Corporate Finance & Accounting

PEST analysis

What is PEST analysis?

PEST analysis (political, economic, social and technological) is a management method by which an organization can assess the main external factors affecting its operations in order to improve market competitiveness. As the acronym describes, these four domains are at the heart of the model.

A popular variant of the PEST analysis format, especially in the UK, is the PESTLE strategic planning method, which includes other aspects of the law and the environment.

It is believed that PEST analysis was originally introduced by Harvard professor Francis J. Aguilar under the name ETPS. In Scanning the Business Environment, published in 1967, Aguilar described economic, technological, political and social factors as the main influences on the business environment. The letters were then rearranged to create a convenient and quirky acronym in use today.

key takeaways

  • PEST analysis stands for political, economic, social and technological.
  • This type of analysis is used to measure external factors that may affect a company’s profitability.
  • In general, it is more effective for larger organizations that are more likely to experience the impact of macro events.
  • PEST analysis is often used in conjunction with SWOT analysis, which represents strengths, weaknesses, opportunities, and threats.

Areas of PEST Analysis Assessment

A comprehensive assessment of the key areas of influence that affect the organization’s sector as well as the organization itself can facilitate more effective strategic planning. This kind of planning can be done to maximize an organization’s ability to take advantage of existing conditions, and to be better prepared and warned about impending changes, allowing the organization to stay ahead of the competition.

The political aspect of PEST analysis focuses on areas where changes in government policy and/or legislation affect the economy, specific industries, and related organizations. Policy areas that may particularly affect organizations include tax law and employment law. The general political climate and international relations of a country or region can also have a significant impact on an organization.

The economic part of the analysis addresses key factors such as interest rates and exchange rates, economic growth, supply and demand, inflation and recessions.

Social factors that may be included in the PEST analysis are demographic and age distributions, cultural attitudes, and workplace and lifestyle trends.

The technology section considers the specific role and development of technology in sectors and organisations, as well as wider uses, trends and changes in technology. Government spending on technology research may also be a point of interest in this area.

Applications of PEST Analysis

PEST analysis can help organizations identify and take advantage of opportunities presented by existing conditions in the business environment. It can also be used to identify current or possible future challenges to effectively plan how best to manage them.

PEST analysis can also be used to assess an organization’s internal structure to determine the strengths and weaknesses of its internal political, economic outlook, social climate, and technological base. The results of this analysis can facilitate changes or improvements in areas identified as sub-par.

PEST analysis can be used in conjunction with other forms of strategic business analysis, such as SWOT (Strengths, Weaknesses, Opportunities, and Threats) models, to obtain more comprehensive results. Comparing between these completed analyses can provide a very solid basis for informed decision-making.

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