What Is PEST Analysis? (With Significance And An Example)
Updated 12 November 2022
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There are various external and internal factors that can affect the growth and profitability of a company. World events and government policies can have a greater impact on larger firms that possibly have an international presence. Carrying out PEST analyses can help diminish the impacts of such factors, and learning about this concept is important for professionals in a business role. In this article, we explore what a PEST analysis is, explain why it is important and show you how to complete one.
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What Is A PEST Analysis?
PEST analysis stands for political, economic, social and technological analysis. It is a method of analysing major external influences that can affect a company's operations and affect its ability to be competitive in the market. These influences may impact the company positively or detrimentally. Multinational companies are likely to be affected more by national and international policies in their markets than smaller firms. For example, a national chain of supermarkets may conduct PEST analyses to see how political events may affect its fresh vegetable stock. This analysis also considers economic, social and technological factors to predict future outcomes.
PEST analyses are a useful strategy to capitalise on existing conditions, predict future prospects and take measures that can help the business remain competitive and strong in the market. You can do this analysis with the help of internal analysts or you may consult external analysts and experts to help with the task. Considering there are four focus areas, a company may require experts, historical data and research for each of these.
Related: Types Of Economists: Work Environment, Job Role And Salary
What Areas Do PEST Analyses Evaluate?
Here are the four main areas that PEST analyses help assess:
Areas involving governmental policies, legislative or regulatory changes, tax and employment laws constitute the political aspects of this analysis. Some of them may affect the entire economy, while others may have a significant impact on a specific industry or organisation. The general political conditions of a region and relations with other nations can also play a key role.
Environmental laws, trade restrictions and tariffs can limit their ability to conduct trade in certain areas. This may reduce the size of their market. A period of elections can also create uncertainty for the organisations because political parties have different agendas and policies that they might want to implement when they come into power.
Related: What Is A Political Scientist? (With Skills And Job Options)
Economic factors may comprise interest rates, economic growth, demand and supply, rate of employment, recessions or inflation, the spending power of the consumers and the cost of labour and raw materials. They consider all matters pertaining to the economy and have a much more direct impact on the business's growth and revenue. It is the central banks and other government agencies that usually measure and report these economic indicators.
This is the aspect of PEST analyses that involve people, culture and other demographic factors that can affect a business. They may include the age of the population and its distribution, education, lifestyle and income, trends, cultural behaviours and attitudes, job environments, social norms and practices and more. A thorough study of the social factors can help an organisation understand its market, anticipate its target customers' needs and motivations and predict their behaviour more accurately. They can use this knowledge and understanding of the population to either enhance their product to better suit the demands or design new products altogether.
For example, if a clothing company is considering expanding to a new market, the production team may first want to be sure that their types of clothing are going to be accepted in that new market. If the company sells only modern clothing styles and the dominant culture in that market is more conservative and traditional, it may be challenging to penetrate that market. The clothing is likely not going to get the acceptance or approval of the consumers.
This component is concerned with the advancement or development of technology. These can be within an industry, organisation or a general upgrade and innovation in technology. Sometimes, companies may employ new applications or systems that can enhance or increase productivity, which may help increase revenue. At other times, technological advancement may actually affect the business more negatively. For instance, if a new, more advanced and innovative device comes into the market, it might make older devices obsolete. It is sometimes called disruptive technology.
Related: What Is an Information Technologist? (A Complete Guide)
In several countries, PEST analyses also include legal and environmental components. The acronym gets expanded to PESTLE analysis and here is what this entails:
Legal: Legal factors include government policies and legislation that may affect an organisation. Organisations may also have their own policies and the legal component of PESTLE analysis looks at both internal and external policies, like consumer and employment laws, safety standards, employment laws and how they may impact business operations.
Environmental: The surrounding environment also has an important role in the performance of certain types of businesses. Some industries, such as agriculture and tourism, get affected by the weather and climatic changes.
Related: What Is A Business Impact Analysis? (And How To Conduct One)
Significance Of PEST Analyses
PEST analyses are useful in various industries and businesses. Usually, businesses use this analysis with other types of analyses, such as strengths, weaknesses, opportunities and threats (SWOT) analysis to get a more thorough insight into the current scenario. This helps identify any flaws, opportunities and advantages that the company has currently or in the future. They can then work with their advantages and try to mitigate any disadvantages to avoid potential dangers to the business. Some dormant challenges may become easier to identify after conducting PEST analyses, which can otherwise go unnoticed.
Companies can identify opportunities in the current business environment after conducting PEST analyses. This means the business may capitalise on them for growth and an increase in revenue. For example, if remote working culture becomes more prevalent, the demand for home office furniture and accessories may increase. This means a business that already produces furniture can explore this niche. PEST analyses can also help an organisation recognise opportunities for improvement and upgrade of technology. It can also help in cutting costs.
Related: SWOT Analysis Guide (With Examples)
Example Of PEST Analysis
Here is a fictional example of how a company can conduct a PEST analysis:
Better Way Food is an international company that exports food products to 14 countries. Better Way Food used a few members of their internal teams in collaboration with an external consultant to conduct this analysis and their findings are:
Better Way Food enjoyed a large market share India, but faces challenges in its expansion plans. It currently operates in 14 countries and planned to expand to two more, but it experienced legislative challenges regarding the food items. Reduction in tariffs in three other Asian countries has opened up new opportunities for growth there. The newly developed friendly relations with a European country are also encouraging for them. So while they have lost two markets, three new potential markets are available to Better Way Food.
The lack of strong competitors in the market reveals that Better Way Food may gain a monopoly in this business within the next three to five years. Also, having found new and cheaper suppliers means they can now scale more rapidly and increase their revenues. The company can buy out the smaller players in the market and increase its market share even further. After their calculations, they understand that the returns on investment far outweigh the costs of acquiring these smaller companies.
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With the increased awareness and consciousness related to health and diet in western countries, Better Way Food sees another opportunity for growth and expansion. They expect their healthy products can be popular in the newer western markets. They intend to add cookbooks and informational content related to superfoods, which can further enhance the awareness amongst the new consumers and attract them to these products.
Better Way Food has developed a more enhanced e-commerce website to help retailers place bulk orders online. This website automates all orders and ensures that the suppliers receive them and can deliver on time. This improvement has led to faster orders and greater volumes of sales. They have also incorporated many payment gateways that the retailers can use to make the payments to speed up the process. More payment options can help them get more orders and attract new retailers to the website.
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