PEST Analysis

DEFINITION of 'PEST Analysis'

PEST Analysis (Political, Economic, Social, and Technological) is a method whereby an organization can assess major external factors that influence its operation in order to become more competitive in the market. As described by the acronym, those four areas are central to this model.

A popular variation on the PEST Analysis format, especially in the UK, is the PESTLE strategic planning approach, which includes the additional aspects of Legal and Environmental.

BREAKING DOWN 'PEST Analysis'

It is believed that PEST Analysis was first introduced under the name ETPS by Harvard professor Francis J. Aguilar. In the 1967 publication, "Scanning the Business Environment," Aguilar presented the Economic, Technical, Political, and Social factors as being major influences on the business environment. Subsequently, the letters were rearranged to create the convenient and quirky acronym used today.

The Areas Assessed by PEST Analysis

A comprehensive assessment of the major areas of influence that affect the sector in which an organization is positioned, as well as the organization itself, can facilitate more effective strategic planning. This planning can be undertaken to maximize the organization’s ability to capitalize on conditions as they exist, and to be forewarned of and better prepared for imminent changes, allowing the organization to stay ahead of competitors.

P - The Political aspect of PEST Analysis focuses on the areas in which government policy and/or changes in legislation affect the economy, the specific industry, and the organization in question. Areas of policy which may particularly impact an organization include tax laws and employment laws. The general political climate of a nation or region, as well as international relations, can also greatly influence the organization.  

E - The Economic portion of the analysis targets the key factors of interest and exchange rates, economic growth, supply and demand, inflation, and recession.

S - The Social factors which may be included in a PEST Analysis are demographics and age distribution, cultural attitudes, and workplace and lifestyle trends.

T - The Technological component considers the specific role and development of technologies within the sector and organization, as well as the wider uses, trends, and changes in technology. Government spending on technological research may also be a point of interest in this area.

Applications of PEST Analysis

PEST Analysis can assist an organization in recognizing and thereby capitalizing on opportunities offered by existing conditions in the business environment. It can also be used for identifying current or possible future challenges, allowing for effective planning of how to best manage these challenges.

PEST Analysis can also be applied in assessing the in-house structure of an organization in order to identify strengths and weakness in the internal politics, economic outlook, social climate, and technology base within the organization. The results of this analysis can facilitate changes or improvements in areas identified as sub-par.

PEST Analysis can be used in conjunction with other forms of strategic business analysis, such as the SWOT (Strengths, Weaknesses, Opportunities and Threats) model, for an even more comprehensive result. Conducting a comparison between these completed analyses can provide a very solid basis for informed decision making.