PEST Analysis

Reviewed by Annapoorna | Updated on Aug 27, 2020

What is PEST Analysis?

PEST Analysis is an acronym that stands for political, economic, social, and technological analysis. It is a method of management used in an enterprise to determine certain external factors that affect its activity to become more competitive in the market. Those four areas are central to this model, as defined in the acronym.

A common variation on the PEST Analysis model, particularly in the United Kingdom, is the PESTLE strategic planning method, which includes the additional legal and environmental aspects.

The PEST control is thought to have been initially developed by Harvard professor Francis J. Aguilar under the name ETPS. Aguilar described cultural, technological, political, and social factors as being significant influences on the business environment in the 1967 publication "Scanning the Business Climate."

The letters were then rearranged to create a simple, quirky acronym that is used today.

Areas addressed by PEST Analysis

A thorough evaluation of the significant areas of influence affecting the sector in which an organisation is situated, as well as the organisation itself, can encourage more successful strategic planning.

Such preparation should be done to optimise the potential of the company to capitalise on events as they arise, and to be forewarned and better prepared for inevitable changes. It thereby allows the company to stay ahead of its competitors.

The political dimension of PEST Analysis focuses on the areas where government policy and regulatory changes impact the economy. The analysis includes the specific sector and the organisation in question. Policy areas that may affect an entity, in particular, include tax and employment laws. A nation or region's general political climate, as well as foreign affairs, may also significantly affect the organisation.

The 'economic' section addresses main factors such as interest and exchange rates, economic growth, supply and demand, inflation, and recession. Demographics and age distribution, societal behaviors, occupational, and lifestyle patterns are the demographic parameters that could be used in the PEST study.

The 'technical' dimension takes into account the particular role and advancement of technology within the sector and organisation, as well as the broader applications, patterns, and technological changes. In this field, too, government expenditure on technical innovation can be of interest.

Applications of PEST Analysis

PEST analysis can assist an organisation in recognising and eventually capitalising on the opportunities in the business environment offered by existing conditions. It can also be used to identify current or potential future problems, allowing for better preparation on how such issues can be best handled.

The study may also be used to determine an organisation's in-house framework to recognise strengths and deficiencies in its internal dynamics, economic environment, social atmosphere, and technology base. Such analytical findings will promote adjustments or improvements in areas defined as subpar.

PEST analysis can be used together with other tools of strategic business analysis, such as the SWOT model (strengths, weaknesses, opportunities, and threats) for an even more detailed outcome. Comparing these studies will provide a rock-solid foundation for informed decision-making.