The PEST Analysis is a strategic planning model. It is a way of evaluating the external environment in which a business is operating.
PEST is an acronym of:
More recently the acronym has been extended to include E and L (The PESTLE Analysis), some say this is to account for the changes and additional influences in the business environment. The additional letters represent:
Using the PESTEL Model to evaluate the components of the environment in which the business operates is a way a business can identify and assess opportunities for growth.
Political factors include the government regulations and legal issues that govern the environment in which the business operates. Some of these can include: Tax Policies, Employment Laws, trade restrictions and tariffs in particular foreign trade regulations as well as the overall political stability.
A business will need to consider factors including is the current government likely to be in power for some time to come, is there an impending election which may mean a change of political direction. It is also important to keep appraised of future legislative changes which can impact on a business’s marketing strategy.
Economic factors will affect the purchasing power of potential customers and the firms cost of capital. Economic growth which can include interest rates, exchange rates and inflation rates. These will directly affect a business’s borrowing cost as well as the spending power of the consumer.
Any increase in the cost of borrowing will play a large influential part in a business’s investments decisions. If borrowing costs are too high this may result in a business cutting back expenditure, limiting investment and lower growth rates.
The business will also need to be aware of the impact of fluctuations in interest rates and how this will potentially increase the risks involved in foreign trade.
To a degree the government policies can play a part in the economic factors. Take for example the increase in an individual’s personal allowance, this gives the individual additional disposable income thus increasing their ability to spend.
Social Factors include the demographic and the culture within the population. These are factors that will impact and influence a customer’s needs and the market size. Factors to consider will include Health consciousness, Population Growth rate, Age Distribution, Career attitudes and an emphasis on safety.
Take for example a business developing new technology, this may struggle to take of in an area where the population is aging.
Technological factors can lower the barrier to entry, reduce minimum efficient production levels and influence outsourcing decisions. Factors include; Research and Development (R&D) Activity which initially can be a costly outlay and may deter new start-ups, conversely you will see incentives being made available to reduce the financial burden through tax reliefs. The reliefs available to support R&D will ensure that we continue to see technological advancements.
This element also focuses on the ability of a business to recognize and utilize technological advances, this will extend to acknowledging that the use of obsolete technology can be detrimental.
By recognizing the developments in technologies such as automating processes can help achieve greater efficiencies.
In more recent years the focus on the environmental impacts of businesses has grown, this covers aspects from the sourcing of materials and choice of energy sources through to waste by products and clean-up costs incurred when processes go wrong. There can be substantial fines for falling foul of environmental laws.
Environmental factors do not always need to be seen as restrictive, a business may also wish to consider environmental factors in terms of how the preferable choices can benefit a business. This can be from promoting a positive image of the business and engaging with customers who may have concerns around the environmental impacts of businesses.
Preferable choices can have a very positive effect on public image and brand identity.
Legal is almost an extension of the Political element that we saw at the beginning. It will encompass the government imposed laws and regulations which are a result of the present political position. This element focuses on the need for a business to be knowledgeable regarding the laws and regulations which govern their business area in order to avoid the legal pit falls and subsequently facing large legal costs
These factors are not standalone influences; it is important to remember that many are interdependent. For example, ignoring the environmental factors may result in increased legal costs. The political decisions of the present government are likely to impact on all factors. Legislative changes introduced may increase technological incentives, thus pushing the focus in that direction, likewise the government will have the power to influence the economy in terms of tax rates and interest rate and the environmental factor through policies and legislation.
The PESTLE Analysis a great starting point to review the business environment. The findings can be analysed further and considered in relation to the specific business focusing on using the strengths to take advantage of opportunities and take action to avoid threats as a result of the weaknesses through the SWOT analysis.