This article explains the PEST Analysis by Francis J. Aguilar in a practical way. After reading you will understand the basics of this powerful macro environment analysis.
What is the PEST Analysis?
The PEST Analysis is an external analysis in which “P” represents Politics, ‘E’ for Economic, ‘S’ for social and ‘T’ for Technology. The PEST Analysis describes a framework of macro environmental factors that are important for strategic management. It is a useful strategic tool for understanding market growth or decline, business position, opportunities and direction for the possibly required actions.
Founder of the PEST Analysis is Francis J. Aguilar, a Harvard University management professor. He developed this macro environmental analyze tool for scanning the business environment (1967).
Political factors indicate to what extent the Government influences in the economy. These factors are of crucial importance for strategic management. Political factors include areas such as fiscal policy, labour law, environmental law, trade restrictions, rates and political stability. Political factors may also include goods and services the Government wants to provide or does not want to provide or be provided (for instance subsidies). The Government also has great influence on the healthcare, education and infrastructure of a country or nation.
Economic factors include growth, interest rates and the inflation rate of an economy. These factors have a major impact on how businesses operate and make decisions. For example, interest rates may influence an enterprise’s cost of capital and therefore they may influence to what extent a company grows and expands. Exchange rates may affect the costs of export goods and the supply and prices of imported goods.
Social factors are, among other things, cultural aspects and include health consciousness, population growth, age structure, careers and an emphasis on safety. These social factors influence the demand for the products and services of an organization and how this organization responds to this demand. An ageing population, for example, may imply a smaller and less flexible staff resulting in higher labour costs. Based on social factors, organizations may change their management strategies to adapt to these developments for example by recruiting older staff on account of a shortage of knowledge workers.
Technological factors include ecological and environmental aspects as well as aspects of research and development (R&D) and automation. Technological factors influence entry barriers, minimum efficient production levels and in-sourcing and outsourcing considerations.In addition, technological factors affect the costs and the quality of products and services and often lead to innovation.
The factors of the PEST Analysis will vary in importance to a company based on its industry and the products and services it supplies.
For example, consumers and B2B companies tend to be more affected by the social factors, whereas an organization with a specific service provision to the Government would be more affected by political factors. Factors that are more likely to change in the future or more relevant to an organization will carry greater importance. For example, an organization that has to borrow external capital will find that the economic factors (especially interest rates) are becoming more important than the political or social factors.
There are more acronyms for the PEST Analysis, also because additions have been made to the four existing factors. For example, the DESTEP analysis, to which demographic and ecological factors have been added.
Or a more recent model STEEPLED (Social, Technological Economic, Environmental, Political, Legal, Education, Demographic).
Another variant is the PESTLE analysis to which Legal and Environmental factors have been added. If people want to add another layer at local, national or global level, they could use another variant namely the so-called LoNGPESTEL.
The PEST analysis factors, combined with external micro-environmental factors and internal drivers, can also be classified as opportunities and threats in a SWOT Analysis. It is important to view the PEST Analysis as a part of an external analysis for conducting strategic planning or strategic analysis. The PEST Analysis provides an overview of the macro environmental factors that are important to an organization.
It’s Your Turn
What do you think? Is the PEST Analysis applicable in today’s modern economy and marketing? Do you recognize the practical explanation or do you have more suggestions? What are your success factors for making up a good PEST Analysis?
Share your experience and knowledge in the comments box below.
- Aguilar, F. J. (1967). Scanning the business environment. Macmillan.
- Chapman, R. J. (2006). Simple tools and techniques for enterprise risk management. John Wiley & Sons.
- Peng, G. C., & Nunes, M. B. (2007). Using PEST analysis as a tool for refining and focusing contexts for information systems research. In Proceedings of the 6th European Conference on Research Methodology for Business and Management Studies (pp. 229-237). Academic Conferences Limited.
- Thompson, J. and Martin, F. (2010). Strategic Management: Awareness & Change. 6th ed. Cengage Learning EMEA, p. 86-88, 816.
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