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While it’s important for business owners to understand the internal factors that affect their company, strategic management cannot be confined to internal factors alone. Business leaders should also examine the external factors that dictate their business environment. PEST analysis is a tried and true method of assessing the external factors that influence a business.
What Is PEST Analysis?
A PEST analysis is an objective study of the political, economic, social, and technological (PEST) factors affecting an organization’s environment. Organizational leaders rely on PEST analyses when they plan for new initiatives such as launching a new product, expanding a workforce, spinning off a new business, exploring new markets, and adapting to government policies.
The 4 Elements of PEST Analysis
The acronym PEST stands for “political, economic, social, and technological”—the four primary types of external factors that can impact a business. Each of these PEST factors contributes to a holistic assessment of an organization's external environment.
- Political factors: Employment laws, federal and state tax policy, trade restrictions, overall political stability, and other broad legal factors all fall into this category. Political factors are considered relatively fluid, as new government regulations, consumer protections, environmental laws, and safety laws routinely emerge within an organization's political environment.
- Economic factors: When it comes to topics like interest rates, exchange rates, and inflation rates, economic factors intertwine with political factors. These and other economic factors, like unemployment rates, disposable income levels, and overall economic growth affect a company’s chances of success.
- Socio-cultural factors: Social factors include the population growth rate and age distribution, as well as shifting trends like health consciousness and career attitudes within the general populace.
- Technological factors: The development of new technology affects corporate initiatives. As the rate of technological change accelerates, business leaders may need to revisit this component of the PEST analysis with greater frequency.
Some organizations broaden the PEST analysis template to include other factors. For instance, the PESTLE analysis (or PESTEL analysis) adds legal and environmental factors to the mix. A STEEPLE analysis adds ethics as well.
What Is the Purpose of a PEST Analysis?
Strong organizations make PEST analyses part of their decision-making process because businesses do not rise and fall on internal factors alone. Effective management and a committed workforce can bring business success, but those strengths might be undercut by negative external factors like an overly-saturated marketplace or an unstable government. Conversely, a poorly managed business might unexpectedly thrive thanks to external factors like high demand. A PEST analysis allows a business leader to better recognize and adapt to external factors.
PEST Analysis vs. SWOT Analysis: How Are They Different?
PEST analyses are frequently compared to SWOT analyses, but one is not a substitute for the other. A PEST analysis concerns itself exclusively with external factors. A SWOT analysis is compartmentalized into four categories—two internal and two external. Those categories are strengths (internal positive factors), weaknesses (internal negative factors), opportunities (external positive factors), and threats (external negative factors).
Many business leaders opt for both a PEST and a SWOT analysis to cover their bases. These analyses can be conducted by a business's own team members or by external consultants.