenges, allowing for effective planning of how to best manage these challenges.
PEST analysis can also be applied in assessing the in-house structure of an organization in order to identify strengths and weaknesses in its internal politics, economic outlook, social climate, and technology base. The results of this analysis can facilitate changes or improvements in areas identified as subpar.
PEST analysis can be used in conjunction with other forms of strategic business analysis, such as the SWOT (strengths, weaknesses, opportunities, and threats) model, for an even more comprehensive result. Conducting a comparison between these completed analyses can provide a very solid basis for informed decision-making.
What Is PEST vs. PESTLE Analysis?
PEST analysis stands for "political, economic, social, and technological" whereas PESTLE stands for the same but adds "legal" and "environmental" factors to the analysis. These areas are considered when assessing the impact of external factors on a company's profitability.
How Do You Do a PEST Analysis?
To do a PEST analysis, you must consider the different factors under each category (political, economic, social, and technological), and how these factors affect your business. For the political component, you would assess laws, regulations, government policies, and tariffs, for example. For the economic component, some of the topics you would assess would include access to financing, cost of living, interest rates, inflation, and labor costs. For the social component, you would consider consumer trends and behaviors, education, division of wealth, population growth rates, and health. For the technological component, you would assess areas such as artificial intelligence growth, innovation, research and development, social networking, and cybersecurity.
How Often Should a PEST Analysis Be Done?
A PEST analysis can be done as often as a business would like. It is good to perform a PEST analysis when there have been significant changes that may impact a business, such as a change in interest rates, new government policies, or the introduction of new technology. It should be done often so as not to become outdated.
The Bottom Line
By analyzing the political, economic, societal, and technological factors that impact its business, a company can plan, reorganize, and adjust to these external factors in order to become a more successful operation. A business's success is not only predicated on how well it internally manages its operations but also on how it functions in the larger world. PEST analysis helps it to succeed in that aspect.
