Definition

PEST analysis

is an analysis of the political, economic, social and technological factors in the external environment
of an organization, which can affect its activities and performance.
[1]

PESTEL model

involves the collection and portrayal of information about external factors which have, or may have,
an impact on business.
[2]

Understanding the tool

PEST or PESTEL analysis is a simple and effective tool used in situation analysis to identify the key
external (macro environment level) forces that might affect an organization. These forces can create both
opportunities and threats for an organization. Therefore, the aim of doing PEST is to:

• find out the current external factors affecting an organization;

• identify the external factors that may change in the future;
• to exploit the changes (opportunities) or defend against them (threats) better than competitors would
do.

The outcome of PEST is an understanding of the overall picture surrounding the company.

PEST analysis is also done to assess the potential of a new market. The general rule is that the more negative
forces are affecting that market the harder it is to do business in it. The difficulties that will have to be dealt
with significantly reduce profit potential and the firm can simply decide not to engage in any activity in that
market.

PEST variations

PEST analysis is the most general version of all PEST variations created. It is a very dynamic tool as new
components can be easily added to it in order to focus on one or another critical force affecting an
organization. Although following variations are more detailed analysis than simple PEST, the additional
components are just the extensions of the same PEST factors. The analysis probably has more variations
than any other strategy tool:

STEP = PEST in more positive approach.

PESTEL = PEST + Environmental + Legal
PESTELI = PESTEL + Industry analysis
STEEP = PEST + Ethical
SLEPT = PEST + Legal
STEEPLE = PEST + Environmental + Legal + Ethical
STEEPLED = STEEPLE + Demographic
PESTLIED = PEST + Legal + International + Environmental + Demographic
LONGPEST = Local + National + Global factors + PEST
 Using the tool

The process of carrying out PEST analysis should involve as many managers as possible to get the best
results. It includes the following steps:

• Step 1. Gathering information about political, economic, social and technological changes + any
other factor(s).
• Step 2. Identifying which of the PEST factors represent opportunities or threats.

Gathering PEST, PESTEL and STEEPLED information

In order to perform PEST (or any other variation of it) managers have to gather as much relevant
information as possible about the firm’s external environment. Nowadays, most information can be found on
the internet relatively easy, fast and with little cost. When the analysis is done for the first time the process
may take a little longer and as a beginner you may find yourself asking “What changes do I exactly look for
in politics, economic, society and technology?” The following templates might be useful when gathering
information for PEST, PESTEL and STEEPLED analysis.

NOTE: PEST covers all macro environment forces affecting an organization. Therefore, when doing
PESTEL or STEEPLED analysis, legal, environmental, ethical and demographic factors may overlap with
PEST factors.

PEST analysis template

Political factors Economic factors

• Government stability and likely changes • Growth rates

• Bureaucracy • Inflation rate
• Corruption level • Interest rates
• Tax policy (rates and incentives) • Exchange rates
• Freedom of press • Unemployment trends
• Regulation/de-regulation • Labor costs
• Trade control • Stage of business cycle
• Import restrictions (quality and quantity) • Credit availability
• Tariffs • Trade flows and patterns
• Competition regulation • Level of consumers’ disposable income
• Government involvement in trade unions and • Monetary policies
agreements • Fiscal policies
• Environmental Law • Price fluctuations
• Education Law • Stock market trends
• Anti-trust law • Weather
• Discrimination law • Climate change
• Copyright, patents / Intellectual property law
• Consumer protection and e-commerce
• Employment law
• Health and safety law
• Data protection law
• Laws regulating environment pollution

Socio-cultural factors Technological factors

• Health consciousness • Basic infrastructure level

• Education level • Rate of technological change
• Attitudes toward imported goods and services • Spending on research & development
• Attitudes toward work, leisure, career and • Technology incentives
retirement • Legislation regarding technology
• Attitudes toward product quality and customer • Technology level in your industry
service • Communication infrastructure
• Attitudes toward saving and investing • Access to newest technology
• Emphasis on safety • Internet infrastructure and penetration
• Lifestyles
• Buying habits
• Religion and beliefs
• Attitudes toward “green” or ecological
products
• Attitudes toward and support for renewable
energy
• Population growth rate
• Immigration and emigration rates
• Age distribution and life expectancy rates
• Sex distribution
• Average disposable income level
• Social classes
• Family size and structure
• Minorities

PESTEL analysis template

Political Economic

Socio-cultural Technological

+
 Environmental (ecological) Legal

• Weather • Anti-trust law

• Climate change • Discrimination law
• Laws regulating environment pollution • Copyright, patents / Intellectual property law
• Air and water pollution • Consumer protection and e-commerce
• Recycling • Employment law
• Waste management • Health and safety law
• Attitudes toward “green” or ecological • Data Protection
products
• Endangered species
• Attitudes toward and support for renewable
energy

STEEPLED analysis template

Political Economic

Socio-cultural Technological

Environmental (ecological) Legal

Ethical Demographic

• Ethical advertising and sales practices • Population growth rate

• Accepted accounting, management and • Immigration and emigration rates
marketing standards • Age distribution and life expectancy rates
• Attitude towards counterfeiting and breaking • Sex distribution
patents • Average disposable income level
• Ethical recruiting practices and employment • Social classes
standards (not using children to produce • Family size and structure
goods) • Minorities

Identifying opportunities and threats

 Gathering information is just a first important step in doing PEST analysis. Once it is done, the information
has to be evaluated. There are many factors changing in the external environment but not all of them are
affecting or might affect an organization. Therefore, it is essential to identify which PEST factors represent
the opportunities or threats for an organization and list only those factors in PEST analysis. This allows
focusing on the most important changes that might have an impact on the company.

PEST analysis example

The following table shows PEST analysis example. It lists opportunities and threats that are affecting a firm
in its macro environment.

PEST analysis example

Political Economic

• Government has passed legislation which • GDP will grow by 3% in 2013

requires further reductions of CO2, HC and NC•
emissions for vehicles until 2015
• New political forces, which are against tax
reductions, may be elected in the next years’
elections
• Import restrictions will increase in 2013
• Government is increasing its funding to
‘specific’ industry
• Government is easing regulations for
employment
• Increasing tensions between our government •
and our major export partner’s government
Availability of credit for businesses will
slightly grow or remain unchanged in 2013.
The same applies for the cost of credit in the 1
half of the year
• Unemployment is expected to decrease to 7%
• Inflation will fall to 3% or 2% in 2013
• Corporate tax rate will decrease by 2% next
year to 23%
• Dollar exchange rates are expected to decrease
compared to euro
Disposable income level will decrease
• Metal and oil prices will increase by 5% and
6% respectively in 2013

Socio-cultural Technological

• Positive attitude towards “green” vehicles • New machinery that could reduce production
• Number of individuals and companies buying costs by 20% is in development
through the Internet is 67% and 45% • Country’s major telecom company announced
respectively and is expected to grow its plans to expand its internet infrastructure
• Immigration is increasing and install new optic fiber cables
• Increasing attitude toward jobs with shorter • Driverless cars may be introduced in the near
work hours future
• People tend to buy more domestic rather than • “New” type of table will be introduced into the
foreign products market next year
• People change their eating habits and now tend
to eat healthier food
Sources

1. Thompson, J. and Martin, F. (2010). Strategic Management: Awareness & Change. 6th ed. Cengage
Learning EMEA, p. 86-88, 816
2. Rothaermel, F. T. (2012). Strategic Management: Concepts and Cases. McGraw-Hill/Irwin, p. 56-61
3. David, F.R. (2009). Strategic Management: Concepts and Cases. 12th ed. FT Prentice Hall, p. 104-
114
4. Johnson, G, Scholes, K. Whittington, R. (2008). Exploring Corporate Strategy. 8th ed. FT Prentice
Hall, p. 55-57
5. Wikipedia (2013). PEST analysis. Available at: http://en.wikipedia.org/wiki/PEST_analysis