What Is a PEST Analysis?

What is a PEST analysis?

A PEST analysis is an assessment of the political, economic, social and technological factors that could affect a business now and in the future. The purpose of a PEST analysis is to give a company’s management team a better understanding of the market they’re operating in now and how they can prepare for potential shifts, such as regulatory changes.

Elements of a PEST analysis

A PEST analysis covers political, economic, social and technological factors. Here’s more about each:

P (political)

The “P” in the analysis refers to the political factors that help or hinder a business. 

“We see this currently in the U.S., particularly in the area of international business,” said grant professional Donna Lubrano. “We look at tariffs, trade deals as they are developed not only by the economics or business side but what political relationships influence those decisions.”

A PEST analysis examines the following political factors:

• Employment regulations: Will it become more expensive to employ staff because of minimum-wage laws, safety-at-work legislation, pension contributions, healthcare contributions and more? Are tax authorities classifying more contractors as employees?
• Environment: Can profit levels be maintained if authorities demand a less-polluting production process or if they levy a charge on companies in your sector for post-use cleanup of your products?
• Government policy: Are laws that a government passes conducive to businesses and, specifically, to your business?
• Intellectual property protection: Do a country’s laws and court systems recognize the rights of intellectual property holders? In addition, how hard is it to seek redress in instances of copyright infringement and intellectual property theft?
• Property rights: Do you have sufficient rights to protect and exploit resources and your assets?
• Stability: Unstable political environments, particularly in countries with regular (and often forced) changes of government, make planning difficult. In more stable countries, will a particular party coming to power materially affect your business and its profitability?
• Tariffs: If you expand your business internationally by importing materials for production or exporting finished products to customers, how will tariffs affect your business’s production costs and pricing competitiveness?
• Taxation: How does the current government’s tax policy affect your small business taxes? For example, does it impact your business’s cash flow, allowable tax deductions and profit margins?
• Trade restrictions: Are there sanctions (or likely sanctions) against doing business with a country you’re targeting?

E (economic)

The “E” in a PEST analysis refers to outside economic issues that can play a role in a company’s success. Look at interest rates, exchange inflation, unemployment, gross domestic product, credit availability, and the rise and fall of the middle class. 

A PEST analysis examines the following economic factors:

• Access to credit: For higher-ticket products and services, can consumers or business customers easily access competitively priced credit to purchase from your company?
• Business investment levels: Do companies in your target market regularly replace their machinery and equipment, or do they try to make these assets last as long as possible?
• Cost of living: How high is the cost of living where you do business? Higher prices affect business competitiveness because they increase housing costs and require staff to be paid more to mitigate those costs.
• Economic growth or decline: What is the current state of the economy? If an economy is improving, consumers and businesses will likely have more cash to purchase products or services. Economic growth triggers higher investment levels by businesses in general.
• Exchange rates and interest rates: What are the economic considerations for other countries that affect your business? Countries with more robust economies suffer fewer currency-value fluctuations; this is important if you import or export products. In addition, these countries are more likely to have higher interest rates that dampen local inflation, although this has not always been the case since the Great Recession of 2008-2009.
• Tariffs and restrictions: How do tariffs and international restrictions affect your business? Globalized countries where tariffs and restrictions have largely been removed enjoy faster economic growth and improved socioeconomic conditions for customers and staff.
• Inflation: What is the current level of inflation? Higher levels of inflation erode the value of money faster. In some cases, businesses may not be keen to pass on higher costs to customers, so profits fall.
• Labor costs and workforce skill levels: What is the state of the labor market? A shortage of workers with in-demand career skills will lead to rising labor costs that will hurt profitability. Sometimes, a shortage may be severe enough to require companies to spend more on employee training.
• Market conditions: How fast is the market growing? How big is the total market? How many competitors are in this market, and how does this affect pricing and costs?
• Spending habits: Are the consumers or businesses you target spending more money on your products and services? Are they spending a different way — for example, moving from in-person to online spending?
• Tax levels: What are the tax rates in the areas where you’d like to do business? If given a choice between two states or countries where almost every other PEST consideration is equal, a company may be more likely to target lower-tax countries first for investment.

S (social)

The “S” in a PEST analysis relates to the social environment of a given industry’s market — how consumer needs are shaped and what brings consumers to the market for a purchase. 

“We look at what changes in culture and society are taking place,” Lubrano said. “The drive to eat healthier, the drive to care for the environment, baby boomers staying in the workforce longer, adults having fewer children later in life. All of these impact how consumers buy houses, cars, etc.”

A PEST analysis examines these social factors:

• Productivity: How productive is your workforce? The more productive a workforce is, the more competitively your business can price products or services or increase profit margins.
• Consumer trends/tastes/fashions: What are the latest consumer trends, and should your business take advantage of them? In the process of turning ideas into products, there is often a substantial time lapse between inception, creation and launch. Therefore, tracking trends, tastes and fashions is crucial to ensuring any new product’s success.
• Corporate responsibility and values: What are your company’s and employees’ values? It’s increasingly important to Gen Z and millennials that their brands of choice support their values. Should you launch a corporate social responsibility program and implement diversity, equity and inclusion training?
• Division of wealth: Is there a large wealth gap? According to an often-cited 2015 study in the journal Human Relations, economic inequality hurts organizational performance. It also affects growth in consumption rates during periods of economic decline.
• Education: What are the education levels of your staff and candidate pool? Educational quality varies among states and countries. Lower education levels require a more significant investment in staff training and may be matched by lower levels of pay.
• Employment patterns and job market trends: What are the job market and typical work arrangement like in your area? Many states and countries have shifted toward part-time work and self-employment, making it harder to recruit and hire employees. In addition, the type of staff you wish to recruit may be in particular demand, leading to higher employment costs.
• Generational attitude shifts: Does your company employ people of different generations? Workers’ expectations of employers may differ among generations, necessitating a change in how team members are rewarded, targeted and remunerated.
• Population health: Will you invest in your staff’s mental and physical well-being to reduce absenteeism and improve productivity?
• Population demographics: Does a state or market contain your ideal potential employees and customers?
• Population growth rate: What is the population growth rate in your area? States or countries whose populations are growing primarily through immigration may experience slower pay-rate growth due to increased competition.
• Social mobility: How easy is it for workers to move up the socioeconomic ladder? States or countries with larger middle classes that are easier to enter often have higher economic growth rates and lower income inequality rates.
• Unionization: Is unionization common in your industry? How might this affect the expectations of your workforce? Many employers believe that more highly unionized workforces cost more and are less flexible, although this is disputed.

T (technological)

Technology plays a massive role in business and can have positive and negative effects. Some organizations may have challenges adjusting to tech trends, including new products and services, so it’s essential to assess existing and imminent technology from all angles.

A PEST analysis examines these technological factors:

• Artificial intelligence (AI): How will the growth of AI affect your business? AI is transforming businesses with new ways to optimize efficiency and productivity. What are the potential applications for your sector and business?
• Automation and robotics: How will workplace automation technologies affect your industry and business? Many sectors now automate as many processes as possible to use raw materials more efficiently, offer better service to clients, and manufacture more products at a cheaper cost per unit.
• Cybersecurity and data protection: Does your business have solid cybersecurity and data protection measures in place? Cyberattacks continue to affect businesses, so companies should collect only the data they need for operation and protect that data with robust cybersecurity practices.
• Disruptive technologies: What new technologies might open new markets for your company? Which of these should you invest in to grow your business?
• Innovation: Given the accelerated rate of technological innovation affecting many sectors, should you invest in innovation now to stay ahead of the curve, or react to competitors’ innovations?
• Remote work: Do existing technology and infrastructure allow staff to work remotely? Are you accessing appropriate remote work tools to maximize productivity?
• Research and development (R&D): Should you invest in R&D in jurisdictions with significant R&D tax credits and breaks?
• Social networking: Should your company invest in social media for business to promote its products and services and hire staff via social platforms? Should you invest in apps such as Slack and Asana to enable smoother communication among employees in different locations?
• Tech hubs: Should your company (or part of the company) relocate to tech hubs where technological innovation is more likely because of the availability of staff, investors, suppliers, educational establishments and service providers?

How to conduct a PEST analysis

Now that you know what a PEST analysis is, it’s time to gather the data. Follow these steps to conduct a PEST analysis:

1. Identify the political factors.

Conduct internal research to identify what types of laws or policies affect your company. These factors may include the following:

• Material or product sourcing (e.g., import quotas, tariffs, price supports and subsidies, preferences)
• Human resources (e.g., visas, Equal Employment Opportunity Commission requirements, vaccine requirements)
• Manufacturing/operations (e.g., Occupational Safety and Health Administration requirements)
• Accounting and finance (e.g., IRS requirements; tax hikes, breaks and deductions; Securities and Exchange Commission reporting requirements)
• Marketing and customer demand (e.g., online business law requirements, CAN-SPAM Act)

Consult an attorney or the people in charge of HR compliance, safety, reporting, finance and accounting. Each should be familiar with current and proposed laws.

2. Identify the economic factors.

Determine which economic factors affect your business.

• If you sell consumer goods and services, look at the consumer price index, inflation, employment, consumer confidence, disposable income and wages.
• If you sell high-ticket items that require financing, look at interest rates.
• If you sell business-to-business (B2B) services, such as marketing or consulting, look at unemployment and other recession measures.
• If you sell or buy products as components, consider supply chain issues and tariffs.
• If you employ relatively low-wage workers, examine salaries and employment to determine whether you need to raise wages to attract talent.

3. Identify the social factors.

If you have conducted market research on customer or target market perceptions and demographics, this step is at least partially done. It’s also a good idea to read industry publications, which frequently highlight social factors that affect the industry as a whole. 

Talk to your customer service and sales staff to get feedback from customers on why they buy,  return or cancel your offerings. If you have a local business, conduct a market analysis periodically to understand your potential customers.

4. Identify the technological factors.

Although identifying technological factors is particularly important in tech industries, these considerations affect every industry in some way. 

Read industry publications and conduct a competitive analysis to learn about new technologies and innovative ways to deliver products and services in your field. Look for the following updates:

• New programming languages and methods that will make your product or service faster, more accurate or more detailed
• New apps that deliver your products or services in different ways
• New technology or processes that you can use to make your products stronger, smarter, cheaper, more convenient or more readily available

Benefits of a PEST analysis

A PEST analysis focuses exclusively on external factors, such as current and future regulations, taxes, political issues, environmental legislation and employment laws. Here’s how it can help your business. 

• A PEST analysis improves your understanding of your company. No company is an island; each business is intricately connected to its customers and society. By understanding the factors that can boost or reduce your success, you can get a sense of how your business can make a difference in other people’s lives.
• A PEST analysis informs long-term strategic planning. Conducting a PEST analysis every year helps you anticipate changes and plan for the future. You have the opportunity to prepare for shifts in the market and society in general. This will save you money, prevent lost revenue and position you well against competitors.
• A PEST analysis alerts you to potential threats and dangers. When you are aware of potential threats, you can address or prevent them. Be proactive about implementing policies to gain a competitive edge, devote resources to influencing laws that may hurt your business, or make strategic alliances that give you a stronger market position.
• A PEST analysis provides insight into valuable business opportunities. Be the first in your field to take advantage of beneficial government policies or market opportunities. By keeping your finger on the pulse of the market, you can be in the right place with the right message. 

A well-executed PEST analysis can help your company successfully navigate changes in the world around it and signal new opportunities to expand into different markets and territories. 

PEST analysis disadvantages and limitations

Although there are many potential benefits of a PEST analysis, it can also have limitations. Consider the following drawbacks:

• Ever-changing environments: Because these environments are so dynamic, your analysis could be outdated within days or even hours.
• Guesswork: You must make assumptions about specific factors, so there’s always a chance of miscalculation.
• Data overload: Because a PEST analysis involves such large data sets, it takes careful analysis to parse the data and decide how to use it to your advantage.
• Risk of inaccuracy: Most of the time, you’ll get your information from outside sources, so you can’t be sure it’s 100 percent accurate.

What is a PESTLE analysis?

A PESTLE analysis is similar to a PEST analysis, but it includes two additional factors: legal and environmental. 

• Legal: When examining legal factors, a company should evaluate how legal changes and interpretations could affect it, directly or indirectly, according to Daniel Feiman, managing director at consulting and training firm Build It Backwards. Feiman recommended examining law changes, global law conflicts and Supreme Court decisions in this portion of the analysis.
• Environmental: For the environmental portion of the analysis, Feiman recommended examining how environmental regulations, such as laws surrounding endangered species, could affect the business. 

Feiman also suggested measuring each PESTLE factor against the following considerations:

• Potential impact: Low, medium or high
• Time frame: Immediate, short-term or long-term
• Type: Positive or negative
• Direction of impact: Increasing or decreasing
• Relative importance: High, medium or low

Other types of business analyses

For a PEST analysis to be truly valuable, it should be used in conjunction with the following analyses:

• SWOT (strengths, weaknesses, opportunities and threats): A SWOT analysis allows you to identify your company’s strengths, weaknesses, opportunities and threats. SWOT analyses are best suited for making major business decisions or determining the associated risks.
• MOST (mission, objectives, strategies and tactics): A MOST analysis helps a business align with its missions and objectives by analyzing its internal strategies and tactics. This analysis is especially helpful for making organizational strategy decisions.
• SCRS (strategy, current state, requirements and solution): An SCRS is a solution-based analysis that helps you identify the correct course of action to address a business challenge or issue. By analyzing your business’s current state and requirements, you can develop an effective strategy that will solve the problems your business faces. 

Using a PEST analysis for business decision-making

Using a PEST analysis to assess your business’s environment, including any external threats and opportunities, is an excellent way to inform decisions and strategies. It is especially effective for larger businesses that want to understand their place in their industry.

Sammi Caramela contributed to this article. Source interviews were conducted for a previous version of this article.