PEST Analysis

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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 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 should 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 or launch a new product. It can also be used 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 for reasons beyond control.

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

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 the industry type, geographical location, and the nature of the offered products and services. For example, retail stores 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. Another alternative is the STEEPLED variation which adds demographic, ethical, environmental and legal to the four perspectives.

The following tree structure is the outcome of a brainstorming session to identify all the possible PESTLE factors for a specific company.

Conducting an Environmental Scanning Analysis

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 the green light indicates an opportunity while the red light indicates a threat.