Adapting to Change: Using PEST Analysis for Better Decision-Making

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Also known as Environmental Scanning Analysis.

Variants include STEEPLED and PESTLE.

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 these external factors might affect the business and subsequently formulate adaptive strategies. PEST analysis is often linked with SWOT analysis, and together, they provide a comprehensive overview of an organization’s strategic situation.

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 organizations seek to enter new markets or launch new products. PEST analysis can also be useful in project management to increase the awareness of the opportunities and threats a project may have. This helps avoid starting a major project that is likely to fail due to external uncontrollable factors.

PEST Analysis Four Perspectives — PEST stands for Political, Economic, Social, and Technological external factors

PEST analysis is used to analyze the impact of four key environmental perspectives that have the potential to affect a business. These external factors can vary in importance based on the industry type, geographical location, and the nature of products and services offered. For example, retail stores tend to be more influenced by economic and social factors than political and technological factors.

There are other variations that are based on the PEST model 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 alongside the foundational four perspectives. Alternatively, STEEPLED extends the analysis by including demographic, ethical, environmental, and legal considerations.

Presented below is a hierarchical structure resulting from a brainstorming session conducted to identify the comprehensive spectrum of PESTLE factors related to a specific company.

Conducting an Environmental Scanning Analysis

The following steps outline the procedure for conducting an environmental scanning analysis using the PEST method.

With your team, clearly describe the purpose of the environmental scanning analysis.
Brainstorm the external environmental factors that may affect the business and its performance.
Brainstorm the potential opportunities and threats that may arise from each factor.
Identify the sources of information for each environmental factor.

5. Collect the external environment data from the appropriate data sources.

6. Analyze the collected data and then present the results to the appropriate stakeholders.

7. Take appropriate actions where you have identified significant opportunities and threats.

There are many external and internal sources that can be used to gather the required information when conducting an environmental scanning analysis

Example

The following example uses a four-field matrix to present the outcome of a PEST analysis for an organization. Note that green indicators signify opportunities while red indicators signify threats.

There are many tools that are available to help the execution of a PESTLE analysis. One straightforward approach involves utilizing this PESTLE analysis template.

Wrapping Up

Alterations within the business environment can yield significant opportunities or cause significant threats. Opportunities may arise from a changed government policy that will increase long-term economic growth, while threats may come from increased tax rates or introduction of new taxes. PEST analysis should provide a comprehensive understanding of all those opportunities and threats which have either already affected the organization or are potentially looming on the horizon.

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