The PEST analysis is a useful tool for understanding market growth or decline, and as such the position, potential and direction for a business. A PEST analysis is a business measurement tool. PEST is an acronym for Political, Economic, Social and Technological factors, which are used to assess the market for a business or organizational unit.
PEST Analysis is a simple but important and widely-used tool that helps you understand the big picture of the Political, Economic, Socio-Cultural and Technological environment you are operating in. PEST is used by business leaders worldwide to build their vision of the future.
It is important for these reasons:
By making effective use of PEST Analysis, you ensure that what you are doing is aligned positively with the forces of change that are affecting our world. By taking advantage of change, you are much more likely to be successful than if your activities oppose it.
Good use of PEST Analysis helps you avoid taking action that is condemned to failure for reasons beyond your control.
PEST is useful when you start operating in a new country or region. Use of PEST Analysis helps you break free of unconscious assumptions, and helps you quickly adapt to the realities of the new environment.
How to Use the Tool:
PEST is a simple mnemonic standing for Political, Economic, Socio-Cultural and Technological.
Using the tool is a three stage process:
Firstly, you brainstorm the relevant factors that apply to you, using the prompts below.
Secondly, you identify the information that applies to these factors.
Thirdly, you draw conclusions from this information.
Political:
Government type and stability.
Freedom of press, rule of law and levels of bureaucracy and corruption.
Regulation and de-regulation trends.
Social and employment legislation.
Tax policy, and trade and tariff controls.
Environmental and consumer-protection legislation.
Likely changes in the political environment .
Economic:
Stage of business cycle.
Current and projected economic growth, inflation and interest rates.
Unemployment and labor supply.
Labor costs.
Levels of disposable income and income distribution.
Impact of globalization.
Likely impact of technological or other change on the economy.
Likely changes in the economic environment.
Socio-Cultural:
Population growth rate and age profile.
Population health, education and social mobility, and attitudes to these.
Population employment patterns, job market freedom and attitudes to work.
Press attitudes, public opinion, social attitudes and social taboos.
Lifestyle choices and attitudes to these.
Socio-cultural changes.
Technological Environment:
Impact of emerging technologies.
Impact of Internet, reduction in communications costs and increased remote working.
Research & Development activity.
Impact of technology transfer.
Key Points:
PEST Analysis is a useful tool for understanding the ‘big picture’ of the environment in which you are operating, and for thinking about the opportunities and threats that lie within it. By understanding your environment, you can take advantage of the opportunities and minimize the threats.
PEST is a mnemonic standing for Political, Economic, Social and Technological. These headings are used firstly to brainstorm the characteristics of a country or region and, from this, draw conclusions as to the significant forces of change operating within it.
This provides the context within which more detailed planning can take place, so that you can take full advantage of the opportunities that present themselves.
While economic conditions and government policy are closely related, they both influence a number of other environmental forces that can affect organizations. Capital markets determine the conditions for alternative types of funding for organizations. They tend to be a subject to government controls, and they will be guided by the prevailing economic conditions. The rate of interest charged for loans will be affected by inflation and by international economics and, although the determining rate may be fixed by a central bank, as it is the case with the Bank of England, that will also be influenced by stated government priorities. According to Thompson (2002), government spending can increase the money supply and make capital markets more buoyant. The expectations of shareholders with regard to company performance, their willingness to provide more equity funding or their willingness to sell their shares will also be affected.
The labour market reflects the availability of particular skills at national and regional levels; this is affected by training, which is influenced by government and other regional agencies. Labour costs will be influenced by inflation and by general trends in other industries, and by the role ad power of trade unions.
Advantages of PEST
Simple and only costs time to do.
Provides an understanding of the wider business environment.
Encourages the development of strategic thinking.
May raise awareness of threats to a project.
Can help an organisation to anticipate future difficulties and take action to avoid or minimise their effect.
Can help an organisation to spot opportunities and exploit them.
Disadvantages of PEST
Usually a simple list and not critically presented.
The rapid pace of change in society makes it increasingly difficult to anticipate developments that may affect an organisation in the future.
Collecting large amounts of information may make it difficult to see the wood for the trees and lead to "paralysis by analysis."
The analysis may be based on assumptions that prove to be unfounded.
PEST analysis only covers the external environment and the results need to be considered with other factors, such as the organisation itself, competitors and the industry in which it is working.
PEST is an acronym that stands for Political, Economic, Social, Technological. PEST analysis is one way that a business can analyze the environment in which it operates.
Political Environment: refers to government laws, regulations, and policies. These are things that impact the business either directly or indirectly. This may include trade laws, tariffs, labor laws, taxes, environmental regulations, zoning restrictions, etc. Some of these, if passed recently, may have a long term affect on the economy as well. While PEST covers the economic environment, some political environment considerations, such as leadership changes that come from elections, may not have impacted the economy yet (this is an example of an indirect impact). So the analyst should watch for how new government regulations may impact the economy longer term and assess its impact on the business.
Economic Environment: refers to the forces at play within the economy that the business has little control over. These may include interest rates, inflation rate, exchange rates, increase in Gross Domestic Product (GDP), the financial and stock markets, the job market, etc. All of these have impacts on the business from the ability to generate revenue to the cost of borrowing money to the salaries they will need to pay employees.
Social Environment: refers to the demographics of the environment that the company operates within. Since demographics are nothing more than characteristics of a human population this could include a nearly infinite number of groups. Some common demographics that are considered are gender, race, age, income, disabilities, educational attainment, employment status, and religion. Ultimately, if the strategic plans of a business affect a particular group, they may react positively or negatively. A business may face criticism, negative publicity or even protests based on the decisions it makes. These factors could have an enormous impact on the operations and revenue of the business.
Technological Environment: refers to the technology that currently exists that the business has accessible to them. This could include servers, computers, networks, software and software frameworks, database technologies, wireless capabilities, availability of Software as a Service (Saas), and more. The rate of technological progress should also be considered, particularly if the business has plans to develop a system or product that takes advantage of cutting edge technology.
