PEST analysis
PEST analysis is a strategic planning framework used to evaluate the Political, Economic, Social, and Technological factors in the external macro-environment that may affect an organization's performance and strategic options (Aguilar F.J. 1967, p.32)[1]. A retail chain plans expansion into a new country. What should they understand? Government regulations on foreign investment. The state of the economy and consumer spending power. Cultural attitudes toward their product category. The technological infrastructure for e-commerce and payment systems. PEST analysis provides a structured approach to scanning these environmental forces.
Francis Aguilar developed the framework in 1967 as a tool for environmental scanning. Over the years, practitioners have extended it—PESTLE adds Legal and Environmental factors; STEEPLE includes Ethics. Regardless of the variant, the core purpose remains: understanding external forces that shape opportunities and threats. Brexit's impact on UK businesses, the coronavirus pandemic's disruption across industries, the rise of artificial intelligence—all are external changes that strategic PEST analysis might have anticipated and prepared organizations to address.
The four factors
Each dimension examines different forces:
Political factors
Government influence. How do governments shape business conditions?[2]
Specific elements. Tax policy, labor law, environmental regulations, trade restrictions, tariffs, political stability, government spending priorities.
Examples. Changes in minimum wage laws affect labor costs. Trade agreements open or close export markets.
Economic factors
Economic conditions. What is the state of the economy and how might it change?[3]
Specific elements. Economic growth rates, inflation, interest rates, unemployment, exchange rates, consumer and business confidence, disposable income.
Examples. Rising interest rates increase borrowing costs. Economic recession reduces consumer spending.
Social factors
Societal forces. What demographic, cultural, and social trends affect demand and operations?[4]
Specific elements. Population growth and age distribution, health consciousness, education levels, cultural attitudes, lifestyle trends, career expectations.
Examples. Aging populations increase demand for healthcare. Growing environmental awareness shifts consumer preferences.
Technological factors
Technology dynamics. How is technology changing and what are the implications?[5]
Specific elements. Research and development activity, automation, technology incentives, rate of technological change, digital disruption.
Examples. E-commerce growth disrupts traditional retail. Artificial intelligence transforms manufacturing processes.
Extended frameworks
Variants add dimensions:
PESTLE
Legal. Separate from political, focuses on regulatory compliance—consumer protection, employment law, health and safety[6].
Environmental. Ecological and environmental issues—climate change, sustainability pressures, environmental regulations.
Other extensions
STEEPLE. Adds Ethical considerations.
DESTEP. Reorders factors with Demographic as distinct category.
Conducting the analysis
Effective PEST analysis involves:
Identify relevant factors. Not all factors matter equally—focus on those most likely to affect your industry and organization.
Gather information. Use diverse sources: government publications, industry reports, academic research, news media[7].
Assess implications. For each factor, consider: Is this an opportunity or threat? What's the potential impact? How likely is it?
Link to strategy. Connect findings to strategic decisions—market entry, product development, resource allocation.
Relationship with SWOT
PEST and SWOT analysis complement each other:
External focus. PEST identifies macro-environmental forces; these feed into the Opportunities and Threats quadrants of SWOT[8].
Internal completion. SWOT adds internal analysis (Strengths, Weaknesses) that PEST doesn't address.
Sequential use. Often PEST is conducted first, then findings are incorporated into SWOT analysis.
| PEST analysis — recommended articles |
| SWOT analysis — Strategic management — Environmental scanning — Strategic planning |
References
- Aguilar F.J. (1967), Scanning the Business Environment, Macmillan.
- Johnson G., Whittington R., Scholes K. (2017), Exploring Strategy, 11th Edition, Pearson.
- CIPD (2024), PESTLE Analysis Factsheet.
- CFI (2024), PESTLE Analysis.
Footnotes
- ↑ Aguilar F.J. (1967), Scanning the Business Environment, p.32
- ↑ Johnson G. et al. (2017), Exploring Strategy, pp.45-62
- ↑ CIPD (2024), PESTLE Analysis Factsheet
- ↑ CFI (2024), PESTLE Analysis
- ↑ Aguilar F.J. (1967), Scanning the Business Environment, pp.67-82
- ↑ Johnson G. et al. (2017), Exploring Strategy, pp.89-104
- ↑ CIPD (2024), PESTLE Analysis Factsheet
- ↑ CFI (2024), PESTLE Analysis
Author: Sławomir Wawak