What is PEST Analysis?
The PEST analysis (political, economic, social, and technological) serves as a management method through which an organisation can evaluate significant external factors influencing its operations, thereby enhancing competitiveness in the market. As indicated by the acronym, these four areas are integral to this model.
A widely adopted variation of the PEST analysis format, particularly in the U.K., is the PESTLE strategic planning approach. This extended framework incorporates additional elements, specifically legal and environmental considerations, providing a more comprehensive perspective for organisations when analysing the external landscape.
Origins and Significance of PEST Analysis
The concept of PEST analysis was originally introduced under the acronym ETPS by Harvard professor Francis J. Aguilar. In his 1967 publication, “Scanning the Business Environment,” Aguilar identified economic, technical, political, and social factors as key influencers in the business environment. Afterwards, the letters were rearranged to the convenient acronym used today.
At the core of PEST analysis lies the belief that conducting a comprehensive assessment of the primary areas of influence affecting both the industry in which an organisation operates and the organisation itself can greatly enhance strategic planning.
This planning aims to optimise the organisation’s ability to leverage existing conditions, while also providing early awareness and preparedness for impending changes. This proactive approach allows the organisation to maintain a competitive edge by staying ahead of potential challenges posed by competitors.
Components of PEST Analysis
The political aspect of PEST analysis focuses on how government policies and legislative changes impact the economy, the specific industry, and the organisation under consideration. Areas of policy that can significantly affect an organisation include tax and employment laws. The overall political climate of a nation or region, along with international relations, can also exert a profound influence on the organisation.
The economic segment of the analysis hones in on key factors such as interest and exchange rates, economic growth, supply and demand dynamics, inflation, and recession indicators.
The social factors encompassed in a PEST analysis include demographics and age distribution, cultural attitudes, as well as workplace and lifestyle trends.
The technological component takes into account the specific role and development of technologies within the sector and organisation, along with broader trends, uses, and changes in technology. Government spending on technological research may also be a noteworthy consideration in this domain.
How to Use PEST Analysis
A PEST analysis plays a key role in helping an organisation to recognise and capitalise on opportunities presented by prevailing conditions in the business environment. It is equally valuable for identifying existing or potential future challenges, enabling effective planning for their optimal management.
Moreover, PEST analysis can extend its application to evaluating the internal structure of an organisation, determining strengths and weaknesses across its political, economic, social, and technological areas. The insights obtained from this analysis can then serve as a catalyst for necessary changes or improvements in areas identified as substandard.
When combined with other strategic business analysis models, such as the SWOT (Strengths, Weaknesses, Opportunities, and Threats) framework, PEST analysis enhances the comprehensiveness of the results obtained. Conducting a comparative analysis between these assessments establishes a solid foundation for logical decision-making.
What distinguishes PEST from PESTLE Analysis?
PEST analysis includes the assessment of political, economic, social, and technological factors, whereas PESTLE analysis incorporates the same elements and extends its scope by including legal and environmental factors. These areas are integral in evaluating how external factors influence a company’s profitability.
How often should a PEST analysis be conducted?
A PEST analysis can be conducted as frequently as desired by a business. It is advisable to perform a PEST analysis when notable changes occur that could affect the business, such as shifts in interest rates, the implementation of new government policies, or the introduction of innovative technologies. Regular assessments are essential to prevent the analysis from becoming outdated.
Through the analysis of political, economic, societal, and technological factors influencing its business, a company can strategically plan, reorganise, and adapt to these external forces, thereby enhancing its chances of becoming a more successful operation.
The success of a business is contingent not only on its internal management but also on how effectively it navigates the broader external environment. PEST analysis serves as a valuable tool in achieving success in this aspect.
DISCLAIMER: This article is for informational purposes only and does not constitute official business advice.