The PEST analysis is a tool for assessing the broad environment in which a firm operates and is trying to compete, and the model is probably best-known for providing a virtual alphabet soup of acronyms. PEST is an acronym for Political/Economic/Sociocultural/Technological; other variants include PESTEL (Political/Economic/Sociocultural/Technological/Environmental/Legal), STEP, SLEPT, PELTS, LE-PEST-C (which adds Competitive Forces to the PESTEL model), and SPECTACLES (Social/Political/Economic/Cultural/Technological/Aesthetic/Customer/Legal/Environmental/Sectoral). Apart from different degrees of breadth and the suggestion that some factors can be prioritized in different ways depending on how the acronym is arranged, there is no fundamental difference among these variations.
Defining PEST Factors
Political: The political environment consists of the laws, regulations, and policies that currently – or in the foreseeable future – affect the company’s operations and objectives.
Economic: Economic factors are those of the wider macroeconomic environment (which is to say, practically all of it, one way or another) that affect the company. Inflation and interest rates, equity and commodity market trends, and other indicators such as unemployment or job creation rates all have an impact on the company by determining what stage of the business cycle the company’s particular market is currently in; obviously, if the company is pursuing a strategy that is not supported by its economic environment, that would be a problem.
Sociocultural: Cultural characteristics and traditions, the social structure of a population in the company’s market, ethical and moral norms, and other factors such as age, education level, and language are all important factors for the company to understand and respond to appropriately with its products or services.
Technological: Technological influences exist on many different levels. The most obvious one is the technology of products, for example, the rapid proliferation of increasingly capable smartphones and tablets steadily taking market share from ‘traditional’ desktop computers and laptops. Process technology for businesses evolves almost as rapidly because it is supported by the developing technology underlying consumer products. Managerial technology, the ideas, methods, and processes used to manage businesses competitively, also evolves. The latter is the most likely to be overlooked in an environmental analysis; most firms are fairly competent in identifying the characteristics of their environment, but often do not recognize that the means and methods which they must use to respond effectively to new circumstances need to be updated as well.
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My Assignment Brief Says “PESTEL” Analysis, so Where’s the EL?
Including the Environmental and Legal components of the analysis seems to be current academic fashion; in real-world managerial practice, preferences for more or fewer factors are more or less uniformly distributed – some prefer the longer and more sub-divided format like PESTEL or SPECTACLES, others prefer the shorter version. The pitfall of additional factors is that they are often not distinct enough to warrant separate attention. Environmental concerns, for example, do not exist outside the contexts of social and cultural attitudes towards the environment, political factors that affect the management of the environment, and technological impacts on the environment. Legal issues, such as laws regulating company activities, or laws governing the forming and enforcement of contracts, all derive from political factors, and to some extent, from sociocultural factors; they cannot exist on their own.
For the purposes of generating the environmental overview, turning a PEST into a PESTEL or another variation is not at all difficult. Analyzing the factors, however, becomes more complex the more letters there are in the acronym; careful attention must be paid to how the various factors are related to each other.
Common Steps in a PEST Analysis
In general, analyzing the factors gathered together in a PEST requires five steps:
Step 1. Determine which trends are relevant to the organization. Past strategies and their outcomes are a good guide to determining which of the factors identified are likely to have an impact on the company in the future; some will be rather obviously relevant or not, but most will require careful study. Once the relevant factors are identified, investigate their behavior over time to identify general trends and patterns that will be continued in the future.
Step 2. Identify the interdependencies in the trends. All of the relevant factors and trends are connected in some way and either complement or conflict with one another. Using the ‘environment’ example from above, a trend towards stricter environmental laws (a Political factor) would probably be seen to correlate with stronger public attitudes about the environment (a Sociocultural factor) and growth in “green” products (an Economic and/or Technological factor). Understanding these interdependencies is important to prevent the development of strategic objectives that have unintended consequences.
Step 3. Forecast specific issues for the company that the trends will create. Again, past performance is the best source of evidence for how relevant trends will impact the company. At this point, you should begin to prioritize the trends and the issues that are created from them in order of greatest to least impact on the company and its strategy.
Step 4. Develop implications of trends and environmental changes. The trends and issues should be examined in three contexts: the possible impacts on the industry or sector as a whole; possible impacts on the company’s competitive position; and possible impacts on the position of the company’s direct competitors.
Step 5. Conduct a sensitivity analysis. The particular manner in which this is done depends on the circumstances and priorities of the firm. As a general rule of thumb, if the projected possible negative result of a particular issue is slightly below the ‘worst-case scenario’ result for the related objective, the issue should be considered critical.
Advantages & Disadvantages of PEST
The PEST analysis is a useful precursor to internal analyses or analyses such as SWOT analysis that combine internal and external factors. Like the Critical Success Factors analysis, a significant part of the benefits from doing a PEST analysis come from the exercise itself. Key drivers of change in the organization or its market are identified along with their relationships, and this analysis framework provides a sort of “common language” for managerial decision-making and interaction.
On the other hand, PEST does have a number of flaws. The four factors of the basic PEST model are somewhat arbitrary; the assumption that they do significantly affect every business is usually correct, but there is no guarantee of this. And of course, adding more factors to turn PEST into a PESTEL or another variant comes at the cost of added complexity. The model also makes the assumption that historical behavior and trends predict the future, which may not always be the case. In addition, determining which trends and factors are relevant to the company and its market is entirely subjective, as is identifying interdependencies among trends to some degree. Various data-management programs can help reduce the uncertainty but add time and cost to the analysis. And finally, PEST does not necessarily suggest a course of action; it helps to identify important factors and trends, but not what the organization should do about them.