PEST Analysis

In the discussion on SWOT analysis as a tool for strategy development, we talked about internal factors (strengths and weaknesses) and external factors (opportunities and threats) that can have an impact on business. In this post, we introduce another useful strategy framework – PEST Analysis.

Introduction and Definition

PEST analysis is a framework that helps ascertain aspects of various external factors (political, economic, sociological, and technological, or PEST) that can mean opportunities or threats for a business concern.

The main difference between a SWOT analysis and a PEST analysis is that while SWOT identifies the overall feasibility of a business proposition or idea at a point in time, a PEST analysis evaluates the market a company hopes to enter.

Although the quality of leadership and extent of financial resources decide a company’s future, the macro-environmental milieu represented by the PEST factors also greatly influence its prospects.

The most important aspect of these factors is that a company or business has no control over them and can only manage them as best as it can. This is why it has to evolve strategies to counter these factors, and this is where an analysis of the factors helps.

PEST analysis template

How exactly do PEST factors impact a business? Let us consider each factor.

Image Credit: creately.com

Political factors

The policies of the government of the country where the business is operating have a big say on the sustainability and profitability of the business. For example, a strict health and safety policy would require a restaurant chain to invest more in systems to ensure hygiene.

Here are some other points to ponder:
– What is the political ideology of the government?
– Is the government socialist-leaning, or does it favour a completely free market economy?
– Will the government’s policies influence laws, regulation, or taxes?
– What is the government’s approach to trade and labour laws?
– What is the level of political stability?
– What is the level of corruption?

A business may also have to take into account local laws, too.

Economic factors

The economic climate would obviously affect the future of a business. Among issues to consider when analysing the economic environment are the business cycle (whether it is a time of boom or recession), rate of economic growth, rate of inflation, economic stability, and employment policy.

For example, the rate of inflation would be a major factor in fixing employee wages, and the higher the inflation, the higher the wages and the higher the business expenditure.

Social factors

Social factors include the social, religious, and culture mores of the society where a business is operating and serving its customers.

Social factors bring under its sway demographics aspects, such as the average age and income of the population, level of education, and general outlook on life (whether liberal or conservative), and lifestyle preferences.

For example, a cell phone manufacturer probably cannot expect to sell a very high number of a high-end model in a society dominated by blue-collar workers.

Technological factors

A study of the technological factors in an external environment would focus on the leverage the use of technology would give a business.

Among questions to ponder are these:
– What level of automation is available?
– What is the scope for research and innovation?
– Is there adequate facility for online business?

For example, a garment retailer will be able to reduce costs by adopting online sales and reducing dependence on brick-and-mortar showrooms.

The PEST factors may affect companies differently. For example, a home appliance company would be more affected by social factors such as lifestyle than a defence equipment manufacturer.

Similarly, a global defence equipment manufacturer may be more affected by political factors and a government’s policy on whether to outsource defence procurement.