PEST analysis: what it is and what you can use it for

By Indeed Editorial Team

Updated 22 June 2022 | Published 3 January 2022

Updated 22 June 2022

Published 3 January 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

In the business world, it's important to be aware of the external factors that can affect a company's performance. Events of global significance can especially impact larger organisations and international businesses in particular and carrying out a preliminary assessment like a PEST analysis can help organisations prepare for such events. As a professional, knowing what a PEST assessment is and how to carry one out can serve you well, especially if you work in finance. In this article, we cover what a PEST analysis is and what it's used for and how to carry one out.

What is a PEST analysis?

A PEST analysis is a business management tool that identifies and assesses the main external factors that can affect a company or organisation's ability to become or remain profitable in a certain market. For example, a national telecommunications company might choose to carry out a PEST assessment to see what challenges it could face in the coming financial year, such as adverse weather conditions that could cause disruption or new product releases from competitors that could impact sales. PEST is an acronym that refers to the four main external factors that can influence a company's standing:

  • Political factors

  • Economic factors

  • Social factors

  • Technological factors

A PEST assessment is a useful part of a company's strategic planning that can gauge current conditions and forecast future developments to strengthen the business and help it remain competitive. You might choose to conduct a PEST assessment internally if there's a suitably skilled person within your organisation or you might choose to hire a consultant to organise and conduct the PEST assessment on your behalf. A thorough PEST assessment often involves the efforts of different departments and functions within a company and input from external experts such as market researchers.

What factors does PEST assess?

There are four external factors assessed by PEST that can affect a company or the industry a company operates in. Below is an explanation of each, along with examples:

Political

The political aspect of a PEST assessment concerns itself with governments and how their policies and changes to legislation or regulations may impact an industry or organisation. Tax and employment-related laws are two of the most common areas affected. Other potential political factors that a PEST assessment might take into account include the following:

  • political climate or stability/instability of a region, nation or continent

  • international relations between countries, regions or governments

  • changes in governments

  • trade regulations or embargoes

  • environmental laws or regulations

Economic

Economic factors are likely to impact a business or industry directly, affecting its operations, profitability or both. The economic aspect of a PEST assessment concerns factors such as the following:

  • interest and (currency) exchange rates

  • economic growth or lack thereof

  • supply and demand

  • employment/unemployment rates

  • inflation and recessions

  • consumer spending power/habits

  • cost of labour and raw materials

For example, a decrease in the cost of parts or raw materials could give a manufacturer a chance to increase its rate of production. This may enable it to sell more products and increase its revenue. A steep increase in the cost of parts or raw materials could also lead to a reduced workforce and higher prices for consumers and reduced revenue and profits for companies. In a PEST assessment, economic and political factors can often overlap because governments have the power to enact economic reform or restrictions, which can affect an economy's growth and stability.

Social

The social (sometimes referred to as sociocultural) aspect of a PEST assessment focuses on factors involving people and populations, whether nationally or internationally. Such factors include:

  • age distribution

  • demographics such as education level, income and lifestyle

  • cultural attitudes and trends

  • social trends

  • workplace environments

  • societal expectations and social norms

  • population growth rates and average life expectancy

Social insights gained via PEST assessment can be invaluable in helping a company understand its customers, their unique motivations and how best to market to them. It can also help in predicting attitudes, behaviours and spending habits.

Technological

The technological aspect of a PEST assessment focuses specifically on the role of technology and technological advances and the impact this can have on a particular industry or company. How a business makes use of technology in its operations, such as automating certain duties and tasks, can help it shape or streamline its finances, processes or strategy. In a PEST assessment, there may occasionally be an overlap between technological and political factors, because government research and investment into technology often have an impact in this area.

Additional areas of focus

A PEST assessment often involves two additional areas of focus, forming the acronym PESTLE analysis:

  • Legal: The laws and legislation at a local, national or international level. This can include issues such as advertising standards, consumer rights, health and safety, product safety and labelling and trade regulations, for example.

  • Environmental: The environmental factors considered in a PESTLE analysis often include issues such as climate change, pollution, sustainability and scarcity of raw materials, waste management concerns, weather forecasts and recycling/reducing carbon footprint.

How is a PEST assessment used?

More often than not, companies undertake PEST assessment as part of a broader business analysis approach. It's often used in conjunction with a strengths, weaknesses, opportunities and threats (SWOT) analysis to give a comprehensive overview of the state of a business, both now and in the future. Together these can help you make informed decisions for the business and your team. Below are examples of five ways in which a PEST assessment is most often used in business:

  • to assess current conditions and maximise opportunities to increase profit and revenue, along with maintaining competitive advantage

  • to evaluate the management structure of a company and its internal hierarchy and economic outlook

  • to identify areas of opportunity both internally and externally to plan or make strategic business decisions

  • to gain an advantage over competitors

  • to increase revenue or cut costs

It's worth undertaking a PEST assessment every six months, or at the very least annually, to keep abreast of current events, analyse market trends and effectively strategise ways to stay ahead of the competition while satisfying customer needs.

Example of PEST assessment

Below is an example of a PEST assessment involving a small international airline:

Air Vélo is a small international airline based in Europe that carries out a PEST assessment every six months to remain competitive as a low-cost yet quality airline. Based in Paris, France, Air Vélo currently flies to seven countries and is looking to at least double its fleet size, list of destinations and profit margins within the next three to five years. With input from a cross-departmental team, an external consultant and a market researcher, here are Air Vélo's main priorities and concerns as arrived at through PEST assessment:

  • Political: Plans to launch a new route from Paris to our next expansion market are proving problematic because of tense relations between France and the market in question, as well as the market's political instability and occasional unrest. It will be a risky move if Air Vélo decides to proceed and there's a chance that either country's government may abruptly change its travel restrictions, which will affect the airline's ability to sell tickets and transport passengers to and from the other country.

  • Economic: An opportunity has arisen to buy seven used aircraft from a now-defunct competitor airline, significantly increasing the size of Air Vélo's fleet and potentially increasing revenue also. An upturn in France's economy and the wider European economy is also expected to lead to a 15% increase in revenue in the business travel market within the region. According to predictions, this could last through at least the next year.

  • Social: In addition to growth in the business travel market, people expect the leisure travel market to grow steadily throughout the next three quarters and beyond. As a result, Air Vélo is looking to add destinations in the Mediterranean and potentially the Greek islands to its list of routes. These routes will launch in the summer when consumer spending on such travel is at its peak.

  • Technological: Air Vélo undertook several 'continuous improvement studies' to help minimise the amount of time an aircraft stays on the ground between trips, invested in state-of-the-art autopilot technology and also upgraded its app and web-based booking systems, all of which led to increased satisfaction among customers and employees.


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