What Is PEST Analysis? Its Applications and Uses in Business

What Is PEST Analysis?

PEST analysis (political, economic, social, and technological) is a management 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 U.K., is the PESTLE strategic planning approach, which includes the additional aspects of legal and environmental.

Understanding 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 a convenient and quirky acronym used today.

The core of PEST analysis is the belief that 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.

Components of PEST Analysis

Political: 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 that may particularly affect an organization include tax and employment laws. The general political climate of a nation or region, as well as international relations, can also greatly influence the organization.

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

Social: The social factors that may be included in a PEST analysis are demographics and age distribution, cultural attitudes, and workplace and lifestyle trends.

Technological: 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 weaknesses in its internal politics, economic outlook, social climate, and technology base. The results of this analysis can facilitate changes or improvements in areas identified as subpar.

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.

The Bottom Line

By analyzing the political, economic, societal, and technological factors that impact its business, a company can plan, reorganize, and adjust to these external factors in order to become a more successful operation. A business's success is not only predicated on how well it internally manages its operations but also on how it functions in the larger world. PEST analysis helps it to succeed in that aspect.