A PEST analysis looks at how external factors can affect a business's activities and performance. Here's how to create and use one.
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 affecting 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. It's a way of understanding how external forces impact your business. It was created by Harvard professor Francis Aguilar in 1967. It should be included in every business plan, in addition to a SWOT analysis, as it is part of risk management and strategy design.
P – Political Environment
According to Donna Lubrano, senior advisor at Northeastern University, the political environment is an analysis of what politics is doing to the business world.
"We see this currently in the U.S., particularly in the area of international business. We look at tariffs, trade deals as they are developed not only by the economics or business side but what political relationships influence those decisions," Lubrano 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.
E – Economic
The economic factor examines outside economic issues that can play a role in a company's success. For this analysis, look at interest rates, exchange inflation, unemployment, gross domestic product, credit availability and rise and fall of the middle class. Lubrano noted it's important to look at what the Fed is doing in terms of the tax rate as "this is what your pocketbook/wallet lives on every day."
S – Social
With the social factor, a business can analyze the socioeconomic environment of the given industry's market to understand how consumer needs are shaped and what brings them to the market for a purchase. Among the items that should be examined are demographics, population growth rates, age distribution, attitudes toward work and job market trends.
"We look at what changes in culture and society are taking place. The drive to eat healthier, the drive to care for the environment, baby boomers staying in the workforce longer, adults have fewer children later in life. All of these impact how consumers buy houses, cars, etc.," said Lubrano.
T – Technology
Technology plays a huge part in business, and it can impact it either negatively or positively. With the introduction of new products, new technologies and services, a certain marketplace can have a tough time adjusting so it's important to assess the technology from all angles.
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.
A similar and related analysis, called PESTLE, includes two more factors: Legal and Environmental. For the legal factor, a company should examine how legal changes and interpretations could impact a company, directly or indirectly, according to Daniel Feiman, managing director at Build It Backwards. He advised including changes in laws, global law conflicts and Supreme Court decisions in this portion of the analysis.
For the environmental portion of the analysis, Feiman said to look at environmental evolutions and regulations to determine how they could impact a business. Look closely at ecological regulations and restrictions as well as endangered species.
Feiman also suggested that each of factors, including the original PEST factors, should be measured against the following grid:
- Potential impact: low, medium or high
- Time frame: immediate, short term or long term
- Type: positive or negative
- Direction of impact: increasing or decreasing
- Relative Importance: high, medium or low
Benefits of a PEST analysis
There are numerous benefits of conducting a PEST analysis, which can reap dividends for your business. The more significant benefits include:
- A greater understanding of your company
- More effective long-term strategic planning
- Heightened attention to potential threats and dangers
- Insight for valuable business opportunities
Solarju, a digital marketer at Housingman India, noted a few disadvantages as well.
"Even though [you] analyze all the factors, there is a chance that they might change within an hour or day due to its dynamic nature," said Solarju. "Some factors are based on assumptions, so they may not be accurate. As the data collect[ed] is huge, one needs to carefully utilize it in a better way, and as it is from external sources, one is not sure about the accuracy."
For a PEST analysis to truly be valuable, it should be used in conjunction with SWOT (strengths, weaknesses, opportunities and threats), MOST (mission, objective, strategies, tactics) or SCRS (strategy, current state, requirements, solution) analyses.
Additional reporting by Katherine Arline.