PEST - Analysis

By Dagmar Recklies

The PEST analysis has proven to be a flexible and easy to understand tool in the context
of strategic planning. Like with all tools, the real value of the PEST analysis depends on
the way it is used. Hence, the following article not only describes the content of this tool, it
also provides advice for its practical application and interpretation.

Content

The PEST or PESTLE is a useful starting point for the analysis of an organizations external
environment and the forces at work there.

PESTLE stands for political, economical, socio-cultural, technological, legal and ecological
factors. There are different opinions in literature about the inclusion of legal and
ecological factors. Their importance doubtlessly differs from industry to industry. In case
such factors are of high relevance to an industry, they should be analyzed separately. In
industries that are less influenced by legal and ecological factors, they could be allocated
to the other categories, e.g. legislation as a political factor or ecological awareness as a
socio-cultural factor. In any case it is important to include only external factors which an
organization cannot influence by itself.

The following chart shows some examples for typical content of a PEST. These examples
are not comprehensive; they should be modified according of the actual subject of
analysis.

Political Economical
Legislation (current and pending) Development of relevant economic
Laws relating to the industry indicators
Tax laws
Regulation of transfer for Business cycles
capital and labour
Unemployment
Stability of the political system
Availability of relevant resources
Membership in free trade areas
Key industries, industrial clusters

Industry structures

Socio-Cultural Technological
Population and demographics Technological level of
Distribution of income The economy
Mobility The own industry
Level of education Supplier and customer industries

Customer behaviour State and private R&D expenses

Savings rates
Preferences for branded / Lifecycle phases of relevant products
unbranded products
Application

Regarding the subject of analysis, the PEST tool can be used to analyse business segments,
industries, particular markets or whole economies. Thus the PEST provides a summary of
the driving forces in the macro environment. It identifies drivers that were of high
importance in the past, indicates to what extend they might change in future and how this
will interfere with the organization or the whole industry. Depending on the objective of
the analysis, a distinction between the current situation and potential future changes may
be helpful.

In order to gain really meaningful results it is not enough to understand the PEST as a
mere list of drivers. It rather is a starting point for further analysis of the external
environment:

For instance it is possible to identify different external drivers for change with the help of
the PEST. These are such drivers that will influence and change the industry structures or
market structures in all likelihood. For example, the combination of the factors
deregulation of trade barriers, improvement of communication technology, increasing
competitive pressure on local markets and converging customer preferences are likely to
be drivers for further globalisation.

Starting from the PEST it is possible to analyze the different levels of impact that
particular drivers will have on an organization. The examination of historical
developments is equally important as the analysis of future trends in this context. An
impact-uncertainty-matrix is a helpful means for visualization.

Impact:
Impact of the drivers on the Organization

high Highly relevant factors,

Driver 4 subject of further
analysis

Driver 2

Less relevant factors,

Driver 1 less relevant for
further analysis
Driver 3
low

low high
Uncertainty:
on the probabilty of a particular future development and
the extent of its impact

It may also be helpful to asses the impact of the most important drivers on the
organizations’ competitors. Provided there is sufficient information available about the
competitors’ competences, strengths and weaknesses, it is possible to derive ideas about
 the extent to which a competitor may be able to exploit new chances or to
handle risks arising in the environment

how the competitor might react to these changes

The following chart illustrates how the impact of an identified driver can be analyzed
further. This example relates to the business of housing finance.

Diver:

pending changes in legislation on housing finance and mortgage finance in

Turkey (P – political factor): The Turkish government plans to deregulate mortgage
financing in order to harmonize this industry with international standards

Questions to think about:

Which business opportunities will be legally feasible for foreign banks? (P –

political issue)

Is this market economically attractive, e.g. is the market large enough to achieve
economies of scales; will it be possible to realize sufficient margins? (E – economical
issue)

Will the players in the Turkish market (especially retail customers) accept foreign
financial services providers? (S – socio-cultural issue)

Which international competitors might enter the Turkish market? What kind of
services will they probably offer and how will they do so? (E – economical issue –
competitor analysis)

Should our own organization enter the Turkish market? (strategic option)

The application of the PEST-format (allocation of external factors to four categories) has
proven useful in practice in two ways:

For compiling and structuring of information

Normally, huge amounts of information are compiled in early stages of the analysis of
new markets or business segments. Pre-sorting this information into the four PEST-
categories can help to get the general idea and will serve as a starting point for
further structuring of the relevant pieces of information. Used in this way, the PEST will
naturally comprise comprehensive and detailed lists.

As a means of presentation
The PEST-scheme is a helpful structure for presentations, e.g. of the results of market
analyses. Here it can serve as an executive summary. The first slide would cover the
most important findings under the four PEST-headlines. At this stage, no category should
comprise more than two to four distinct findings. The following slides would discuss these
findings in more detail; political, economical etc. issues on one or two slides each. The
PEST offers an easily comprehensible presentation structure since it is widely known and
easy to understand.