business analysis Business analysis is a professional discipline of identifying business needs and determining solutions to business problems. Solutions often include a software-systems development component, but may also consist of process improvements, organiza ...

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

environmental scanning Market environment and business environment are marketing terms that refer to factors and forces that affect a firm's ability to build and maintain successful customer relationships. The business environment has been defined as "the totality of p ...

component of strategic management. 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. Mar ...

, 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

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 is ...

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

tax policy Tax policy includes the guidelines developed by a government regarding how taxes are imposed, in what amounts, and on whom. It has both microeconomic and macroeconomic aspects. The macroeconomic aspect concerns the overall quantity of taxes t ...

, labour law, environmental law,

trade restriction A trade restriction is an artificial restriction on the trade of goods and/or services between two or more countries. It is the byproduct of protectionism. However, the term is controversial because what one part may see as a trade restriction ...

tariffs A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and po ...

, and political stability. Political factors may also include goods and services which the government aims to provide or be provided (

merit good The economics concept of a merit good, originated by Richard Musgrave (1957, 1959), is a commodity which is judged that an individual or society should have on the basis of some concept of benefit, rather than ability and willingness to pay. The te ...

s) and those that the government does not want to be provided (

demerit good In economics, a demerit good is "a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves"; it could be over-consumed if left to ma ...

s 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 Organiza ...

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 of a nation. * Economic factors include economic growth, exchange rates,

inflation rate In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...

, 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, ...

s. These factors can drastically affect how a business operates. For example, interest rates affect a firm's cost of capital 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 Technological change (TC) or technological development is the overall process of invention, innovation and diffusion of technology or processes.From ''The New Palgrave Dictionary otechnical change by S. Metcalfe. •biased and biased techno ...

. These can determine barriers to entry, minimum efficient production level and influence the outsourcing 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 entit ...

Variants

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

legal Law is a set of rules that are created and are law enforcement, enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. ...

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 scale f ...

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 Consumer protection is the practice of safeguarding buyers of goods and services, and the public, against unfair practices in the marketplace. Consumer protection measures are often established by law. Such laws are intended to prevent business ...

antitrust law Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust ...

employment 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, ...

, and

health and safety law Occupational safety and health (OSH), also commonly referred to as occupational health and safety (OHS), occupational health, or occupational safety, is a multidisciplinary field concerned with the safety, health, and welfare of people at wor ...

, 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 scale f ...

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 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 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 commu ...

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. Fo ...

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

External links