PEST analysis

PEST analysis is one of the most popular and simple method for strategic analysis of organization’s macro environment containing four group of factors: Political, Economic, Social and Technological.

Macro environment has a significant effect on business entities’ activities, but most importantly these forces and factors are independent from activities of company and its management. Due to increasing rate of change in environment management has to continuously monitor, identify and observe trends of all important factors influencing its strategy.

PEST analysis factors

• Political - first step of a PEST analysis is a study of political factors which could create plenty of advantages and opportunities for organizations. These factors include: political situation, political stability, state legislation, market regulations, state interference, trade agreements, tariffs or restrictions, taxes, lobbying and clarity of law, and other legal factors affecting business.

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• Economical - second step of PEST analysis is focused on economic factors. Interest rates and fiscal policy creates overall economic conditions, influencing purchasing power of consumers and structure of their expenditure. These factors include: gross domestic product (GDP), demand, stock market, currency rate fluctuations, rate of inflations, market substitutes, complementary products, tax policy, commodity price changes, revenues and savings of consumers and level of unemployment.

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Fig. 1. PEST analysis framework

• Social - third step of a PEST analysis concentrates around society. Social forces influence consumer's attitudes, interests, opinions, behaviour and ultimately purchase decisions. Changes in trends have direct impact on enterprises. These factors contain: demography, structure of population, rates of increase/decrease, competition, traditions, level of education, cultural diversity and values, ethics, religion, fashion, social group pressures.

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• Technological - fourth step of PEST analysis involves technology. Technological advances have greatly changed the manner in which businesses operate. Nowadays technological and scientific progress in developing society is getting faster and leads to new products, services and consumer needs and expectations. These factors include: new production technologies, absorptive capacity for innovation, globalization in communication. New technologies shorten product life cycle and increase demand for new products. Technological revolution has also increased the rate at which information is exchanged between companies, suppliers, consumers and other stakeholders and it forces companies to increase speed of response to changes in technology and market conditions.

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Above mentioned external environment factors, can have both positive influence (then they are called opportunities) or negative influence (and then they are called threats). Theory and practice of management science led to the development of many variants of strategic external environment analysis. Most notable and worth mentioning are: PESTEL analysis, PESTLE analysis, PESTLED analysis, STEEP analysis, STEPLE and STEEPLE analysis.

Examples of PEST analysis

• Political: The political environment of an organization can be affected by changes in government policies, taxation, legislation, trade barriers and regulations. For example, changes in government regulations on data protection could have a significant impact on the operations of an online marketing company.
• Economic: The economic environment of an organization can be affected by changes in economic activity, inflation, exchange rates and interest rates. For example, a company specializing in luxury goods may be adversely affected by an economic downturn, where people are less willing to spend money on discretionary items.
• Social: The social environment of an organization can be affected by changes in demographics, lifestyle changes, and attitudes of the population. For example, a fast food company may need to adjust its marketing strategy to target a different demographic group, such as millennials, in order to remain competitive.
• Technological: The technological environment of an organization can be affected by changes in technology, research and development, automation, and new inventions. For example, a traditional manufacturing company may need to invest in new machinery in order to remain competitive as automation becomes more prevalent.

Advantages of PEST analysis

PEST analysis is a popular and simple method for strategic management and analysis of an organization’s macro environment. The following are the advantages of the PEST analysis:

• It allows managers to identify and analyze external factors that may have an impact on their business. For example, understanding the effects of political, economic, social and technological changes can help managers make informed decisions about how to adapt their business practices.
• It helps managers to keep track of changes in their external environment and assess potential risks and opportunities. Being aware of potential changes in the market can help managers plan for the future.
• It helps to identify areas where the organization may need to adjust its strategy. For example, if the organization is facing new political or economic changes, it may need to shift its focus or adjust its business plans to remain competitive.
• It provides a comprehensive overview of the external environment. By considering all the factors, managers can make informed decisions that take into account the big picture.

Limitations of PEST analysis

PEST analysis is a useful tool for organizations to analyze their external environment, but it has certain limitations:

• It does not consider internal factors or any legal elements, such as regulations or laws.
• It does not take into account the interrelation between the four main factors.
• It does not offer any concrete solutions for the external environment.
• It is a static analysis, meaning it does not take into account changes in the external environment over time.
• It does not consider changes in the competitive landscape, such as new competitors entering the market.
• It does not provide any indication of the potential impact of changes in the external environment on the organization.

Other approaches related to PEST analysis

PEST analysis is one of the most popular and simple methods for strategic management and strategic analysis of the organization’s macro-environment containing four groups of factors: Political, Economic, Social and Technological. There are also other approaches related to PEST analysis, such as:

• SWOT analysis - a strategic planning tool used to evaluate the Strengths, Weaknesses, Opportunities, and Threats in a business environment.
• Porters Five Forces model - a tool used to analyze the competitive environment of an industry, by assessing the five forces of competition: threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, and rivalry among existing firms.
• Industry Life Cycle analysis - an analysis that looks at the stages of a particular industry’s development and the potential opportunities and threats related to them.
• Political-legal analysis - an analysis of the political, legal and regulatory environment of a business and the potential risks and opportunities related to it.

In summary, there are several approaches related to PEST analysis and each of them provides a different perspective on the external environment of a business.

PEST analysis — recommended articles

Macro environment analysis — STEEPLE analysis — External analysis — STEEP analysis — Factors affecting business — Industry environment — Environmental factors affecting business — Opportunities and threats — Market environment

References

• Bowman, C. (1998). Strategy in practice (p. 201). Prentice Hall Europe.
• Burt, G., Wright, G., Bradfield, R., Cairns, G., & Van Der Heijden, K. (2006). The role of scenario planning in exploring the environment in view of the limitations of PEST and its derivatives. International Studies of Management & Organization, 36(3), 50-76.
• Carruthers, H. (2009). Using PEST analysis to improve business performance. In Practice (0263841X), 31(1).
• Koumparoulis, D. N. (2013). PEST Analysis: The case of E-shop. International Journal of Economy, Management and Social Sciences, 2(2), 31-36.
• Peng, G. C. A., & Nunes, M. B. (2007, July). Using PEST analysis as a tool for refining and focusing contexts for information systems research. In 6th European conference on research methodology for business and management studies, Lisbon, Portugal (p. 229-236).
• Pearce, J. A., Robinson, R. B., & Subramanian, R. (2000). Strategic management: Formulation, implementation, and control. Columbus, OH: Irwin/McGraw-Hill.

Author: Weronika Winkowska