What is a PEST analysis, and what are its four parts? What is the difference between PESTLE analysis and PEST, and why is it important for every business? As a business student, analyst, manager or owner, you are called to conduct a PEST analysis sooner or later. In the next 10 minutes, I’ll go through everything you need to know about PEST analysis and how you can do a PEST analysis of an organization starting from scratch. I promise you’ll know more about PEST analysis than 99% of people out there, as I’m explaining everything as concisely as possible. Let’s start with the PEST analysis definition.
What is a PEST Analysis?
PEST analysis is a strategic tool for organizations to identify and assess how Political, Economic, Social, and Technological external factors impact operations so that they can gain a competitive edge. A PEST analysis helps you determine how these factors will affect a business’s performance and strategy in the long term. It is often used in collaboration with other analytical business tools. For example:
- A combination of PEST and SWOT analysis usually gives a clearer understanding of a situation with related internal and external factors
- PESTLE analysis is an extension of PEST analysis that covers legal and environmental factors
I’m going to explain the PEST analysis as simply as possible with examples and a template for better understanding. I will also show how to do a PEST analysis starting from scratch, even for people without any business education like me!
Contents
Why Do a PEST Analysis
It’s simple: to succeed. For a business to be successful, they need a few things:
- A solid product
- Marketing plan
- Identifiable brand
- Happy customers
- Thorough budget
- An investor or two
- Unique selling position
- And a whole lot of research
Throughout the endless market research, customer acquisition costs, and project risk assessments, business managers could forget about outside influences (we call these external factors in this type of analysis). Aside from the company’s internal resources and industry factors, PEST’s macroeconomic factors can impact a company’s performance in a big way.
By being aware of external factors, managers can aid their business. But if they don’t know them, they can cripple their business before it begins. That’s how advantageous PEST analysis is.
What are the four parts of PEST analysis?
Now, let me explain each of the four parts of a PEST analysis more thoroughly. You’ll better understand what each of these external factors in this analysis is all about.
- Political – Here, government regulations and legal factors are assessed in terms of their ability to affect the business environment and trade markets. The main issues addressed in this section include political stability, tax guidelines, trade regulations, safety regulations, and employment laws.
- Economic – Next, businesses examine the economic issues that have an impact on the company. This would include factors like inflation, interest rates, economic growth, the unemployment rate and policies, and the business cycle followed in the country.
- Social – At this stage, businesses focus on the society and people. Elements like customer demographics, cultural limitations, lifestyle attitudes, and education come into play here. This part allows a business to understand how consumer needs are shaped.
- Technological – This may come as a surprise, but technology may not always be an ally for businesses. Depending on the product, technology may affect the organization positively but also negatively. In PEST’s last section we find technological advancements, the role of the Internet, and how an industry’s innovation creates winners and losers.
Every business is different. Some factors may not affect a firm or industry as they would with others. But it’s beneficial to have a well-rounded view of the many factors that could affect them. Along with the ones that will affect them.
This is why we do PEST analysis for a business — to be aware of risks, opportunities, influences, and limitations. Let’s go deeper into these external factors that impact the success of a business. I’ll also briefly mention a specific example for each of them.
Political Factors
Political factors in PEST analysis refer to the extent to which the government and political actions in a country influence the business climate. Here are some examples that will occasionally make it into the (P) of my PEST analysis:
- Tax policies
- Tax incentives
- Political tensions
- Employment laws
- Import restrictions
- Health and safety laws
- Consumer protection laws
- Tariff and Trade restrictions
- Regulation and deregulation
For instance, a country’s foreign policy often plays an important role in determining trade regulations. This can either result in trade restrictions or trade incentives and can affect an organization’s operations. Read my dedicated page on political factors with more examples here.
Economic Factors
In the (E) part of PEST Analysis, we run into how the economy affects the organization. I consider the following economic factors when doing a PEST analysis:
- Tax rates
- Recession
- Interest rate
- Inflation rates
- Exchange rates
- Unemployment rate
For instance, exchange rates affect a global organization by influencing the cost of imported and exported goods. Furthermore, interest rates influence the cost of capital available to the organization. Thus they are significant in the expansion and growth of a business. Find more economic factors and examples of how they affect businesses here.
Social Factors
Social factors include different cultural and demographic aspects of society. These can affect the macro-environment in which the organization operates.
In the ‘S’ part of the PEST analysis I usually examine:
- Age distribution
- Cultural diversity
- Demographics shifts
- Population growth rate
- Health consciousness and trends
- Changing consumer lifestyles and preferences
A study of these factors can help organizations understand the dynamics of existing and emerging potential markets along with future customer needs.
Social factors are more unpredictable than economic and political factors, simply because people are unpredictable. But every business needs customers. And what and how they buy has an immediate effect on an organization’s profitability.
Based on these social factors, marketers create buyer personas. These avatars are necessary for businesses to target the ideal customer.
For example, if you’re selling whey powder, you go after fitness enthusiasts and bodybuilders. You are looking for people that follow an active lifestyle. Hence, a declining trend in health consciousness doesn’t seem encouraging.
That’s the tip of the iceberg. Learn more about social factors here.
Technological Factors
Technological factors aren’t important only for tech-related businesses. The (T) part in PEST analysis may affect even the most old-school organization that’s been operating for a century.
Technology is evolving at a rapid pace and consumers are becoming extremely tech-savvy. With the advent of new technology, older technology gets outdated and obsolete. If an organization does not look out for technological changes, it can lag behind its competitors.
I often include the following technological factors when conducting a PEST analysis:
- E-commerce
- Cybersecurity Threats
- Emerging Technologies
- Big data and computing
- AI and Machine Learning
- Supply Chain Automation
Let’s consider the advancements in computing; more specifically, networking.
If a business offers the latest and fastest Wi-Fi in their store, it’s an added luxury. It’s annoying if it still operates on 3G speeds, but won’t ruin sales. However, if they handle all receipts in an online database and that goes offline because they didn’t keep their network infrastucture up-to-date then they have a major problem. Especially in big holidays like Black Friday.
Again, this is about impact on the business operation. How will ‘X’ technology affect the business in the long and short term? That’s what we’re trying to figure out with PEST analysis.
A ton more technological factors can be found here.
PEST Analysis Examples
Here is a hypothetical PEST analysis example that can give you a clear understanding of how this works:
| Political | Economic | Social | Technical |
| – New state tax policies for accounting – New employment laws for employee handbook maintenance – Political instability in a foreign partner country | – International economic growth – Changes in interest rates | – Shift in educational requirements and changing career attitudes – Population growth rate | – Automated processes in the industry – Rate of innovation – Changes in technology incentives |
Here at PESTLEanalysis.com I rarely limit myself to PEST analysis. I almost always go the extra mile and include the Legal and Environmental factors when I initiate a PEST analysis. This leads to a more detailed analysis called PESTLE.
PESTLE Analysis: An extension of PEST Analysis
PESTLE analysis is an extension of PEST that is used to assess two additional macroeconomic factors. These factors are theLegaland Environmentalconditions that can have an impact on a organization. Examples of PESTLE analysis are similar to those of a PEST analysis, but they will include factors such as these:
Legal:
- Discrimination laws
- Health and safety laws
- Consumer protection laws
- Copyright and patent laws
Environment:
- Waste management
- Changes in weather and climate
- Laws regarding pollution and recycling
- Use of green or eco-friendly products and practices
So, if you want to assess a business situation comprehensively, a PESTLE analysis is a definite must. You can find more about that analysis here.
Why PEST Analysis Is Important For Every Business
So, now that we did a PEST analysis, how’s that going to help the business?
What does a five-year business plan look like? Or a ten-year plan? It likely involves growth.
Whether it’s the expansion of a product line or opening stores in new locations, business changes need proper preparation. And that’s where the PEST analysis comes in.
PEST analysis is the foolproof plan for business expansion!
Both new business owners and veterans should include PEST analysis in their business plan. By breaking down the critical influences in the P.E.S.T. categories, businesses get a better understanding of whether their next business move is strategic or doesn’t make sense.
For example, politics isn’t just about political tensions, unrest and elections. Politics are also about trade policies, regulations and taxation. Companies doing business worldwide have to consider laws in the countries they operate, as well. Even if they aren’t doing international trade yet, it could be a possibility in the future, and going in blind is a good way to toss success out the window.
PEST analysis helps people become aware.
Aware of how political parties and regulations can impact a business. And how the economy (past, present, and future) affects an industry. It allows people to understand consumers — who they are, what they buy, and why they don’t buy. And finally, it identifies what technology is necessary for the development and success of a product, business, or industry.
It’s almost like an outline. It shows people what influences impact the quality, success, or devastation of businesses and industries. You can’t stop the four influences, but if you’re aware of them and their impact, you can plan around, against, or with them.
PEST analysis is often used by business analysts, marketers, students, and business owners, since it’s super important for every business!
All you need to do a proper PEST analysis is time. And the payoff is worth every second.
How PEST analysis works
PEST analysis requires research and data, sometimes ten years old, sometimes only a couple. The more information I have to go through, the more accurate my final results will be. By looking into the past and the present, I can make predictions for the future.
By studying these recent developments through a PEST analysis lens, organizations are deciding whether to jump into this for the long haul or for the time being.
You want to look at your industry in a similar light. Ten years ago, did it exist? Has it slowed down within the last two years or are more companies diving in? More competition can be a strong sign an industry is booming, but it could also be the first sign of oversaturation.
Break down your assessment into the four categories of PEST analysis. Start with politics and work your way through the remaining factors. Or start from the bottom. Whatever gets the job done and makes the analysis enjoyable.
How to Do a PEST Analysis From Scratch
I’ve written dozens of PEST analyses over the last couple of years. Below I document my process on how to do a PEST analysis, even when you’ve never written one before.
You should have a topic in mind. Most PEST analyses are about a specific business, industry, or product. However, they can also be applied to countries, too. You can’t start without a topic, though, so have it ready.
Where to find information for your PEST analysis
It’ll be easier to find and segment information if you break your analysis down into four sections, like the acronym implies:
- Political
- Economic
- Social
- Technological
Each section will require its own information. However, some of this information will overlap.
For instance, the economy is often closely tied to political (in)stability. And the state of the economy always affects consumers (social). You don’t need to look for these patterns specifically— it’ll become apparent as you discover new information.
Start with the history
You should be familiar with your topic. If you’re not, read about its history. Learn how it was established, how long it has been around, and who founded it. Read about any major achievements on the organization in question over the last few years. Jot down notes whenever something that seems relevant or important pops up.
After this informational primer, it’s time to start on the four sections. I do my PEST analysis in order of the acronym because the information often bleeds into the next section.
Finding Political Information
Political information is easier to find than in other sections of the analysis (social and technological, specifically). Here, you’ll want to investigate the current political climate.
For instance, if the organization originates from America, you’ll research the current political parties. Who is in charge? Has this affected business operations in any way?
If your topic (business, product, industry) was established years ago, what was the political climate like then? Are different parties in power now? If this is the case, then you’ll want to compare how things have changed for your topic from then to now.
This is also the section where you’ll look into laws and regulations affecting business. Remember the list we went through in the beginning.
I find this information with a simple Google search. Such as “tariff laws USA” (plug in the country you’re searching for if it’s not the United States).
It’s best to get this information from a government site. These sites end in .gov. You may also find information from organizations (websites ending in .org) but not all of these sites are legitimate organizations. Be wary while you research.
Honestly, most of the information you’ll find is dense. But it’s easier if you have a goal. Look for signs of:
- Government (in)stability
- Possible political corruption
- New bills/regulations that may impact your topic
- Any issues your topic has had with current/former regulations or political parties
If your topic is a company, finding the right information may be easier. Search for “company name + political issues” or “company name + policies” and see what comes up. Avoid any information from untrustworthy sites and sites with no legitimate source.
Finding Economic Information
While you’re researching political information, you may come across connections to the current economy. For instance, political instability often leads to economic instability. This causes unemployment rates to rise and employee strikes. This affects how much disposable income people have.
You may have already found information in your political section that confirms economic problems. But if you haven’t, search government sites for current tax rates, interest rates (if your topic involves international business), and the current state of the economy. Is it good? Thriving? Or bad and declining?
Again, use government websites. Search for economic statistics over the last few years. If your topic is an industry, see how many companies (startups) have started within the last few years.
If your topic is a business that has international stores, look into the relationship between the country of origin and each country the company does business. If the relationship is good, it’s often a good outlook for the company. But if it’s bad, it may lead to problems. What problems? Do a bit of digging online.
Also, if your PEST analysis is for a company, you may look into stocks. Have they been declining? On the rise? Because if it’s the former, then the business may not be looking good. And you’ll want to find out why.
If my topic is a business, I sometimes check out the competition. I’ll look into how that other company has been fairing economically, specifically how its sales have risen or fallen over the last couple of years. If it’s dropped products, shifted marketing efforts, etc., I want to know why. A competitor analysis isn’t always necessary, but it can shed light on possible problems your topic may face.
Finding Social Information
This section is a bit trickier. Political and economic sectors rely heavily on data and evidence. You can find this information on government websites. News sites too, even. And although you can find databases about demographics and population growth for this section — all applicable in a PEST analysis — I wouldn’t stop there.
In the social section, I often examine how consumers are impacted by political and economic factors. You can draw conclusions based on the information you’ve already gathered from your political and economic segments.
For instance, if there is political instability and the economy is on the fritz, then consumers may feel uneasy. They may have fewer job options. And that means they’re less likely to spend frivolously. If your topic is a luxury product, it may mean the company that makes it may have lower sales this year.
But you also want to learn about how consumers feel about your topic. If it’s a company, do consumers generally like it? Or is public opinion souring? There should be a reason for why.
Consider Facebook. The company’s CEO, Mark Zuckerberg, has consistently been in hot water over the years. If not for data breaches affecting millions of users, but for their shady involvement with fake news and political tampering.
This has led many consumers to shy away from using Facebook. And this affects businesses that use Facebook to reach new customers.
In this section of the PEST analysis, I’m more likely to search for my topic on news sites and publications. The more popular the topic, the easier it’ll be to find articles written about it. But if the topic has ever been in the news, you’ll likely find it online.
Websites to search include:
- Consumer Reports
- Local news websites
- Other reputable sources
If you know your topic has been in the news for something bad, you can search the topic + the problem.
Although the information may overlap, take keynotes here. See how the problem is affecting consumer opinion. You may even want to take a look at the comments (if there are any) and see what people are saying. It’s coming straight from the lion’s mouth (consumers).
I think many PEST analyses favor numbers too much. We live in a world where anyone with an opinion can be heard, thanks to the internet. And enough of those voices can cause a business to change its policies and products. It can even cause the company to collapse.
So it’s important to search for how consumers feel about your topic too.
Finding Technological Information
This section of the PEST analysis is a bit abstract as well. You’re looking into how new technological advancements has affected your topic positively or negatively. You should also look into what technology your topic uses (currently). And what technology they may want to incorporate.
You may want to look at competitors if your topic is a product or business. See what others are using. And think about why they are.
Press releases
It may be beneficial to search for press releases involving your topic, if possible. If your company is using new technology, they may have announced it through a press release. You can search “company name + press release” or search through these press release websites:
- NewsWire
- Backlinkfy
- PR NewsWire
- NPR: National Public Radio
You may also find other information here for the other sections of the PEST analysis. Which is just an overall bonus. If all else fails, check if your topic has a website (unless it’s an industry or country). Discuss how they use social media (if they don’t, then… discuss that too!). In this section, you’re assessing what your topic uses, what it doesn’t, and why.
Putting it all together in a final PEST analysis
You’ll likely have heaps of information at hand. For some it’ll feel like too much — but that’s never the case for a PEST analysis. As you begin to read through each section’s notes, incorporate the most interesting, pressing, or surprising information. If anything overlaps with other sections, include that too.
I write each section of a PEST analysis at a time. I take my notes and create coherent sentences. Sometimes I make a list of the most important points and include them that way. If the section is long, I’ll use subheadings to break up the information.
Work on each section separately. And then if there are overlapping themes, incorporate those in. You may want to use those at the end of each section to connect to the next.
Once you’ve done this, you’ve completed your PEST analysis! Most of the work is in finding the information and making it coherent. The last 10-20 percent is putting it all together. So, once the research phase is done, you’re basically done too!
Understanding PEST Analysis: Taking Action
In conclusion, developing an understanding of what is PEST analysis becomes even more important when a company is about to launch a new business or a new product. In general, when they are about to change something drastically. That’s when all these factors play an important role in determining the feasibility and profitability of the new venture.
Therefore, developing an understanding ofPEST analysisis useful for organizationsforanalyzing and understanding the ground realities of the environment theyhave to operate in.
Realizing what is PEST and knowing how to take this analysis into consideration, the organization can be in a better position to analyze the challenges, environment, factors, opportunities, restrictions and incentives it faces. In case an organization fails to take into account any one of these factors, it may fail to plan and operate properly.
But don’t PEST analysis stop you. Here are some variations that may come in handy when assessing how the external environment affects an organization:
- STEEP Analysis
- STEEPLED Analysis
- SWOT Analysis
