PEST Analysis

Identifying "Big Picture" Opportunities and Threats

Understand your environment, with James Manktelow & Amy Carlson.

Changes in your business environment can create great opportunities for your organization - and cause significant threats.

For example, opportunities can come from new technologies that help you reach new customers, from new funding streams that allow you to invest in better equipment, and from changed government policies that open up new markets.

Threats can include deregulation that exposes you to intensified competition; a shrinking market; or increases to interest rates, which can cause problems if your company is burdened by debt.

PEST Analysis is a simple and widely used tool that helps you analyze the Political, Economic, Socio-Cultural, and Technological changes in your business environment. This helps you understand the "big picture" forces of change that you're exposed to, and, from this, take advantage of the opportunities that they present.

In this article, we'll look at how you can use PEST Analysis to understand and adapt to your future business environment.

About the Tool

Harvard professor Francis Aguilar is thought to be the creator of PEST Analysis. He included a scanning tool called ETPS in his 1967 book

"Scanning the Business Environment." The name was later tweaked to create the current acronym.

PEST Analysis is useful for four main reasons:

1. It helps you to spot business or personal opportunities, and it gives you advanced warning of significant threats.

2. It reveals the direction of change within your business environment. This helps you shape what you're doing, so that you work with change, rather than against it.

3. It helps you avoid starting projects that are likely to fail, for reasons beyond your control.

4. It can help you break free of unconscious assumptions when you enter a new country, region, or market; because it helps you develop an objective view of this new environment.

Note:

PEST Analysis is often linked with SWOT Analysis , however, the two tools have different areas of focus. PEST Analysis looks at "big picture" factors that might influence a decision, a market, or a potential new business. SWOT Analysis explores these factors at a business, product-line or product level.

These tools complement one another and are often used together.

How to Use the Tool

Follow these steps to analyze your business environment, and the opportunities and threats that it presents.

1. Use PEST to brainstorm the changes happening around you. Use the prompts below to guide your questioning, and tailor the questions to suit the specific needs of your business.

2. Brainstorm opportunities arising from each of these changes.

3. Brainstorm threats or issues that could be caused by them.

4. Take appropriate action.

Our worksheet guides you through these steps.

Step 1: Brainstorm Factors

Political Factors to Consider

• When is the country's next local, state, or national election? How could this change government or regional policy?

• Who are the most likely contenders for power? What are their views on business policy, and on other policies that affect your organization?

• Depending on the country, how well developed are property rights and the rule of law, and how widespread are corruption and organized crime? How are these situations likely to change, and how is this likely to affect you?

• Could any pending legislation or taxation changes affect your business, either positively or negatively?

• How will business regulation, along with any planned changes to it, affect your business? And is there a trend towards regulation or deregulation?

• How does government approach corporate policy, corporate social responsibility, environmental issues, and customer protection legislation? What impact does this have, and is it likely to change?

• What is the likely timescale of proposed legislative changes?

• Are there any other political factors that are likely to change?

Economic Factors to Consider

• How stable is the current economy? Is it growing, stagnating, or declining?

• Are key exchange rates stable, or do they tend to vary significantly?

• Are customers' levels of disposable income rising or falling? How is this likely to change in the next few years?

• What is the unemployment rate? Will it be easy to build a skilled workforce? Or will it be expensive to hire skilled labor?

• Do consumers and businesses have easy access to credit? If not, how will this affect your organization?

• How is globalization affecting the economic environment?

• Are there any other economic factors that you should consider?

Tip:

Use Porter's Diamond to align your strategy with your country's business conditions.

Socio-Cultural Factors to Consider

• What is the population's growth rate and age profile? How is this likely to change?

• Are generational shifts in attitude likely to affect what you're doing?

• What are your society's levels of health, education, and social mobility? How are these changing, and what impact does this have?

• What employment patterns, job market trends, and attitudes toward work can you observe? Are these different for different age groups?

• What social attitudes and social taboos could affect your business? Have there been recent socio-cultural changes that might affect this?

• How do religious beliefs and lifestyle choices affect the population?

• Are any other socio-cultural factors likely to drive change for your business?

Tip:

Values take a central role in any society. Use the Competing Values Framework to identify your organization's values, and Hofstede's Cultural Dimensions to explore the values of your customers.

Technological Factors to Consider

• Are there any new technologies that you could be using?
• Are there any new technologies on the horizon that could radically affect your work or your industry?
• Do any of your competitors have access to new technologies that could redefine their products?
• In which areas do governments and educational institutions focus their research? Is there anything you can do to take advantage of this?
• How have infrastructure changes affected work patterns (for example, levels of remote working)?
• Are there existing technological hubs that you could work with or learn from?
• Are there any other technological factors that you should consider?

Note:

There are variations of PEST Analysis that bring other factors into consideration. These include:

• PESTLE/PESTEL: Political, Economic, Socio-Cultural, Technological, Legal, Environmental.
• PESTLIED: Political, Economic, Socio-Cultural, Technological, Legal, International, Environmental, Demographic.
• STEEPLE: Social/Demographic, Technological, Economic, Environmental, Political, Legal, Ethical.
• SLEPT: Socio-Cultural, Legal, Economic, Political, Technological.
• LONGPESTLE: Local, National, and Global versions of PESTLE. (These are best used for understanding change in multinational organizations.)

Choose the version that best suits your situation.

Step 2: Brainstorm Opportunities

Once you've identified the changes that are taking place in your business environment, it's time to look at each change, and brainstorm the opportunities that this could open up for you. For example, could it help you develop new products, open up new markets, or help you make processes more efficient?

Step 3: Brainstorm Threats

It's also important to think about how these changes could undermine your business. If you understand this early enough, you may be able to avoid these problems, or minimize their impact.

For example, if a core part of your market is in demographic decline, could you open up other areas of the market? Or if technology is threatening a key product, can you master that technology and improve the product? (Risk Analysis can help you to assess these threats and devise strategies to manage them.)

Step 4: Take Action

Where you have identified significant opportunities, build the actions you'll take to exploit them into your Business Plan . Where you've identified significant risks, take appropriate action to manage or eliminate them.

Key Points

PEST Analysis helps you understand the Political, Economic, Social, and Technological changes that will shape your business environment.

You can use these headings to brainstorm the "big picture" characteristics of a business environment (this could be a country, a region, or a new or existing market), and, from this, draw conclusions about the significant forces of change operating within it.

This provides a context for more detailed planning, within which you will be able to minimize risk and take full advantage of the opportunities that present themselves.