Changes in the business environment can create both great opportunities and significant threats to an organization. For example, opportunities can come from new technologies that help attract new customers, new funding streams that allow investment in better equipment, and government policies that open up new markets. Threats include deregulation, shrinking markets, higher interest rates, and so on.
PEST analysis was first created by Harvard professor Francis Aguilar. In his 1967 book, Scanning the Business Environment, he proposed a business environment scanning tool called ETPS. The name was later adapted by academics to become what is now known as the PEST analysis model.
The PEST model is a simple and widely used tool that helps entrepreneurs analyze political, economic, socio-cultural and technological changes in the business environment. This helps entrepreneurs understand the "big picture" forces of change facing their organization and use them to capitalize on the opportunities they present.
Why use PEST
PEST analysis is useful to entrepreneurs in four ways:
It can help entrepreneurs identify business or personal opportunities, and it can warn entrepreneurs of serious threats.
It reveals the direction of change in the business environment thus helping entrepreneurs to shape the way they work, and entrepreneurs are able to deal with change comfortably rather than fear it.
It helps entrepreneurs avoid launching projects that may fail for reasons beyond their control.
It helps entrepreneurs objectively understand the new environment to get rid of unconscious assumptions when their project enters a new country, region or market.
Tips
PEST analysis is often associated with SWOT analysis, but the two tools have different areas of focus. PEST analysis looks at the "big picture" factors that may influence decisions, markets, or potential new businesses. SWOT analysis focuses on exploring influencing factors at the business, product line, or product level. Influencing Factors. The two tools complement each other and are often used together.
How to use the PEST tool
Entrepreneurs can conduct a PEST analysis by following these steps to analyze your business environment and the opportunities and threats it presents. The following worksheet will guide you through these steps:
Step 1: Brainstorm Factors
Political Factors to Consider
Who is most likely to compete for power? What do they think about business strategy and other strategies that affect your organization?
Depending on the country, how well developed are property rights and the rule of law, and how widespread is corruption and organized crime? How are these situations likely to change and how might this affect you?
Will any pending legislation or tax law changes affect your business positively or negatively?
When is the country's next local, state or national election? How will this change government or regional policy?
How will business regulations and any planned changes to them affect your business? Is there a trend toward regulation or deregulation?
How do governments deal with corporate policy, corporate social responsibility, environmental issues and consumer protection regulations? What impact will this have and is it likely to change?
What is the likely timetable for proposed legislative changes?
Are there other political factors that could change?
Economic factors to consider
How stable is the current economy? Is it growing, stagnating or declining?
Are key exchange rates stable, or do they tend to vary widely?
Is the level of disposable income of customers rising or falling? How might this change over the next few years?
What is the unemployment rate? Will it be easy to build a skilled labor force? Or will hiring skilled labor be expensive?
Will it be easy for consumers and businesses to get credit? If not, how will this affect your organization?
How is globalization affecting the economic environment?
Are there other economic factors you should consider?
Tips
Using Porter's Diamond Model analysis can help align an entrepreneur's strategy with the business conditions in the country/region where the business is located.
Socio-cultural factors to consider
What is the growth rate and age of the population? How might this change?
Is there a generational shift in attitudes that might affect your work?
What are the levels of healthcare, education and social mobility in your society? How are these changing and what impact will this have?
What employment patterns, job market trends and attitudes to work can you observe? Are these different for different age groups?
What social attitudes and social taboos affect your business? Are there any recent socio-cultural changes that might affect this?
How do religious beliefs and lifestyle choices affect the population?
Are there other socio-cultural factors that may be driving change in your business?
Technology Factors to Consider
Can you use any new technology?
Are there any new technologies coming up that could fundamentally impact your work or your industry?
Can any of your competitors use new technologies that could redefine their products?
In what areas are governments and educational institutions concentrating their research? Are there any that you can capitalize on?
How are infrastructure changes affecting work patterns (e.g., remote work levels)?
Can you use or learn from existing technology centers?
Are there other technology factors you should consider?
Note: Variations of PEST analysis take other factors into account. These include:
PESTLE/PESTEL: POLITICS: political, economic, socio-cultural, technological, legal, environmental.
PESTLIED: Political, economic, socio-cultural, technological, legal, international, environmental, demographic.
STEEPLE: Social/Demographic, Technical, Economic, Environmental, Political, Legal, Ethical.
SLEPT: Socio-cultural, legal, economic, political, technical.
LONGPESTLE: Local, national and global versions of PESTLE.
Entrepreneurs can choose the version that best suits your situation.
Step 2: Brainstorm
Once you've identified the changes that are happening in your business environment, it's time to look at each one and brainstorm the opportunities that open up for you. For example, could it help you develop a new product, open up a new market or help you make a process more efficient?
Step 3: Brainstorm the threats
It's also important to consider how these changes could disrupt a startup's business. If you understand this early enough, you can avoid them or minimize their impact.
For example, if a core part of the startup's market is declining population, can you tap into other markets? Or, if technology threatens a key product, can the startup master that technology and improve the product?
Tip: A risk analysis model can help you assess these threats and develop strategies to address them.
Step 4: Take Action
Where the entrepreneur identifies a significant opportunity, develop actions that will be taken to incorporate it into the business plan. When the entrepreneur identifies significant risks, take appropriate steps to manage or eliminate them.
Summary
PEST analysis helps entrepreneurs understand the political, economic, social, and technological changes that will affect the business environment. Entrepreneurs can use these models to brainstorm the "big picture" characteristics of the business environment (which may be a country, a region, or a new or existing market), and from this, derive a sense of the magnitude of the forces of change that will be required to operate in that environment. This provides a context for more detailed planning, in which entrepreneurs will be able to minimize risk and take full advantage of opportunities as they arise.