PEST analysis

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A PEST analysis is a very useful framework which helps organisations identify and understand external factors. These factors (also called macro-environmental factors) impact on organisations significantly; therefore, understanding them is very important for strategic managers. A PEST analysis helps managers explore potential risks specific to their industry and organisation, and in fact, they can the tool in a number of situations.

History of PEST analysis

PEST model has been developed over the years and has a number of variations e.g. STEP, PESTEL, STEEPLE etc. However, Francis Aguilar (a Harvard professor) is widely considered the originator of the model. He used ETPS in his book ‘Scanning the Business Environment’ in 1967. ETPS stands for Economic, Technological, Political and Social environment. The term PEST came in business literature much later. It stands for Political, Economic, Social, and Technological environment.

Political factors

Political factors help you understand the role and intervention of a government in the economy and/or a particular industry. These factors are but not limited to tax policy, tariffs, future legislation, government term and change, funding and grants, employment law, environmental law, trade restrictions, regulatory bodies, political stability, wars, and conflicts. These factors often have an impact on organisations and how they operate. Therefore, organisations need to adapt and develop their business strategies in line with these factors.

Economic factors

There are a number of economic factors that can have an impact on how an organisation does business and how profitable it is. These factors are but not limited to the type of economy (command, mixed, free market) economic trends, economic growth, interest rates, exchange rates, inflation, minimum wage, working hours, unemployment (both local and national) and credit availability, cost of living, and international monetary issues.

Social factors

The social environment represents everything which is social and cultural within a country or society. Factors such as demography, population growth, age distribution, health consciousness, consumer attitudes and opinions, consumer culture, motivation, lifestyle, consumer buying behaviour, ethnic background, and religions impact on what organisations offer to their customers. It is worth noting that socio-cultural influences on business may vary dramatically from country to country.

Technological factors

Technology impacts on the processes and functions of virtually all businesses to some degree. Therefore, the question remains as to how efficiently an organisation can make use of technology. Technology is extremely vital for competitive advantage, and is one of the major drivers of globalisation. As a manager, you need to keep pace with competing technology development, information and communication systems, compatibility of technology, accessibility of technology and so forth. It is not hard to imagine how fast the technological landscape is changing, and how significantly they impact on organisations.

Companies such as Google, Microsoft, Apple, Amazon, eBay, Facebook, Rolls Royce, JCB, Coca-Cola, Wal-Mart, and many others have used technology to develop creative ways of producing goods and services; to develop new and alternative ways of distributing goods and services; and to develop new ways of communicating with target customers.

How to do a PEST analysis

There are four typical steps to do a PEST analysis. These are as follows:

1st step: Identify and collect information concerning political, economic, social, and technological factors that can impact on your business.

2nd step: Identify opportunities that may emerge from these factors.

3rd step: Identify threats and challenges which may be caused by them.

4th step: Take appropriate actions. Use the information for which you have collected them.

We hope the article has helped you explore the PEST analysis model. You may also like reading PESTEL analysis of the USA and PESTEL analysis of ASDA. If you liked this article, please share it by clicking on the icons below.

The article publication date: 24 November 2017

Further reading/references

Johnson, G., Scholes, K. and Whittington, R. (2006) Exploring Corporate Strategy: Text and Cases, 7th Edition, UK: Prentice Hall

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Author: M Rahman

M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.