What is a PEST analysis? How do I do a PEST analysis?

Introduction

A PEST analysis (also sometimes called STEP, STEEP or PESTLE analysis) looks at the external business environment.

In fact, it would be better to call this kind of analysis a business environmental analysis but the acronym PEST is easy to remember and so has stuck. PEST stands for Political, Economic, Sociocultural and Technological. (Technological factors in this case, include ecological and environmental aspects – the second E in STEEP and PESTLE, while the L in PESTLE stands for legal or legislative which are included among Political factors, when using the PEST acronym). The analysis examines the impact of each of these factors (and their interplay with each other) on the business. The results can then be used to take advantage of opportunities and to make contingency plans for threats when preparing business and strategic plans.

Political Factors

When examining political factors, you need to look at any political changes that could effect your business. What laws are being drafted? What global changes are occurring? Legislation on maternity rights, data protection, health and safety, environmental policy, etc. should also be considered.

As an example, take a company employing a large number of women. Changes in maternity rights and/or paternity rights may have a major impact on such a business – and the alert business will keep an eye out for changes in such legislation.

Economic Factors

Often the political factors spill over into economic factors. Politicians don’t operate in a vacuum, and many political changes result from changes in the economy or in social and cultural mores. 

For example tax is usually decided by politicians based on a mixture of political and economic factors – such as what is the state of the economy. Interest rates, in many countries are decided by a central bank, but political factors may still be important. The fall of the Soviet Union in 1991  caught most businesses and Western Governments by surprise – but not all. Some companies – notably Shell Petroleum – had picked up signals that all was not well in Russia. Many of these were related to economic problems within the Soviet Union.

In Europe, politicians drove the introduction of the Euro but the impacts include economic factors: cross-border pricing, European interest rates, bank charges, price transparency and so on – and the crises that impacted Southern Europe (and especially Greece) can be traced to disparities between the different economies in Europe. The 2016 referendum in the UK to leave the EU (Brexit) also has economic ramifications - that will impact the overall EU for several years, although many of the issues that led to the Brexit vote were also political and social. 

Other economic factors include exchange rates, inflation levels, income growth, debt and saving levels (which impact available money), tariffs and consumer and business confidence. The changes in tariffs for many goods from China to the USA has an economic impact although the decisions relating to these changes have been political - again showing the interplay between factors. 

These areas are national and global, but it is also important to look at factors affecting individual industries. There can be narrow industry measures that become important. Issues such as the availability of skilled labour or raw-material costs can impact industries in different ways. For example, are paper costs rising? For a book, magazine or newspaper publisher, the price of paper is a crucial economic measure. Another example is the UK software industry which has complained of a shortage of computer programmers – driving up wage costs. Again – the global picture can be important. Some companies are now using programmers in countries like India for software development. This helps them keep costs down – and leads to competitive advantage over companies with higher costs.

Social Factors

All this influences and is influenced by social factors – the elements that build society. Social factors influence people’s choices and include the beliefs, values and attitudes of society. So understanding changes in this area can be crucial and can lead to political and societal change. Typical things to look at for each of these include:

• consumer attitudes to your product and industry
• demographic changes – in an aging population, will a product targeted at a youth market succeed?
• environmental issues (especially if your product involves hazardous or potentially damaging production processes)
• the role of women in society;
• attitudes to health;
• attitudes to wealth;
• attitudes to age (children, the elderly, etc.);
• views on gender, work and leisure….

Added complications when looking at social and cultural factors are differences in national, ethnic and social groups. Not all groups have the same attitudes – and this influences how they view various products and services.

Technological Factors

Advances in technology can have a major impact on business success – with companies that fail to keep up often going out of business. Technological change impacts political and economic factors as well as socio-cultural attitudes. For example the way people spend their leisure has changed dramatically over the last 30 or so years. As well as advances in your own industry, think about the likely impact of new technologies – the "Internet of Things", nanotechnology, 3D-printing, and the increasing advances in computing and computers (and especially artificial intelligence / AI developments). Look out for any technology that could make producing your product easier (e.g. 3D-printing). Also watch out for the technology that could make your product obsolete.

As an example, think about the potential impact that video-conferencing could have on the business travel market. Why spend hours and much money travelling some distance for a meeting, when all participants can join in – face-to-face – through a video-conference that lacks only the physical presence of the attendees.

Another example is the Internet and e-commerce. The Internet has had a major influence on the ways consumers and businesses research and purchase products. Whereas in the early and mid-1990s, it was rare for consumers to consider cross-border purchases this is now common via services such as eBay, with the result that even small businesses can now serve a global market. Politicians are still coming to grips with the tax issues involved! Meanwhile the music industry has still not found a fully effective solution to the threat posed by the successors to Napster and music streaming (e.g. Spotify, Pandora, etc.), and the cinema/movie industry is also being challenged by the availability of peer-to-peer networks facilitating easy and free downloads of the latest blockbuster films. Environmental factors to consider here include the impact of climate change: water and winter fuel costs could change dramatically if the world warms by only a couple of degrees.

Compiling a PEST analysis

One way of compiling a PEST analysis for your business is to take a LARGE sheet of paper. In the top left corner, put the heading Political; in the top right corner, Economic; bottom left = Socio-cultural; bottom right= Technological.

For each heading, think of every factor that could possibly have an impact on your business. Think laterally – just because something seems unlikely does not mean that it will not have an influence in the future. You need to consider each PEST factor as they all play a part in determining your overall business environment. Thus, when looking at political factors you should consider the impact of any political or legislative changes that could impact your business. If you are operating in more than one country then you will need to look at each country in turn. Political factors include aspects such as laws on parental rights, data protection and even environmental policy: these three examples alone have an impact on employment terms, information access, product specification and business processes in many businesses globally.

Having compiled a list of key factors, think of inter-relationships between factors. For example, the rise of the Internet (technological factor) is  influencing consumer purchasing (social factors) – while an awareness of prices in other markets through electronic commerce may lead to a narrowing of cross-border price differences (economic).

Connect up all inter-related factors. You will find that some areas have more connections than others. These are often the areas that will have the greatest potential impact on your company. These are the aspects that you most need to be aware of, in your marketing planning – and represent future opportunities and threats.

The final stage in a PEST analysis is to use the results.

Prepare contingency plans for any threats identified. If there are factors that lead to business opportunities, then include these in your planning. For example, your target customer group may be growing faster than other sectors. This is an opportunity to increase production to take advantage of more potential customers.

However before you can use the results effectively, you should also develop an understanding of your own companies capabilities. This comes from a SWOT analysis.

We’ve led workshops on both PEST and SWOT analysis at competitive intelligence conferences in Europe and the USA. We have also prepared a more in-depth white paper on both PEST and SWOT analysis. The key thing when carrying out either a PEST or SWOT analysis is to ensure that the results are objective – and often a perspective external to the organisation can help with this. For help with either technique, contact us on the form below (with topic marketing / strategy planning).

Note: This FAQ is based on an article originally published in the Strategic & Competitive Intelligence Professional‘s membership magazine (Competitive Intelligence Magazine – Jul-Aug 2002)