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What is a PEST analysis?

Last updated

20 March 2023

Reviewed by

Hugh Good

PEST analysis is an evaluation of political, economic, social, and technological factors that can affect your business operations, growth, and development. Analyzing these four factors regularly can help you make better business decisions.

Performed correctly, a PEST (Political, Economic, Social, Technological) analysis can allow you to prepare your company for upcoming market changes, political issues, technological innovations, and social shifts.

Used in combination with other analyses, PEST factor evaluation can help a business stay ahead of the competition by taking a proactive approach in preparing for future threats and opportunities. 

PEST analysis: definition

PEST analysis is a framework for evaluating the external factors (political, economic, social, and technological) that may affect business operations. By performing this analysis, business owners can determine what may await their company in the future and which changes they should make to ensure successful adaptation to new developments.

The four elements of PEST analysis

PEST is an acronym that stands for Political, Economic, Social, and Technological. Here is a breakdown of the essential PEST analysis elements:

Political factors

Political factors demonstrate how political issues such as elections, new regulations, and policy changes can affect your business. Examples include:

  • Upcoming elections

  • Government industry regulations

  • New trade policies

  • Import restrictions

  • Tax policies

  • Employment laws

  • Property rights

  • Political stability

This information can help you plan for compliance tactics, allocate budgets for adjusting to new policies, change product development approaches, and more.

For example, when employment regulation changes (e.g., minimum wage increase), you may need to raise salaries or provide extra benefits to remain compliant. Or if you are importing or exporting products, the imposition of restrictions or new regulations could mean changes in business operations and logistics.

Economic factors

Economic factors allow business owners to study and consider macroeconomic influences, including:

  • Economic growth and stability

  • Interest rates

  • Exchange rates

  • Inflation rates

  • Fiscal policies

  • Unemployment rates

  • Consumer buying habits

  • Fiscal policies

This data can help you evaluate consumer demand, product costs, expansion possibilities, and competition levels.

For example, if costs of living are increasing, you might need to raise salaries to mitigate the situation. If the economy is improving (or declining), your customers and clients are likely to have more (or less) money to invest in your products and services. Meanwhile, high inflation means lower purchasing power.

Social factors

There are many social factors that may affect your business growth and development. These involve demographic elements, age distribution, lifestyle trends, and more. Examples are:

  • Consumer lifestyles

  • Family structures

  • Consumer habits

  • Ecological trends

  • Generational shifts

  • Educational trends

  • Work trends

  • Health of the population

Social factors can help you identify and segment your target audience as well as gather insight  regarding approaches to challenges or pain points.

For example, a major shift toward remote work could help you adjust your approach in attracting top talent. Alternatively, a shift in fashion trends could dictate your upcoming product development tactics.

Technological factors

Technological factors involve studying how technology affects consumer behavior and demands in addition to changing the way work is done, products are produced, or services are delivered. 

These factors include:

  • Individual access to new tech solutions

  • Tech infrastructure evolution

  • Rise of artificial intelligence implementation

  • Industry innovations

  • Cybersecurity

With this information in mind, you can make predictions about your company's success in the industry if it takes full advantage of the available technologies.

For example, new chatbot technologies can help you improve your customer support efforts and make changes to the way your team works. Or maybe you need to move your company's headquarters to a tech hub in order to gain a competitive edge.

Benefits of PEST analysis

The benefits of conducting PEST analysis regularly are:

  • Gaining valuable insight into a company's present and future

  • Leveraging access to long-term strategic planning

  • Discovering new business opportunities

  • Preparing for external environmental threats

When used together with the Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis, PEST analysis can yield more productive results.

How to conduct a PEST analysis

Taking a structured approach to PEST analysis can help you minimize unnecessary action and start taking advantage of results in real-time.

Step 1: Identify PEST factors

The analysis begins with using reliable resources to gather political, economic, social, and technological data relevant to your industry and niche.

  • Political – study the relevant laws pertaining to your business and potential changes in the near future. Find out what the consequences of not following these laws are, or whether you are eligible for exceptions.

  • Economic – evaluate market trends, tax changes, inflation rates, and other elements that may affect your business.

  • Social - study your consumers, buying trends, fashion trends, and other information that may affect consumer buying behavior.

  • Technological – evaluate the technology you are using, learn about innovations in your industry, and find out what the costs of implementing new tech may be.

Once you know which factors can affect your business, proceed to step 2.

Step 2: Discover opportunities

Factors that you evaluate during the first step can help you find opportunities for change. At this moment, you may need to identify the budget for the analysis-related changes.

Step 3: Identify threats

PEST analysis doesn't just give you an overview of opportunities. The information you gather can help you identify threats to your business operations. Taking a proactive approach to threat mitigation can help you get ahead of the competition.

Making PEST analysis part of your business strategy

Analyzing PEST factors doesn't just help you prepare for the future; it provides valuable insight into current business operation and management. Data gathered when identifying PEST factors for your niche can help you grow and develop your company in a highly competitive environment.

Combined with other analyses, including SWOT, MOST (Mission, Objective, Strategies, Tactics), and SCRS (Strategy, Current State, Requirements, Solutions), PEST can help you stay on top of your game, no matter how quickly the world changes.

FAQs

What are the economic factors in PEST analysis?

Economic factors in PEST analysis are financial / economic elements that may impact your business operations. They can include exchange, inflation, and unemployment rates, fiscal policies, and the like.

What is a SWOT and PEST analysis?

Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis and Political, Economic, Social, and Technological (PEST) analysis are two approaches to evaluating the integrity of your business and learning about which outside factors may influence it.

Who created the PEST analysis?

Harvard Business School professor Francis Aguilar created the foundation for the PEST analysis in 1967. It first appeared in his book called Scanning the Business Environment.

What is a PEST analysis diagram?

A PEST analysis diagram is a framework for identifying political, economic, social, and technological changes that may impact your business in the future. This analysis allows you to take proactive measures to stay on top of your business strategies in the ever-changing external environment.

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