What Is A PEST Analysis?

The success of a startup business is influenced by factors operating in its internal and external environment; a business can increase its success by adopting strategies that manipulate these factors to its advantage. A successful business will not only understand existing factors but also forecast change so that it can take advantage of change within the environments in which it operates.

The analysis that describes those environmental factors is called a PEST analysis.

PEST analysis stands for “Political, Economic, Social, and Technological analysis” and describes a framework of macro-environmental factors used in the environmental scanning component of strategic management.

The PEST factors combined with external micro-environmental factors can be classified as opportunities and threats in a SWOT analysis (Strengths, Weaknesses, Opportunities, & Threats). In a marketing plan, therefore, a PEST analysis can be seen as a major framework of the external factors (threats and opportunities) in a SWOT analysis.

Political/legal factors describe to what degree a government intervenes in the economy. Political factors include trends and government regulations such as tax policy, labor law, environmental law, trade restrictions, tariffs, discrimination law, consumer law, employment law, health and safety law, and political stability. These, in turn, can be influenced by sociocultural factors such as the pressure of public opinion, media, and pressure groups.

Economic and competitive environmental factors include macroeconomic factors such as taxation, interest rates, inflation rate, exchange rates, unemployment rate, and economic growth. They can also include economic factors such as income distribution and monopolies. As an example, interest rates will affect a business’s cost of capital, and exchange rates may affect the price of imported goods.

Social environment includes cultural aspects and health consciousness, changing demographic factors such as population growth rates, the graying of the population, and the size of households. Social factors also include changes in lifestyle and societal attitudes. Career attitudes and emphasis on safety are examples of changes in lifestyles and societal attitudes. There may also be a change in attitudes towards business ethics, animal welfare attitudes may change farming methods, health and safety will affect ingredients and production, personal ethics like bribery and unethical practices, and environmental issues affect product origins and product content.

Technological factors include ecological and environmental aspects, the fast pace of technological change, higher R & D costs, and equally high budgets, which can be barriers to entry. The continuing emergence of the internet is also a large technological factor. Environmental factors include weather and climate change, which may affect industries such as tourism, farming, and insurance. Increased pollution, shortages of raw materials such as oil and coal, and increased cost of energy affect most industries. Furthermore, governmental intervention in natural resource management will also affect many businesses.