PEST analysis is used to examine the political, economic, social, and technological aspects of a business environment. This analysis is a key part of the ongoing strategic planning process for a business.
Significant changes in the components of PEST can trigger changes in the way a business should position itself within the market. Examples of the components of PEST are:
- Political. The political stability of the countries in which a business and its customers operate, changes in employment laws that affect the cost or working conditions of employees, changes in regulations, changes in tariffs or customs regulations, or the implementation of new environmental regulations.
- Economic. The expected rate of growth of the economy as a whole, the rate of government spending that impacts the company, the rate of inflation, and anticipated changes in interest rates and foreign exchange rates.
- Social. Changes in demographics that impact the company's customer base, changes in fashions that impact its sales, and alterations in the lifestyles of the population.
- Technological. The introduction of new technologies that can impact the company, as well as the amount of bandwidth available to customers, access to electricity, the rate of spending on research and development within the industry, and the rate at which current technology is being rendered obsolete.
For example, if a PEST analysis were to be conducted on a public utility, several possible results would be an emphasis on the expected increase in use by customers of solar panels to generate their own power, the introduction of smart grids to control the use of electricity, and the expected increase in the cost of fuels used to generate electricity.
A PEST analysis will impact a business in different ways, depending upon its industry. For example, a residential home construction company will be heavily impacted by changes in the interest rate and shifts in population within the country. Conversely, an international engineering firm will pay more attention to political risks and exchange rates. Thus, some aspects of a PEST analysis will have little impact on a business, while other aspects will have a profound impact.