What Is PEST Analysis?
Let me explain what PEST analysis is. It's a management technique that lets you evaluate key external elements that could impact your organization's activities or performance. By doing this, you can make your organization more competitive in the market.
There's a popular variation, especially in the U.K., called the PESTLE strategic planning approach. This adds two more focus areas: legal and environmental.
Key Takeaways
You should know that a PEST analysis gauges external factors that could affect a company's profitability. It's generally more relevant for larger organizations, which are more likely to feel the effects of macro events. Often, you'll use it in conjunction with a SWOT analysis, which covers strengths, weaknesses, opportunities, and threats.
Understanding PEST Analysis
PEST analysis was first introduced as ETPS by Harvard professor Francis J. Aguilar in his 1967 publication 'Scanning the Business Environment.' He identified economic, technical, political, and social factors as major influences on the business environment, and the letters were later rearranged to form the PEST acronym we use today.
At its core, PEST analysis believes that a comprehensive assessment of the major areas influencing your sector and organization can lead to more effective strategic planning. This planning maximizes your ability to capitalize on current conditions and prepares you for imminent changes, helping you stay ahead of competitors.
Components of PEST Analysis
Let's break down the components. The political aspect focuses on how government policy and changes in legislation affect the economy, your industry, and your organization. This includes tax and employment laws, as well as the general political climate and international relations.
For the economic portion, you target key factors like interest rates, exchange rates, economic growth, supply and demand, and inflation.
Social factors in a PEST analysis include demographics, age distribution, cultural attitudes, and trends in workplace and lifestyle.
The technological component considers the role and development of technologies in your sector and organization, along with broader trends, changes in technology, and government spending on research.
Applications of PEST Analysis
You can use a PEST analysis to recognize and capitalize on opportunities in the existing business environment. It also helps identify current or future challenges, allowing you to plan effectively on how to manage them.
Additionally, apply it to assess your organization's internal structure, identifying strengths and weaknesses in internal politics, economic outlook, social climate, and technological base. The results can lead to changes or improvements in subpar areas.
Tip
Here's a tip: Use PEST analysis alongside other strategic tools like the SWOT model. Comparing these analyses provides a solid basis for informed decision-making.
What Is the Difference Between PEST and PESTLE Analysis?
PEST focuses on political, economic, social, and technological areas, while PESTLE adds legal and environmental factors. You consider these when assessing external impacts on a company's profitability.
How Do You Do a PEST Analysis?
To conduct a PEST analysis, consider the different factors—political, economic, social, and technological—and how they affect your business. For politics, assess laws, regulations, government policies, and tariffs. In economics, look at access to financing, cost of living, interest rates, inflation, and labor costs. For social, evaluate consumer trends, behaviors, education, wealth distribution, and population growth. Technologically, examine artificial intelligence growth, innovation, research and development, social networking, and cybersecurity.
How Often Should a PEST Analysis Be Done?
You can do a PEST analysis as often as needed. It's a good idea to perform one when significant changes occur that might impact your business, such as shifts in interest rates, new government policies, or the introduction of new technology.
The Bottom Line
By analyzing political, economic, societal, and technological factors that impact your business, you can plan, reorganize, and adjust to become a more successful operation. Your organization's success depends not just on internal management but on how it functions in the larger world, and a PEST analysis can help you succeed.
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