Use this framework to assess the forces that shape a business
PEST is an acronym that describes four external forces that shape the business environment – political, economic, social and technological. One of the first mentions of the four factors was by Francis Aguilar, a professor at Harvard Business School who, in 1967, wrote a book entitled Scanning The Business Environment, in which he discussed various factors affecting a business. He gave them the acronym ETPS, referring to economic, technical, political and social factors. It was left to others to reassemble the order of the acronym into the more memorable PEST.
The PEST tool is used to examine the macro and micro factors that determine threats and opportunities within the marketplace.
A list (not exhaustive) of factors that can be considered in the PEST analysis are:
• The political stability of a region
• Taxes on goods
• Taxes on people and companies
• Government policy
• Labour laws
• Pricing regulations
• Environmental laws
• The GDP (gross domestic product) of the region
• The GDP per head
• Average incomes and disposable incomes
• Employment and unemployment rates
• Labour skills and costs
• Distribution and channels into the market
• Comparative cost advantages of the region
• The growth of the economy
• Credit availability
• Exchange rates and their stability
• Interest rates
• Population size and growth rates
• The demographics of the population
• Class structures within the country
• Media that reaches the population
• Average length of life and the health of the population
• Attitudes to safety
• The culture of the population and its willingness/ability to work
• Ethical considerations
• Technical infrastructure in the region
• Speed of technological change within the market
• Types of technological change that are taking place
• Technological skills and interest that exist in the region
• The willingness of the population to adopt innovations
• Research and development spend
• Patent protection
Like Porter’s Five Forces or a SWOT analysis, PEST is used to assess the market environment for a business when planning a strategy, writing a marketing plan or thinking about future scenarios. It is normally used before a SWOT as it provides an understanding of the opportunities and threats. The PEST framework can be used to examine the market for a company, product or brand. It is an analysis worth carrying out at least once a year (more frequently if some forces have changed).
Take time to build up a deep understanding of each of the PEST factors. Work out which of these forces are the most important influences on your company. Set up alerts to inform you of any changes on these factors. Pay particular attention to the threats and opportunities that arise from the analysis. Work out an action plan in response to these.
The simplicity of the PEST model has prompted many variations. Those who believe that the acronym has a negative connotation sometimes refer to the four same factors as STEP. Others have felt that the model needs extending and have added additional factors, the most common being legislative and environmental. These additions turn the acronym into PESTLE.
The legislative and environmental factors are arguably already contained within the original PEST model. For those who want to separate them, they could include:
Legislative: Legislative factors can be separated out or included under the “political” and “social” headings. Legal factors affect the costs and ease of doing business and include such as:
Employment law including discrimination law, health and safety etc.
Company law including restrictions on directors and company shareholders.
Anti-trust law and those affecting competitive practices.
Environmental: Environmental factors include:
Geographical location - a country’s location, especially in a global economy can offer a considerable advantage.
Infrastructure – the roads, railways, airports, water supply and broadband availability give certain environments an advantage.
The weather and climate change - the availability of sunshine, rainfall, and the possibility of hurricanes, tsunamis and wind can all influence the business opportunity.
Pollution - air pollution and water pollution.
Raw materials – energy, minerals, fuel, water etc.
Some things to think about:
Take time to build up a deep understanding of each of the PEST factors. Work out which of these forces are the most important influences on your company. Set up alerts to inform you of any changes on these factors.
Pay particular attention to the threats and opportunities that arise from the analysis. Work out an action plan in response to these.