PEST Analysis (revisited)

I presented a lot of strategic frameworks on this blog. Which one got the most hits on the web site? The PEST analysis is clearly the all time favorite! So I decided to revisit this, and add some additional material in order to create the ultimate guide to a PEST analysis.

To begin with, there is a good Wikipedia page on PEST analysis. That’s certainly a good starting point for everybody. But let’s summarize what the framework is really all about.

Overview:

PEST is an acronym that stands for Political, Economic, Social and Technological factors affecting a business decision. It is a framework used in the early phases of strategy development to describe the landscape and environment in which a firm operates. It’s particularly useful for situations where companies consider entering a new geography (e.g. an emerging market), and would like to get an exhaustive overview of the various factors that will affect its operations there. A company’s success will depend on a number of external and internal factors, and PEST is a good framework to describe these external factors. It can give companies the opportunity to then adopt strategies that take advantage of key trends. A PEST analysis allows you to identify key drivers of market growth (or decline), or it allows you to pressure test a strategy or market positioning of a company or of a business unit. It is a very helpful framework to use in strategic planning, marketing planning, product development, etc. PEST can be used to structure both open ended brainstorming sessions, but it can also be a guide for somebody doing in depth background research on – for example – in which Asian country should we locate our next plant.

Variations on a Theme:

Some people separate Environmental/Ecological, Legal and even Demographic factors from the four core categories. So here are a number of variations on the acronym that I have seen:
To begin with, PEST is sometimes turned around into STEP.
SLEPT (Social, Legal, Economic, Political, Technological).
PESTEL (Political, Economic, Social, Technological, Environmental/Ecological, Legal).
PESTLE (Political, Economic, Social, Technological, Legal, Environmental).
STEEPLE (Social, Technological, Economic, Environmental, Legal, Ethical).
STEEPLED (Social, Technological, Economic, Environmental, Legal, Ethical, Demographic).
PEST LIED (Political, Economic, Social, Technological, Legal, Industry Analsyis, Environmental, Demographic). I have also seen the I stand for International.
PESTELI (Political, Economic, Social, Technological, Environmental, Legal, Industry Analysis).
In reality, though, you really don’t need any of these additional categories. Legal or legislative factors can easily be grouped into the political category, ecological or environmental factors could fall either under political, social or technological trends, industry analysis (the “I” in some of the acronyms) would fall into the economic category, ethical considerations would be part of the social or political groups, and demographics are generally grouped under social issues. I always think of these additional factors as just sub-headers of the main four categories. So it’s probably better, easier, clearer and more consistent to stick with the main PEST categories.

The Meaning of the Categories:

Before you dive in to analyze the various factors, it is critically important that you define the context: What market is being assessed, by which company, for which product line(s), under which brand? You can’t do a PEST analysis in the abstract – the broad generalities will not be particularly helpful. Only in the context of a clear definition of the market opportunity will a PEST analysis yield meaningful results. Note that the context here could also be an acquisition opportunity, an investment opportunity or relocation decision, a partnership, a product launch, etc.

Once that’s done, you’re ready to get going:

Political factors evaluate how to and to what degree the government intervenes in the economy, through tax, labour, environmental, trade and other laws, or to some extent through the direct provision of goods and services and direct control over sectors of the economy (e.g. infrastructure). Key factors that are often included in this category:
Type of government regime, stability;
Rule of the law, levels of bureaucracy, degree of corruption, anti-bribery laws, etc.;
Government policies, key current and future legislation;
Tax policies;
Trade policies and other international legislation, trade agreements, tariffs and restrictions;
Regulatory policies, entities, processes; market regulation; voluntary codes and practices;
Lobbying groups, processes, etc. ;
Grants and incentives given to certain industries, sectors, etc.;
Defence related issues (defence contracting, import/export restrictions, etc.);
Environmental and ecological policies;
Employment and labour legislation, social legislation;
Press freedom;
…
Data points: As an example, you could look up the Economist Intelligence Unit “Index of Democracy” to put some hard facts behind some of the elements of the “political” category.

Economic factors include elements such as growth, interest rates, inflation, exchange rates and other macroeconomic elements that affect a company’s business operations, cost of capital and ability to import/exports goods and services. Key factors that are often included in this category:
General economic trends, GDP growth, unemployment, inflation, stage of the business cycle, etc.;
Import/export/FDI trends and policies;
Taxation issues are sometimes included here, sometimes under the “political” group;
Market and economic cycles;
Monetary policies, interest rates, etc.;
Specific industry issues;
International trade and monetary issues, exchange controls, etc.;
Infrastructure issues, fundamentals of distribution and communication infrastructure;
…
Data points: There is plenty of data available here, so finding hard facts in this category is usually not the problem. One interesting example: There are several sources that provide an aggregate metric of the “Ease of doing business” in various countries.
Social factors include issues such as population growth, demographics, health consciousness, entrepreneurial attitude, etc. Many of them will affect demand for a company’s products and services, as well as its ability to find a qualified labour force. Key factors that are often included in this category:
Demographics, including changes in demographic structure;
Ethnic, religious, racial composition, factors, trends;
Lifestyle trends, life expectancies, health statistics;
Education levels, educational policies, achievement levels;
Ethics;
Social mobility, geographic mobility;
Media issues, media consumption, power of the media;
Laws affecting social changes and consumer changes;
Consumer attitudes and opinions, consumer buying patterns;
Major events of national importance;
Disposable income, income distribution, degree of inequality;
Labour market participation;
Social taboos;
…
Data point example: The Gini Index (published by the CIA) measures the degree of income inequality for various countries. Obviously, a lot of other data is available on life expectancy, demographics, health indicators, etc.
Technological factors include R&D activities, technology incentives and the rate of adoption and change of important technological elements. They may determine barriers to entry, as well as the cost and quality of operations in a given country. Key factors that are often included in this category:
Technology legislation, licensing, patents, trademarks and other intellectual property issues;
Technology funding (private / public); Maturity of the venture capital or private equity sectors, or of the banking sector funding new technologies;
Communications infrastructure, legislation and trends;
Adoption and maturity of various technology trends;
Manufacturing base of key technologies, capacities, leading companies;
Impact of emerging technologies;
…
The PEST analysis can be left at a qualitative level, describing the key elements and trends in the four categories. Sometimes that’s perfectly fine and fits the purpose of the exercise. But sometimes you may want to be a bit more analytical, and actually score the various drivers and sub-elements. I have found it to be most helpful to identify 4 to 5 key drivers within each of the four main categories (i.e. no more than 20 in total), and then score each driver on two dimensions:
How much will this factor be a positive/helpful element (e.g. +5) vs. a negative factor/obstacle (e.g. -5).
How likely is this going to be an important factor (e.g. 10), vs. a minor point, unlikely to have a big influence (e.g. 0).
This would then allow you to do a 2×2 matrix, where you can color the various drivers along the four main categories.

PEST Analysis in Comparison to SWOT Analysis or Porter’s 5 Forces Model

In some ways these frameworks are quite different. While the SWOT analysis includes a number of internal perspectives (strengths and weaknesses of a company or business unit), it also includes external factors in the Opportunities and Threats portion. The PEST framework provides a way to structure these opportunities and threats in a consistent way. It’s typically best to do a PEST analysis first, and then a SWOT analysis. A PEST analysis is almost exclusively focused on external forces over which the organization does not have direct control.

The Porter 5 Forces Model is focused on micro-economic issues and industry dynamics within a given (sometimes quite narrowly defined) market or industry. The PEST Analysis typically deals with more macro-economic issues affecting a country as a whole, although it can certainly also be applied with a focus on specific sectors.

Charts to Use for a PEST Analysis

The graphic above shows four potential charts allowing you to summarize the key findings from your PEST analysis.