PEST or External Environment Analysis

Understanding PEST Analysis

PEST analysis is an acronym for Political, Economic, Social, and Technological analysis.
This tool is used to identify and analyse the external macro-environmental factors that affect an organisation.
It serves as a framework for reviewing a strategic position, direction of a company, or the potential of a new project by analysing the external environment which the organisation operates in.

Political Factors in PEST Analysis

Political factors refer to the degree of government intervention in the economy and include areas such as tax policies, political stability, trade restrictions and tariffs, and the overall political climate of a country.
Understanding these factors allows an organisation to anticipate potential changes in regulation, and to factor these into their strategic decision-making.

Economic Factors in PEST Analysis

Economic factors relate to the performance of the economy and its effects on an organisation’s operations.
This can include economic growth, exchange rates, inflation rates, and interest rates.
Analysing these factors helps businesses prepare for economic shifts and predict trends that could impact their future growth.

Social Factors in PEST Analysis

Social factors examine the social environment of the market and include the cultural aspects, health consciousness, population growth rates, demographics, and changes in consumer attitudes and lifestyle trends.
Understanding these can help businesses target their audience more accurately, design effective marketing campaigns and fundamentally, remain relevant.

Technological Factors in PEST Analysis

Technological factors consider the rate of technological innovation and development that could affect the operations of the industry or the market favourably or unfavourably.
These include new technological advancements, disruptive technology, the impact of emerging technologies, research and development activity, and the access to technology.
Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions.

Benefit of PEST Analysis

PEST Analysis is important for businesses to keep track of their environment and adapt their strategies according to these changes.
The PEST framework allows a business to understand how the larger macro-economic factors can and do affect their business model.
By gaining insight into the broader context within which the company operates, businesses can identify potential opportunities and threats that the external environment presents.
Given that PEST factors are usually outside the control of companies, it’s important to regularly review these aspects to adjust strategic plans as necessary.
Although PEST analysis provides valuable input into SWOT analysis, it does not replace other forms of analysis and should be used in conjunction with other strategic analysis tools.