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Lead Your Team Strategy

What Is a PEST Analysis?

What Is a PEST Analysis?
Credit: Rawpixel.com / Shutterstock

As an entrepreneur, you can try to predict how your products or services will resonate with the public. However, there will always be factors outside of your control that affect how your business operates. One method for discovering and quantifying those factors is the PEST analysis.

PEST is an acronym for political, economic, social and technological – external factors that commonly affect business activities and performance. Created by Harvard professor Francis Aguilar in 1967, PEST can work alone or be used in combination with other tools, such as Porter's Five Forces and a SWOT Analysis, to determine an organization's overall outlook.

Jim Makos, director at Weberience, the digital publishing, web development and marketing company behind the Pestle Analysis website, says PEST can help companies improve their decision-making and timing.

"The best outcome of the PEST analysis would be if your company is able to make the right decisions at the right time by analyzing different factors. Another benefit of PEST analysis is it could aid you in predicting the future by looking at the present. You will be prepared to tackle future challenges. It also helps you highlight the opportunities you can cash in on and threats which could harm your business," Makos said.

Government regulations and legal issues affect a company's ability to be profitable and successful, and this factor looks at how that can happen. Issues that must be considered include tax guidelines, copyright and property law enforcement, political stability, trade regulations, social and environmental policy, employment laws and safety regulations. Companies should also consider their local and federal power structure, and discuss how anticipated shifts in power could affect their business.

This factor examines the outside economic issues that can play a role in a company's success. Items to consider include economic growth, exchange, inflation and interest rates, economic stability, anticipated shifts in commodity and resource costs, unemployment policies, credit availability and unemployment policies.

The social factor analyzes the demographic and cultural aspects of the company's market. These factors help businesses examine consumer needs and determine what pushes them to make purchases. Among the items that should be examined are demographics, population growth rates, age distribution, attitudes towards work and job market trends.

Technology issues affect how an organization delivers its product or service to the marketplace. Specific items that need to be scrutinized include, but are not limited to, government spending on technological research, the life cycle of current technology, the role of the internet and how any changes to it may play out, and the impact of potential information technology changes. Just like the other factors, companies should consider generational shifts and their related technological expectation to figure out how they will affect who will use their product and how it's delivered.

Bright Hub Project Management noted that a PEST analysis scans only the external environment while completely ignoring the internal environment and the competitive scenario. The factors listed above can also change in less than a day's time, making it hard to predict why and how these factors may affect the present or future of the project. This means that there is a lack of easily available updated information, which can lead to making too many assumptions and analysis based on unfounded assumptions. Bright Hub suggests devising some plan for cross-verification to avoid your PEST analysis being based on tenuous assumptions.

For PEST analysis to make worthwhile contributions, use it in conjunction with SWOT (strengths, weaknesses, opportunities and threats), MOST (mission, objective, strategies, tactics) or SCRS (strategy, current state, requirements, solution) analyses.

"Some variations may also add legal, environmental, demographics and ethical factors, which makes the analysis more powerful, because it considers more factors as compared to a normal PEST analysis," Makos said. "The more factors you consider for analysis, the better the results you can achieve from your strategy."

For businesses wanting to conduct their own PEST analysis, additional advice, templates and samples can be found online at the links below.

Additional reporting by Katherine Arline.

Jennifer Post

Jennifer Post graduated from Rowan University in 2012 with a Bachelor's Degree in Journalism. Having worked in the food industry, print and online journalism, and marketing, she is now a freelance contributor for Business News Daily. When she's not working, you will find her exploring her current town of Cape May, NJ or binge watching Pretty Little Liars for the 700th time.