by Sarah K. White

What is a PEST analysis? Preparing your business for external impacts

Apr 20, 2021
IT Governance FrameworksIT Leadership

Conducting a PEST analysis can help your business determine the critical and most influential political, economic, social, and technological factors that will impact your business.

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PEST analysis definition

PEST analysis is used to evaluate external and macro environmental factors that impact your organization, specifically political, economic, social, and technological ones. This four-point analysis method gives your business a framework to identify the most influential factors in your industry, with a focus on entering new business markets and growing within your industry. A PEST analysis can help companies predict how effective or successful a certain business strategy will be in terms of profitability and revenue. 

Other common variations of a PEST analysis include PESTLE or PESTEL, which extends the acronym to include legal and environmental factors. Other factors may also include demographic trends as well as regulatory factors associated with government laws, international and national standards, and other compliance regulations.

PEST analysis core factors

A PEST or PESTLE analysis always includes four core factors to evaluate, which includes:

  • Political: When evaluating political factors in a PEST analysis, your business will want to consider the countries in which you conduct or plan to conduct business, including how any taxes, trade agreements, global trade restrictions, and political power structures might influence your business.
  • Economic: Economic factors considered in PEST analysis include fiscal policies, inflation, recession, interest rates, costs of living, labor costs, exchange rates, consumer spending, and the shifting demographics of the country or countries you operate in.
  • Social: Analysis of social factors is another key factor for PEST, including the cultural norms and expectations of the country you operate in as well as demographics, cultural attitudes, lifestyle preferences, education levels, local culture, and career expectations.
  • Technological: Factors relating to technology include the rapid pace of change, cybersecurity, automation, AI, machine learning, disruptive technologies, social networking, robotics, and other technological developments. It also includes innovation for products and services, the impact of technology on consumers and the company and the impact of changing and evolving technologies.

When extended to PESTLE, the following factors are also included in analysis:

  • Legal: Legal factors play a big role in your business success, and they can vary between countries. You’ll need to consider laws as they pertain to consumers, discrimination, employment, copyright, health and safety, and imports and exports. You will also need to consider any legal issues your own business has experienced to ensure they aren’t repeated in the future.
  • Environmental: There’s a growing concern for environmental factors, which includes your business’ carbon footprint, laws regarding carbon emissions, sustainability, and corporate social responsibility. It also involves the ethical sourcing of goods and services, climate change, pollution, nonrenewable resources, and environmental-related laws.

Additional variations of PEST analysis might also include demographic, regulatory, ethical, ecological, intercultural, educational, religious, security, geographical, historical, organizational and military factors.

How to perform PEST analysis

To conduct a PEST analysis, you will need to sit down with business leaders from your organization to evaluate the core factors and determine which ones are most relevant to your business goals and needs. During the analysis, you will want to brainstorm with other business leaders to identify every possible factor, opportunity, and threat within each category.

Each industry will have a different application of the model — for example, a government contractor might focus more heavily on the political or regulatory aspects of the analysis, whereas a B2B company will be more impacted by social factors. Companies in the tech industry will need to consider regulations such as GDPR, which impacts global compliance regulations in regard to privacy and transparency of data.

You will want to determine factors that require immediate attention or action and plan for factors that have the potential to negatively impact your business in the future. For example, you might discover your business needs to address compliance and regulatory issues to open an office in a new country, which would have immediate impact. Similarly, the analysis may uncover that your business is particularly vulnerable to a recession, which will allow you to create a plan in case your business is ever impacted by that type of economic factor. It can also help your business plan for changing technology and the future impacts of AI, automation, and other disruptive technologies.

After evaluating the core political, economic, societal, and technological factors, as well as legal and environmental factors, you will need to establish the importance of each. Some factors will have more of an impact on your business, so these will be the ones you need to consider the most. You’ll also want to evaluate the additional offshoots of the PEST analysis to see whether there are other factors that might be specific to your industry or business. While there are a lot of factors to evaluate, a solid PEST or PESTLE analysis will be succinct and manageable. You want to keep it as simple as possible so that everyone involved understands the impact and has a clear vision of how to proceed with the overall business strategy.