What is a PEST Analysis?

PEST is a mnemonic for factors that drive and shape market trends and consumer behaviour. The analysis is a simple framework for considering a range of external factors that may be relevant to an organisation as it considers its strategy.

PEST is often rearranged or extended to cover other categories, and you may see versions such as PESTLE, STEEPLE, STEER, SPELIT and more.

In reality you can simply choose which categories are most relevant to your organisation or project, and focus on those. If some categories are irrelevant, don’t include them.

When & Why to Use PEST

It can be really useful to understand and map out the wider context of the sector in which you operate, because these trends and changes will affect and influence your strategy. This is when PEST is most helpful.

You can use PEST towards the start of a strategic planning review, or to add data to the external sections of a SWOT Analysis.

Like SWOT, PEST doesn’t provide any concrete answers on its own - it is most useful as a brainstorming tool to be used within a strategic planning process to heighten your awareness of external factors affecting your organisation.

IN A NUTSHELL: PEST is a template to help you analyse external factors relevant to an organisation.

PEST Categories

• Political factors – government changes that will affect trading – for example taxation & duty, grant funding, stability, international trade policy, environmental policy
• Environmental factors – the impact of environmental change – for example materials availability, flood risk, water shortage, carbon footprint, pollution
• Social factors – changes in the way society is behaving that could influence your customers’ attitudes – for example changing household sizes, the rise of social media, changing attitudes to sexuality, or the adoption of greener lifestyles
• Technological factors – how technology innovation might impact the market and your business

And the various other categories include:

• Legal factors – changes in legislation that could impact your business – for example living/minimum wage laws, toxic materials legislation, labelling laws
• Economic factors – major economic drivers that affect trading, from local factors such as employment costs that affect margin and retail selling price, to national economic stability forecasts and international trading agreements
• Demographic factors - such as gender, age, ethnicity, languages, disabilities, mobility, home ownership, employment status, religion, culture and tradition, living standards and income level
• Regulatory factors - such as acts of parliament, regulations, international and national standards, local government by-laws, and mechanisms to monitor and ensure compliance

PEST Example

Let's imagine how a real-life organisation might look on a PEST Analysis: Irish airline Ryanair, one of the biggest low-cost airlines in Europe.

We have added Legal and Economic categories to make a PESTLE Analysis.

KEY POINT: PEST is a simple top-line analysis tool. You may need to use additional tools to get the full strategic picture.

Running the Process

If you’re running a PEST Analysis within a workshop, draw up the relevant sections on a grid on a flipchart or whiteboard. You can then either invite participants to each begin populating the grid with sticky notes, or act as facilitator and write up notes on their behalf as they call them out.

It’s usually better to not be too picky about what goes on the board to start off with - for efficiency it can be quicker to allow everything to be posted verbatim, and then go through a process of refinement and validation afterwards.

Encourage participants to keep going even after they have posted several points each, make sure there is nothing they have missed or held back from mentioning.

The more complete and honest the appraisal, the more useful it will be.

When the board is populated, you can then run a process of refinement:

• Remove duplicates or consolidate similar entries.
• Prioritise the entries and remove those of a low priority. Focus on quality not quantity.
• Check for relevancy: do all the entries apply to your organisation? You can remove those that are too general or irrelevant.
• Be specific: there is little value in writing down vague points.
• Use an evidence-based approach to support your findings as far as possible – check entries for accuracy and veracity.

Pitfalls to Avoid

Consider looking at the sections in a different order - for example you might find that participants spend lots of time looking at political and environmental factors, and then lose energy as they begin to look at other categories. Make sure you are spending equal effort and time on each section.

Avoid restricting your analysis to senior management and directors only - this could limit your opportunity to gain a realistic overall picture. Invite a variety of people from all levels and departments of your organisation to participate and contribute.

Remove any elements that aren't relevant to your organisation. Also, remove any that are low priority or low impact. It's important to avoid analysis paralysis by only focusing on information that is useful and relevant.

The PEST Analysis is only a surface-level analysis, designed for use in the preliminary stages of decision-making. To gain a true picture of each area, and to inform thorough strategic decision making, it may be necessary to look much more closely at some of the individual elements identified in the exercise.

TOP TIP: Because of these weaknesses and pitfalls, some choose to use a more rigorous alternative to PEST, such as the Five Forces framework.

Using Your PEST Results

You may find there are takeaways from the PEST Analysis that require immediate action - for example taking steps to mitigate your organisation’s exposure to certain areas. Usually however the process is used to inform subsequent strategic planning activities.

When analysing and using the results, consider the following:

• Verify the results: check your opinions against reality. Check against any relevant facts or figures. Conduct research to validate your assumptions.
• Identify the why: What are the drivers behind the key forces that you have identified, and why are these taking place? Once you understand the causes, you will have an improved ability to analyse the market and make strategic moves in response.
• Look at the connections: Are there any related factors across the categories? Is there anything you can do to improve your position or take advantage?

You could use your PEST results to inform a Scenario Planning exercise, where you look at how various elements might play out in the future.

You could also move on to look at the internal elements of your organisation by using Core Competencies Analysis or the SWOT Analysis framework.