What is PEST analysis?

PEST analysis is also known as: STEP, PESTEL, PESTLE, PESTE, PESTLIED, SLEPT, STEEPLE, STEEPLED, LE PEST C and LEPEST analysis.

Introduction
In analyzing the macro-environment, it is important to identify the factors that might in turn affect a number of vital variables that are likely to influence the organization’s supply and demand levels and its costs (Kotter and Schlesinger, 1991; Johnson and Scholes, 1993). The "radical and ongoing changes occurring in society create an uncertain environment and have an impact on the function of the whole organization" (Tsiakkiros, 2002). A number of checklists have been developed as ways of cataloguing the vast number of possible issues that might affect an industry. A PEST analysis is one of them that is merely a framework that categorizes environmental influences as political, economic, social and technological forces. Sometimes two additional factors, environmental and legal, will be added to make a PESTEL analysis, but these themes can easily be subsumed in the others. 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 (Byars, 1991; Cooper, 2000).

Kotler (1998) claims that PEST analysis is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. The headings of PEST are a framework for reviewing a situation, and can in addition to SWOT and Porter’s Five Forces models, be applied by companies to review a strategic directions, including marketing proposition. The use of PEST analysis can be seen effective for business and strategic planning, marketing planning, business and product development and research reports. PEST also ensures that company’s performance is aligned positively with the powerful forces of change that are affecting business environment (Porter, 1985). PEST is useful when a company decides to enter its business operations into new markets and new countries. The use of PEST, in this case, helps to break free of unconscious assumptions, and help to effectively adapt to the realities of the new environment.

Main Aspects of PEST Analysis
Economic conditions affect how easy or how difficult it is to be successful and profitable at any time because they affect both capital availability and cost, and demand (Thompson, 2002). If demand is buyout, for example, and the cost of capital is low, it will be attractive for firms to invest and grow with expectations of being profitable. In opposite circumstances firms might find that profitability throughout the industry is low. The timing and relative success of particular strategies can be influences by economic conditions. When the economy, as a whole or certain sectors of the economy, are growing, demand may exist for a product or service which would not be in demand in more depressed circumstances. Similarity, the opportunity to exploit a particular strategy successfully may depend on demand which exists in growth conditions and does not in recession. Although a depressed economy will generally be a treat which results in a number of organizations going out of business, it can provide opportunities for some (Robinson and et al., 1978; Thompson, 2002).

Economic conditions are influenced by political and government policy, being a major influence affecting government decisions. The issue of whether European countries join, or remain outside, the single European currency is a case in point. At any one time either exported or imported goods can seem expensive or inexpensive, dependent upon currency exchange rates. There are many other ways, however, in which government decisions will affect organizations both directly and indirectly, as they provide both opportunities and threats.

While economic conditions and government policy are closely related, they both influence a number of other environmental forces that can affect organizations. Capital markets determine the conditions for alternative types of funding for organizations. They tend to be a subject to government controls, and they will be guided by the prevailing economic conditions. The rate of interest charged for loans will be affected by inflation and by international economics and, although the determining rate may be fixed by a central bank, as it is the case with the Bank of England, that will also be influenced by stated government priorities. According to Thompson (2002), government spending can increase the money supply and make capital markets more buoyant. The expectations of shareholders with regard to company performance, their willingness to provide more equity funding or their willingness to sell their shares will also be affected.

The labour market reflects the availability of particular skills at national and regional levels; this is affected by training, which is influenced by government and other regional agencies. Labour costs will be influenced by inflation and by general trends in other industries, and by the role ad power of trade unions.

The sociocultural environment encapsulates demand and tastes, which vary with fashion, disposable income, and general changes, can again provide both opportunities and threats for particular companies (Thompson, 2002; Pearce and Robinson, 2005). Over-time most products change from being a novelty to a situation of market saturation, and as this happens pricing and promotion strategies have to change. Similarly, some products and services will sell around the world with little variation, but these are relatively unusual. Organizations should be aware of demographics changes as the structure of the population by ages, affluence, regions, numbers working and so on can have an important bearing on demand as a whole and on demand for particular products and services. Threats to existing products might be increasing: opportunities for differentiation and market segmentation might be emerging.

Technology is widely recognised by various literature on strategic management (Capron and Glazer, 1987; Johnson and Scholes, 1993; Jan, 2002), as part of the organization and the industry part of the model as it is used for the creation of competitive advantage. However, technology external to the industry can also be captured and used, and this again can be influenced by government support and encouragement. Technological breakthroughs can create new industries which might prove a threat to existing organizations whose products or services might be rendered redundant, and those firms which might be affected in this way should be alert to the possibility. Equally, new technology could provide a useful input, in both manufacturing and service industries, but in turn its purchase will require funding and possibly employee training before it can be used.

How to Write a Good PEST Analysis
As it was discussed above, PEST analysis incorporates four perspectives, which give a logical structure, providing clear presentation for further discussions and proactive decision-makings. In writing a good PEST, subject should be a clear definition of the market being addressed, which might include the following issues of:

It is crucial to describe the subject for the PEST analysis clearly so that people, contributing to the analysis, and those interpreting the results from PEST analysis, could understand the purpose of the PEST assessment and its implications (Jan, 2002).

Before producing a good PEST analysis, it is of primary importance to, firstly, brainstorm the relevant factors that apply to the company or to its business environment. Second requirement is to identify the information that applies to these factors; and thirdly, to draw conclusions from this information. It is, however, necessary not only to describe factors, but to think through what they mean and how they impact the business. PEST analysis is only a strategic starting point, and has its own limitations, emphasizing the need to test the conclusions and findings against the reality.

In conducting PEST analysis, it is required to consider each PEST factor as they all play a part in determining the overall business environment. Some examples of topics include the following:

Political: (includes legal and regulatory): elections, employment law, consumer protection, environmental regulations, industry-specific regulations, competitive regulations, inter-country relationships/attitudes, war, terrorism, political trends, governmental leadership, taxes, and government structures.

Economic: economic growth trends (various countries), taxation, government spending levels, disposable income, job growth/unemployment, exchange rates, tariffs, inflation, consumer confidence index, import/export ratios, and production levels.

Social: demographics (age, gender, race, family size, etc.), lifestyle changes, population shifts, education, trends, fads, diversity, immigration/emigration, health, living standards, housing trends, fashion, attitudes to work, leisure activities, occupations, and earning capacity.

Technological: inventions, new discoveries, research, energy uses/sources/fuels, communications, rates of obsolescence, health (pharmaceutical, equipment, etc.), manufacturing advances, information technology, internet, transportation, bio-tech, genetics, agri-tech, waste removal/recycling, and so on.

After the key trends have been identified, the next step is to analyze the potential each trend has to disrupt the way the company does business. The company is able to determine the changes needed to exploit the opportunities, and blunt the threats (Pearce and Robinson, 2005).

When carrying out a PEST analysis it is important to show how and how much the factors that the firm picks out influence the nature of competition. It is this appraisal of the impact of each factor that distinguishes an analysis from a mere list. A common error is to try and devise a single analysis to try and cover the entire history of a firm and an industry. Therefore, the company must keep the analysis of past developments separate from that of the present situation and future trends. When analyzing PEST factors in the present, it is required to make it plain why the present is different from the past, and how the industry may need to change. There is no need to agonise too long over whether a particular item is political, economic, social and technological in nature. Many important factors transcend the simple PEST categories. The advent of the microprocessor is a technological event that has had a broad economic and social impact. The "green" movement my have started as a social-cultural phenomenon, but it has been translated into legislation and has stimulated technological change (Byars, 1991). It is perfectly legitimate when using a checklist like PEST to leave some categories empty. If there are no important political/legal influences on a particular industry, those conducting PEST analysis do not need to waste time trying to find factors that do not exist. There should be a limit to relevant factors.

Thompson (2002) states that for any organization certain environmental influences will constitute powerful forces which affect decision making significantly. For some manufacturing and service businesses the most powerful force will be customers; for other it may be competition. In some situations suppliers can be crucial. In the case of some small businesses external forces can dictate whether the business stays solvent or not. A major problem for these businesses concerns the management of cash flow, being able to pay bills when they are due for payment and being strong enough to persuade customers to pay their invoices on time.

Finding Information for PEST Analysis
To understand what kind of environment the company may compete in the near future, it requires understanding of the forces that will shape the change. For a PEST analysis, that means conducting a scan of the external events outside of the company, such as potential regulatory issues, demographic trends, political upheaval, and cutting-edge technology that could move mainstream. In conducting the analysis it may be essential to look at periodicals, analyst reports, demographics, and anything that will give the exposure to new trends and possibilities. Any reliable secondary data source of current events and projected future trends will provide information for the PEST analysis, including:

  • Newspapers, periodicals, current books
  • Trade organizations
  • Government agencies
  • Industry analysts
  • Financial analysts

One of the potential disadvantages collecting from the secondary sources is derived from issues of validity, reliability and relevance. The limitation could be apparent in the nature of market forces that reduce the applicability of the information sources to present situations. The problem could arise based on the past data and past events being collected within past environmental conditions. Therefore, the data has to be checked and applied to the current business conditions.

Conclusion
PEST analysis looks at the external business environment and is an appropriate strategic tool for understanding the "big picture" of the environment in which business operates, enabling the company to take advantage of the opportunities and minimize the threats faced by thier business activities. When strategic planning is done correctly, it provides a solid plan for a company to grow into the future.

With a PEST analysis, the company can see a longer horizon of time, and be able to clarify strategic opportunities and threats that the organisation faces. By looking to the outside environment to see the potential forces of change looming on the horizon, firms can take the strategic planning process out of the arena of today and into the horizon of tomorrow.

PEST is not a set of rigid compartments into which ideas need to be sorted. It is better thought of as a set of hooks that can be used to fish for important facts. Once the factors have been "fished out", it does not matter which hook they were attached to. When it comes to writing up the analysis, there is no need to mention the PEST labels at all.

If you found this article useful please have a look at the other articles we have written: Ansoff analysis, Porter's 5 Forces analysis, SWOT analysis, BCG Growth-Share Matrix, Porter's Generic Strategies, Scenario Planning, Value chain analysis, BALANCED SCORECARD, Competitor Analysis, Critical Success Factors, Industry Lifecycle, Marketing Mix, McKinsey 7S Framework and Product Life Cycle.

References
Byars, L. (1991) Strategic Management, Formulation and Implementation – Concepts and Cases, New York: HarperCollins.

Jan, Y. (2002) A three-step matrix method for strategic marketing management, Marketing Intelligence and Planning, Vol. 20 Issue 5, pp.269-272.

Johnson, G. and Scholes, K. (1993) Exploring Corporate Strategy – Text and Cases, Hemel Hempstead: Prentice-Hall.

Kotter, J. and Schlesinger, L. (1991) Choosing strategies for change, Harvard Business Review, pp.24-29.

Capron, N. and Glazer, R. (1987) Marketing and technology: a strategic coalignment, Journal of Marketing, Vol. 51 Issue 3, pp.10-21.

Cooper, L. (2000) Strategic marketing planning for radically new products, Journal of Marketing, Vol. 64 Issue 1, pp.1-15.

Kotler, P. (1998) Marketing Management – Analysis, Planning, Implementation, and Control, 9th Edition, Englewood Cliffs: Prentice-Hall.

Pearce, J. and Robinson, R (2005) Strategic Management, 9th Edition, New York: McGraw-Hill.

Porter, M. (1985) Competitive Advantage, New York: Free Press.

Robinson, S., Hichens, R. and Wade, D. (1978) The directional policy matrix-tool for strategic planning, Long Range Planning Journal, Vol. 11, pp.8-15.

Thompson, J. (2002) Strategic Management, 4th Edition, London: Thomson.

Tsiakkiros A (2002) "Strategic planning and education: The case of Cyprus", The International Journal of Educational Management Bradford 2002

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