PEST analysis is a useful tool for any business. Easy to use and understand, PEST analysis provides a methodology for critically examining the external factors that may affect the business itself, its operations and/or its strategy. The most important aspect to remember is that PEST analysis is nothing more than a framework for determining the external factors that may affect a business. PEST analysis itself is not intended as a rigid structure that requires lists upon lists in tightly defined categories. The greatest strength of PEST analysis is its ability to facilitate brainstorming about factors that are outside the company’s control but which affect the business nevertheless. The relative effectiveness of PEST analysis will vary based upon the industry and the good/services produced by a company. PEST analysis is best used in scenarios where a new location, product or service is considered, a potential acquisition or merger is judged, or the current relation of a business, product, service or brand is evaluated in regards to its market.
History and Use
PEST is a type of analysis used in strategic management which takes into account Political, Economic, Social and Technological (PEST) factors. The term “PEST” was first coined by Francis Aguilar in his 1967 book, "Scanning the Business Environment." The analysis also often includes Legal and Environmental factors, thus creating a PESTEL analysis. The “EL” was added by Liam Fahey and V.K. Narayanan in their book, "Macro-environmental Analysis in Strategic Management," published in 1986. Frequently combined with Michael E. Porter’s Five Forces Model and Albert Humphrey’s SWOT analysis, PESTLE analysis is a useful tool for understanding market demand/decline, current business positions and potential opportunities/obstacles. The factors it analyzes should not be considered solely at the company level. Rather, these external factors must be examined at a company, national and global level.
This can be seen as the degree by which government legislation impacts the company. Some examples include tax policy, trade restrictions and tariffs. Less obvious examples include inter-country relationships, political trends, types of government, war, terrorism, treaties and currency.
While closely related to political factors, the economic factors analyzed by PESTEL analysis focus more on the monetary impact created thereby. Examples include exchange rates, interest rates, inflation, import/export levels, consumer confidence, capital markets and job growth rates.
The social factors considered (also called socio-cultural factors) refer to those factors that result from society’s changing tastes, preferences and demands. Examples include disposable income, age distribution, population growth rate, education, diversity, living standards and cultural attitudes.
Technological factors include those within the company, such as research and development, and those of complementary companies and competitors, such as new innovations and advancements. Other technological factors include transportation, communications and the Internet.
Environmental factors include climate change, climate and weather, as well as attitudes toward the environment.
Legal factors to be considered, both domestically and in regard to any country in which the company does business, include antitrust law, consumer law, employment law, health and safety law, and corporate law.