PEST vs. SWOT analysis (plus benefits and limitations)
By Indeed Editorial Team
Published 4 August 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.
The PEST and SWOT analysis are two common methods for analysing companies. These two distinct types of analysis help create an objective perspective about a company's strengths and weaknesses and help make more informed decisions. As they both have benefits and drawbacks, it's helpful to know their differences to better decide whether a PEST or SWOT analysis is more appropriate. In this article, we define what SWOT and PEST analysis are, explore the differences between a PEST vs. SWOT analysis and list the benefits of both.
PEST vs. SWOT analysis
Understanding the differences between a PEST vs. SWOT analysis can help you decide which is more appropriate to use when tasked with analysing a company. Here are the definitions of a PEST vs. SWOT analysis:
What is a PEST analysis?
A PEST analysis seeks to identify what factors influence a company, predominantly focusing on external factors. PEST is an acronym for political, economic, social and technological, all potential factors that may influence a company. Here are some common questions that arise from a PEST analysis:
How may the current political party influence taxation, business grants or trade for a company?
Does the stock market or interest rates affect a company's operations?
Have there been any changes in a company's target demographics or core audience?
How has the adoption of certain technology affected a company and its customers?
There are variations in the PEST analysis, such as PESTLE, which include factors for legal and environmental concerns. An example of a PEST analysis may be a company that uses a specific component for its operations only available from a foreign country. The country may have sanctions against them from the company's home government, which makes it harder to get the components. A PEST analysis is a good way to determine how losing that manufacturer may affect the business and falls under the political aspect of a PEST analysis.
What is a SWOT analysis?
A SWOT analysis focuses on a company's internal strengths and weaknesses and aims to identify any potential external opportunities or threats. SWOT is an acronym for strengths, weaknesses, opportunities and threats. Here's a breakdown of what these terms mean:
The first two parts of the SWOT analysis, strengths and weaknesses, help you understand the current status of a company. This includes where the company excels and areas where it can improve. Strengths outline what gives a company an advantage over its competition and may include the following:
marketing tactics and approach to reaching audiences
geographic location and available equipment or infrastructure
financial backing, such as available funds or key investors
overall quality and reputation of a brand, product or service
Weaknesses look to identify areas that a company is potentially limited by, such as:
lack of financial resources
small target market
high staff turnover
lack of infrastructure, such as IT equipment
Opportunities and threats
The second part of a SWOT analysis looks at the opportunities and threats of a company. These are outside factors that have the potential to influence the overall success of a business. Some of these factors include:
market trends and patterns
availability of financial resources
legal barriers, such as industry regulations
After establishing what opportunities and threats exist for a company, you can assess how they relate to its strengths and weaknesses. For example, if a company's highest selling item is a toy car, but the latest trend is a toy boat, this has the potential to affect the overall success of the company. This issue falls into the threat category of a SWOT analysis, and highlighting this threat can guide the company's future strategy.
The benefits of a SWOT analysis
Here are some of the common benefits of performing a SWOT analysis:
gain a deeper understanding of a business
find and address weaknesses
mitigate the risk of threats to a business
find opportunities and benefit from them
focus on company strengths and capitalise on them
establish clear business goals and develop strategies to achieve them
The limitations of a SWOT analysis
A SWOT analysis is only one part of the business planning process, so it doesn't cover all areas. When looking into more complicated issues, it usually takes a more rigorous form of analysis and research than what a SWOT analysis provides. A SWOT analysis only looks at already known strengths, weaknesses, opportunities and threats. It doesn't look into unknown factors. Some of the key limitations of a SWOT analysis include:
no way to prioritise issues for a company
doesn't offer any solutions or alternatives to a problem
may create too many ideas without helping with choosing the right one
has the potential to produce information that isn't helpful
only provides a broad overview that doesn't focus on any specific factor or issue
The benefits of a PEST analysis
Here are some common benefits of utilising a PEST analysis:
simple framework to use
helps develop an understanding of the business in a wider context
promotes the development of both external and strategic thinking
empowers companies to plan for future threats and act accordingly to mitigate the risks
helps organisations identify business opportunities and take advantage of them
The limitations of PEST analysis
While a PEST analysis is a great way to get a better perspective of a company and how it interacts with the world around it, there are some limitations to consider, such as:
often uses oversimplified amounts of data when making decisions
risk of gathering excessive data that needs extensive analysis to extract useful conclusions
potential for data to lead the company in the wrong direction, as assumptions may be wrong
becomes harder to predict or anticipate upcoming developments for a company as the company or its market changes
often requires trial and error to be practically effective for a company
requires a strong understanding of the company's operations
When to perform a PEST analysis
A PEST analysis is an excellent tool to assess how a company's decision-making or strategic direction aligns with external influences and factors. It helps to identify potential threats before they affect a company and can help with risk mitigation, like avoiding projects that are likely to fail or are not cost-efficient. A PEST analysis provides companies with a more objective outlook for a new business opportunity or plan, particularly if it's outside the company's experience, such as expanding into a new territory or market.
When to perform a SWOT analysis
A SWOT analysis is most useful for companies that are just starting out or are struggling to meet performance goals. A SWOT analysis is also a useful way to prepare for a significant change in the company, such as rolling out new initiatives or adjusting the direction of the business. You can use a SWOT analysis to establish the strengths and weaknesses of a business while also coming up with ideas for opportunities to increase revenue and strengthen the company.
A SWOT analysis is a great way to identify opportunities from a company's strengths and potential threats from a company's weaknesses. This helps with developing strategies for growth and risk mitigation.
Choosing between a PEST and SWOT analysis
Although both a SWOT and PEST analysis serve similar purposes, they each have their own unique benefits and drawbacks. So when deciding between the two, it's more important to consider what the goals of the analysis are. It can often be more helpful to perform a SWOT analysis first, as it can provide a general overview of a company's internal operations and external factors. A better overall understanding of a company can help you perform a more comprehensive PEST analysis to assess its position in the market and how it's affected by external factors.
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