What is PEST analysis?
PEST analysis (Political, Economic, Social, Technological) is a management technique that allows an organization to evaluate the main external factors that influence its operations in order to increase its competitiveness in the market. These four areas, as described by the acronym, are central to this model.
A variation of the PEST analysis format that is particularly popular in the UK is the PESTLE strategic planning approach, which includes additional legal and environmental aspects.
- PEST analysis stands for Political, Economic, Social, and Technical.
- This type of analysis is used to evaluate external factors that can affect a company's profitability.
- Generally, it is more effective for larger organizations, which are more likely to be affected by macro events.
- PEST analysis is commonly used in conjunction with SWOT analysis, which represents strengths, weaknesses, opportunities, and threats.
Understanding PEST analysis
PEST analysis is believed to have first been introduced by Harvard University professor Francis J. Aguilar under the name ETPS. In his 1967 publication “Scanning the Business Environment,” Aguilar showed that economic, technological, political, and social factors have a major impact on the business environment. The letters were then rearranged to create the useful and quirky acronyms we use today.
At the heart of PEST analysis is the belief that a comprehensive assessment of the key impact areas that affect not only the organization itself, but the sector in which it is located, can facilitate more effective strategic planning.
This planning helps organizations stay ahead of their competitors by making the most of the current situation, forewarning impending changes, and better preparing.
Components of PEST analysis
Political: The political dimension of PEST analysis focuses on areas where changes in government policies or laws affect the economy, a particular industry, or the organization in question. Policy areas that may particularly impact your organization include tax law and employment law. The general political situation and international relations of a country or region can also have a significant impact on an organization.
Economic: The economic part of the analysis covers key factors such as interest rates and exchange rates, economic growth, supply and demand, inflation, and economic recession.
Socializing: Social factors that may be included in a PEST analysis include demographic and age distribution, cultural attitudes, and workplace and lifestyle trends.
Technology: The technological component considers the specific role and development of technology within a field or organization, as well as its broader uses, trends, and changes. Government spending on technology research may also be of interest in this area.
Application of PEST analysis
PEST analysis helps organizations recognize and exploit opportunities presented by existing conditions in their business environment. It can also be used to identify current or potential future challenges so that you can effectively plan how to best address these challenges.
PEST analysis can also be applied in assessing an organization's internal structure to identify strengths and weaknesses in the organization's internal politics, economic outlook, social climate, and technology infrastructure. The results of this analysis drive changes and improvements in areas identified as substandard.
PEST analysis provides more comprehensive results when used in conjunction with other forms of strategic business analysis, such as the SWOT (Strengths, Weaknesses, Opportunities, and Threats) model. Comparing these completed analyzes provides a very solid foundation for informed decision making.
What is PEST vs. PESTLE analysis?
PEST analysis stands for “Political, Economic, Social, and Technical” while PESTLE stands for the same but adds “legal” and “environmental” elements to the analysis. These areas are taken into account when assessing the impact of external factors on a company's profitability.
How is PEST analysis performed?
To perform a PEST analysis, you need to consider the different factors in each category (political, economic, social, and technological) and how those factors affect your business. For political factors, we evaluate, for example, laws, regulations, government policies, and tariffs. For economic factors, we evaluate topics such as access to financing, cost of living, interest rates, inflation, and labor costs. Social factors include consumer trends and behavior, education, wealth distribution, population growth, and health. The technology component evaluates areas such as growth in artificial intelligence, innovation, research and development, social networking, and cybersecurity.
How often should I perform a PEST analysis?
A PEST analysis can be run as many times as a company desires. We recommend performing a PEST analysis whenever there are significant changes that may impact your business, such as changes in interest rates, new government policies, or the introduction of new technology. It needs to be done often so it doesn't become outdated.
By analyzing the political, economic, social, and technological factors that affect business, companies can plan, reorganize, and adapt to these external factors to make their operations more successful. Masu. The success of a business depends not only on how well it manages its operations internally, but also on how it functions in the larger world. PEST analysis can help you succeed on that front.