PEST Analysis is a simple, useful and widely-used tool that helps you understand the "big picture" of your Political, Economic, Socio-Cultural and Technological environment. As such, it is used by business leaders worldwide to build their vision of the future.
It is important for these reasons:
First, by making effective use of PEST Analysis, you ensure that what you are doing is aligned positively with the powerful forces of change that are affecting our world. By taking advantage of change, you are much more likely to be successful than if your activities oppose it;
Second, good use of PEST Analysis helps you avoid taking action that is doomed to failure from the outset, for reasons beyond your control; and
Third, PEST is useful when you start operating in a new country or region. Use of PEST helps you break free of unconscious assumptions, and helps you quickly adapt to the realities of the new environment.
How to use the tool:
PEST is a simple mnemonic standing for Political, Economic, Socio-Cultural and Technological.
To use this tool, follow this three stage process:
Brainstorm the relevant factors that apply to you;
Identify the information that applies to these factors; and
Draw conclusions from this information.
To download our free worksheet to record your analysis, click here!
Tip:The important point is to move from the second step to the third step: it is sterile just to describe factors without thinking through what they mean. However, be careful not to assume that your analysis is perfect: use it as a starting point, and test your conclusions against the reality you experience.
The following factors may help as a starting point for brainstorming (but make sure you include other factors that may be appropriate to your situation):
Political:
Government type and stability
Freedom of press, rule of law and levels of bureaucracy and corruption
Regulation and de-regulation trends
Social and employment legislation
Tax policy, and trade and tariff controls
Environmental and consumer-protection legislation
Likely changes in the political environment
Economic:
Stage of business cycle
Current and project economic growth, inflation and interest rates
Unemployment and labor supply
Labor costs
Levels of disposable income and income distribution
Impact of globalization
Likely impact of technological or other change on the economy
Likely changes in the economic environment
Socio-Cultural:
Population growth rate and age profile
Population health, education and social mobility, and attitudes to these
Population employment patterns, job market freedom and attitudes to work
Press attitudes, public opinion, social attitudes and social taboos
Lifestyle choices and attitudes to these
Socio-Cultural changes
Technological Environment:
Impact of emerging technologies
Impact of Internet, reduction in communications costs and increased remote working
Research and Development activity
Impact of technology transfer
Figure 1 below shows this in diagrammatic format:
Figure 1: PEST Analysis in Diagrammatic Format
Other forms of PEST - PESTLE, PESTLIED, STEEPLE and SLEPT:
Some people prefer to use different flavors of PEST Analysis, using other factors for different situations. The variants are:
PESTLE/PESTEL: Political, Economic, Sociological, Technological, Legal, Environmental;
PESTLIED: Political, Economic, Social, Technological, Legal, International, Environmental, Demographic;
STEEPLE: Social/Demographic, Technological, Economic, Environmental, Political, Legal, Ethical; and
SLEPT: Social, Legal, Economic, Political, Technological
Choose the flavor that most suits you!
Example:
We’re going to avoid giving an example here, because of the huge potential for causing offense: few societies seem perfect to outsiders, and there are few things as irritating as having an outsider criticize one's own country...
However, a broad principle is that things that make activity more difficult for people or organizations raise the cost of doing business: business is either stopped altogether, or costs more as people spend time and money circumventing difficulties. The higher the cost of doing business in a region, the more project profitability is squeezed or eliminated. And given that businesspeople normally have at least some level of intelligence, businesses and projects that could otherwise operate are never launched - meaning that less economic activity takes place. (The lower the amount of economic activity, the poorer and less capable societies tend to be.)
Another broad principle is wherever there is rapid or major change in an area, there are likely to be new opportunities and threats that arise. Smart people and companies will take advantage of the opportunities and manage the threats.
And do remember that few situations are perfect: it is up to us to make the most of the situation in which we find ourselves.
Key Points:
PEST Analysis is a useful tool for understanding the “big picture” of the environment in which you are operating, and the opportunities and threats that lie within it. By understanding your environment, you can take advantage of the opportunities and minimize the threats.PEST is a mnemonic standing for Political, Economic, Social and Technological. These headings are used firstly to brainstorm the characteristics of a country or region and, from this, draw conclusions as to the significant forces of change operating within it.
This provides the context within which more detailed planning can take place to take full advantage of the opportunities that present themselves.
