In business analysis, PEST analysis ("political, economic, socio-cultural and technological") describes a framework of macro-environmental factors used in the environmental scanning component of

strategic management In the field of management, strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's managers on behalf of stakeholders, based on consideration of resources and an assessme ...

. It is part of an external environment analysis when conducting a strategic analysis or doing

market research Market research is an organized effort to gather information about target markets and customers: know about them, starting with who they are. It is an important component of business strategy and a major factor in maintaining competitiveness. Ma ...

, and gives an overview of the different macro-environmental factors to be taken into consideration. It is a strategic tool for understanding market growth or decline, business position, potential and direction for operations. PEST analysis was developed in 1967 by Aguilar as an environmental scanning framework. Aguilar argued that firms must scan the economic, technical, political and social categories (ETPS) that may affect strategy, defining environmental scanning as follows, “scanning for information about events and relationships in a company’s outside environment, the knowledge of which would assist top management in its task of charting the company’s future course of action.”

Composition

The basic PEST analysis includes four factors: * Political factors relate to how the

government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government i ...

intervenes in the economy. Specifically, political factors have areas including tax policy,

labour law Labour laws (also known as labor laws or employment laws) are those that mediate the relationship between workers, employing entities, trade unions, and the government. Collective labour law relates to the tripartite relationship between employee, ...

environmental law Environmental law is a collective term encompassing aspects of the law that provide protection to the environment. A related but distinct set of regulatory regimes, now strongly influenced by environmental Legal doctrine, legal principles, focu ...

, trade restrictions, tariffs, and political stability. Political factors may also include goods and services which the government aims to provide or be provided ( merit goods) and those that the government does not want to be provided ( demerit goods or merit bads). Furthermore, governments have a high impact on the

health Health, according to the World Health Organization, is "a state of complete physical, mental and social well-being and not merely the absence of disease and infirmity".World Health Organization. (2006)''Constitution of the World Health Organ ...

education Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty ...

, and

infrastructure Infrastructure is the set of facilities and systems that serve a country, city, or other area, and encompasses the services and facilities necessary for its economy, households and firms to function. Infrastructure is composed of public and priv ...

of a nation. * Economic factors include

economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate o ...

exchange rate In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of t ...

s, inflation rate, and

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...

s. These factors can drastically affect how a business operates. For example, interest rates affect a firm's

cost of capital In economics and accounting, the cost of capital is the cost of a company's funds (both debt and equity), or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". It is used to evaluate ne ...

and therefore to what extent a business grows and expands. * Social factors include the cultural aspects and health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. High trends in social factors affect the demand for a company's products and how that company operates. For example, the ageing population may imply a smaller and less-willing workforce (thus increasing the cost of labour). Furthermore, companies may change various management strategies to adapt to social trends caused from this (such as recruiting older workers). * Technological factors include technological aspects like R&D activity,

automation Automation describes a wide range of technologies that reduce human intervention in processes, namely by predetermining decision criteria, subprocess relationships, and related actions, as well as embodying those predeterminations in machines ...

, technology incentives and the rate of technological change. These can determine

barriers to entry In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or ha ...

, minimum efficient production level and influence the

outsourcing Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...

decisions. Furthermore, technological shifts would affect costs, quality, and lead to

innovation Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed enti ...

Variants

Variants that build on the PEST framework include: * PESTEL or PESTLE, which adds legal and

environmental A biophysical environment is a biotic and abiotic surrounding of an organism or population, and consequently includes the factors that have an influence in their survival, development, and evolution. A biophysical environment can vary in scal ...

factors. Legal factors include

discrimination law Anti-discrimination law or non-discrimination law refers to legislation designed to prevent discrimination against particular groups of people; these groups are often referred to as protected groups or protected classes. Anti-discrimination laws ...

, consumer law, antitrust law, employment law, and health and safety law, which can affect how a company operates, its costs, and the demand for its products.

Environmental A biophysical environment is a biotic and abiotic surrounding of an organism or population, and consequently includes the factors that have an influence in their survival, development, and evolution. A biophysical environment can vary in scal ...

factors include ecological and environmental aspects such as weather, climate, and

climate change In common usage, climate change describes global warming—the ongoing increase in global average temperature—and its effects on Earth's climate system. Climate change in a broader sense also includes previous long-term changes to ...

, which may especially affect industries such as tourism, farming, and insurance. For instance, growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer, both creating new markets and diminishing or destroying existing ones. Further, the PESTLE analysis is one of the most frequently applied models in the evaluation of the highly dynamic external business environment. It is employed as a method in research due to its usefulness. For example. a growing number of studies applied this analytical tool in different sustainable projects, including the evaluation of external factors affecting management decisions for coastal zone and freshwater resources, development of sustainable buildings,

sustainable energy Energy is sustainable if it "meets the needs of the present without compromising the ability of future generations to meet their own needs". Most definitions of sustainable energy include considerations of environmental aspects such as green ...

solutions, and transportation. * ETPS economic, technical, political and social. * SLEPT, adding legal factors. * STEPE, adding ecological factors. * STEEP, including environmental factors. * STEEPLE and STEEPLED, adding ethics and

demographic Demography () is the statistical study of populations, especially human beings. Demographic analysis examines and measures the dimensions and dynamics of populations; it can cover whole societies or groups defined by criteria such as ed ...

factors (occasionally rendered as PESTLEE). Demographic factors include gender, age, ethnicity, knowledge of languages, disabilities, mobility, home ownership, employment status, religious belief or practice, culture and tradition, living standards and income level. * DESTEP, adding demographic and ecological factors. * SPELIT, adding legal and

intercultural Cross-cultural communication is a field of study that looks at how people from differing cultural backgrounds communicate, in similar and different ways among themselves, and how they endeavor to communicate across cultures. Intercultural communi ...

factors. Intercultural factors considers collaboration in a global setting. Other factors discussed in chapter 10 of the SPELIT Power Matrix include the Ethical, Educational, Physical, Religious, and Security environments. *PMESII-PT, a form of environmental analysis which looks at the aspects of political, military, economic, social, information, infrastructure, physical environment and time aspects in a military context. *STEER considers sociocultural, technological, economic, ecological, and

regulatory Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. ...

factors, but does not specifically include political factors. *TELOS framework explores Technical, Economic, Legal, Operational, and Scheduling factors.

Applicability of the factors

The model's factors will vary in importance to a given company based on its industry and the goods it produces. For example, consumer and B2B companies tend to be more affected by the social factors, while a global defense contractor would tend to be more affected by political factors. Additionally, factors that are more likely to change in the future or more relevant to a given company will carry greater importance. For example, a company which has borrowed heavily will need to focus more on the economic factors (especially interest rates). Furthermore, conglomerate companies who produce a wide range of products (such as Sony, Disney, or BP) may find it more useful to analyze one department of its company at a time with the PESTEL model, thus focusing on the specific factors relevant to that one department. A company may also wish to divide factors into geographical relevance, such as local, national, and global.

Limitations

Whereas the PEST analysis is broadly used in business practice, critics argue that it has limitations. PEST analysis can be helpful to explain market changes in the past, but it is not always suitable to predict or foresee upcoming market changes. The reason is that PEST analysis offers a broad range of categories that can be deceivingly simple because they lack specific criteria about what exactly catalyses disruption. In other words, the PEST analysis does not offer guidelines for what to emphasise and what not to emphasise within the categories. As a result, firms can be blindsided by disruptions that cannot be neatly defined within the categories.

References

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