PEST analysis is an analysis of the political, economic, social and technological factors in the external environment of an organization, which can affect its activities and performance.
PESTEL model (or PESTLE model) involves the collection and portrayal of information about external factors which have, or may have, an impact on business.
Understanding the tool
PEST or PESTEL analysis is a simple and effective tool used in situation analysis to identify the key external (macro environment level) forces that might affect an organization. These forces can create both opportunities and threats for an organization. Therefore, the aim of doing PEST is to:
- find out the current external factors affecting an organization;
- identify the external factors that may change in the future;
- to exploit the changes (opportunities) or defend against them (threats) better than competitors would do.
The outcome of PEST is an understanding of the overall picture surrounding the company.
PEST analysis is also done to assess the potential of a new market. The general rule is that the more negative forces are affecting that market the harder it is to do business in it. The difficulties that will have to be dealt with significantly reduce profit potential and the firm can simply decide not to engage in any activity in that market.
PEST analysis is the most general version of all PEST variations created. It is a very dynamic tool as new components can be easily added to it in order to focus on one or another critical force affecting an organization. Although following variations are more detailed analysis than simple PEST, the additional components are just the extensions of the same PEST factors. The analysis probably has more variations than any other strategy tool:
STEP = PEST in more positive approach.
PESTEL = PEST + Environmental + Legal
PESTELI = PESTEL + Industry analysis
STEEP = PEST + Ethical
SLEPT = PEST + Legal
STEEPLE = PEST + Environmental + Legal + Ethical
STEEPLED = STEEPLE + Demographic
PESTLIED = PEST + Legal + International + Environmental + Demographic
LONGPEST = Local + National + Global factors + PEST
Using the tool
The process of carrying out PEST analysis should involve as many managers as possible to get the best results. It includes the following steps:
- Step 1. Gathering information about political, economic, social and technological changes + any other factor(s).
- Step 2. Identifying which of the PEST factors represent opportunities or threats.
Gathering PEST, PESTEL and STEEPLED information
In order to perform PEST (or any other variation of it) managers have to gather as much relevant information as possible about the firm’s external environment. Nowadays, most information can be found on the internet relatively easy, fast and with little cost. When the analysis is done for the first time the process may take a little longer and as a beginner you may find yourself asking “What changes do I exactly look for in politics, economic, society and technology?” The following templates might be useful when gathering information for PEST, PESTEL and STEEPLED analysis.
NOTE: PEST covers all macro environment forces affecting an organization. Therefore, when doing PESTEL or STEEPLED analysis, legal, environmental, ethical and demographic factors may overlap with PEST factors.
|PEST analysis template|
|Political factors||Economic factors|
|Socio-cultural factors||Technological factors|
|PESTEL analysis template|
|STEEPLED analysis template|
Identifying opportunities and threats
Gathering information is just a first important step in doing PEST analysis. Once it is done, the information has to be evaluated. There are many factors changing in the external environment but not all of them are affecting or might affect an organization. Therefore, it is essential to identify which PEST factors represent the opportunities or threats for an organization and list only those factors in PEST analysis. This allows focusing on the most important changes that might have an impact on the company.
PEST analysis example
The following table shows PEST analysis example. It lists opportunities and threats that are affecting a firm in its macro environment.
|PEST analysis example|
- Thompson, J. and Martin, F. (2010). Strategic Management: Awareness & Change. 6th ed. Cengage Learning EMEA, p. 86-88, 816
- Rothaermel, F. T. (2012). Strategic Management: Concepts and Cases. McGraw-Hill/Irwin, p. 56-61
- David, F.R. (2009). Strategic Management: Concepts and Cases. 12th ed. FT Prentice Hall, p. 104-114
- Johnson, G, Scholes, K. Whittington, R. (2008). Exploring Corporate Strategy. 8th ed. FT Prentice Hall, p. 55-57
- Wikipedia (2013). PEST analysis. Available at: https://en.wikipedia.org/wiki/PEST_analysis