PEST analysis is a strategic and structured tool for evaluating the external environment of an organization. It allows any organization to understand the macro-environmental factors that affect its performance and its ability to grow. The aim is to understand how those external factors will affect the business, then take appropriate actions to adapt to the changing environment. PEST analysis is often linked with SWOT analysis, and both tools complement each other and are often used together.
Changes to the business environment can either create great opportunities or cause significant threats. Opportunities may come from a changed government policy that will increase long-term economic growth. Threats may come from an increase in tax rates or introduction of new taxes. PEST analysis will provide a comprehensive understanding of all those opportunities and threats that are affecting or might affect the organization in the future.
PEST analysis is often used when conducting strategic analysis, and serves as a useful input into the strategic planning process. It can be useful when an organization wants to enter a new market in which traditional assumptions about the business need to be changed. It can also be used in project management to increase awareness of the opportunities and threats a project may have. This will help avoid starting a major project that is likely to fail for reasons beyond control.
PEST analysis is used to analyze the impact of four environmental perspectives that might affect a business. These four perspectives are: political, economic, social and technological. These external factors can vary in importance based on industry type, geographical location, and the nature of the offered products and services. For example, store-based retailers tend to be more affected by the economic and social factors than the political and technological factors.
There are other variations that are based on the PEST framework and can be used based on the needs of the organization. For example, PESTLE is an alternative of PEST which adds environmental and legal factors to the four perspectives, making them a total of six factor groups. Another example is the STEEPLED variation which adds the demographic and the ethical factors, making them a total of eight factor groups.
Conducting an Environmental Scanning Analysis
- With your team, clearly describe the purpose of the environmental scanning.
- Brainstorm the external environmental factors that may affect the business and its performance.
- Identify the potential opportunities and/or threats that may arise from each factor.
- Identify the sources of information for each environmental factor.
- Collect the external environment data from the appropriate data sources.
- Analyze the collected data and then present the results.
- Take appropriate actions where you have identified significant opportunities and threats.
There are many tools that can help you to conduct PEST Analysis. One of the simplest ways is to use this PESTLE analysis template.
The following tree structure is the outcome of a brainstorming session to identify all the possible PESTLE factors (for a specific company).
The following example uses a four-field matrix to present the outcome of a PEST analysis for an organization. Note that the green light indicates an opportunity while a red light indicates a threat.