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PEST - Analysis

By Dagmar Recklies 

The PEST analysis has proven to be a flexible and easy to understand tool in the context of strategic planning. Like with all tools, the real value of the PEST analysis depends on the way it is used. Hence, the following article not only describes the content of this tool, it also provides advise for its practical application and interpretation. 

Content

The PEST or PESTLE is a useful starting point for the analysis of an organizations external environment and the forces at work there. 

PESTLE stands for political, economical, socio-cultural, technological, legal and ecological factors. There are different opinions in literature about the inclusion of legal and ecological factors. Their importance doubtlessly differs from industry to industry. In case such factors are of high relevance to an industry, they should be analyzed separately. In industries that are less influenced by legal and ecological factors, they could be allocated to the other categories, e.g. legislation as a political factor or ecological awareness as a socio-cultural factor. In any case it is important to include only external factors which an organization cannot influence by itself. 

The following chart shows some examples for typical content of a PEST. These examples are not comprehensive; they should be modified according of the actual subject of analysis.

Political

 

Economical

·        Legislation (current and pending)
·       
Laws relating to the industry
·        Tax laws
·       
Regulation of transfer for capital and labour

·        Stability of the political system

·        Membership in free trade areas

 

·       Development of relevant economic indicators

·      Business cycles

·       Unemployment

·       Availability of relevant resources

·       Key industries, industrial clusters

·       Industry structures

 

 

 

Socio-Cultural

 

Technological

·        Population and demographics
·        Distribution of income
·        Mobility
·        Level of education

·        Customer behaviour
·        Savings rates
·        Preferences for branded / unbranded products

 

·       Technological level of
·        The economy
·        The own industry
·        Supplier and customer industries

·       State and private R&D expenses

·       Lifecycle phases of relevant products

Application

Regarding the subject of analysis, the PEST tool can be used to analyse business segments, industries, particular markets or whole economies. Thus the PEST provides a summary of the driving forces in the macro environment. It identifies drivers that were of high importance in the past, indicates to what extend they might change in future and how this will interfere with the organization or the whole industry. Depending on the objective of the analysis, a distinction between the current situation and potential future changes may be helpful.  

In order to gain really meaningful results it is not enough to understand the PEST as a mere list of drivers. It rather is a starting point for further analysis of the external environment:  

For instance it is possible to identify different external drivers for change with the help of the PEST. These are such drivers that will influence and change the industry structures or market structures in all likelihood. For example, the combination of the factors deregulation of trade barriers, improvement of communication technology, increasing competitive pressure on local markets and converging customer preferences are likely to be drivers for further globalisation.  

Starting from the PEST it is possible to analyze the different levels of impact that particular drivers will have on an organization. The examination of historical developments is equally important as the analysis of future trends in this context. An impact-uncertainty-matrix is a helpful means for visualization.

It may also be helpful to asses the impact of the most important drivers on the organizations’ competitors. Provided there is sufficient information available about the competitors’ competences, strengths and weaknesses, it is possible to derive ideas about

·          the extent to which a competitor may be able to exploit new chances or to handle risks arising in the environment

·          how the competitor might react to these changes 

The following chart illustrates how the impact of an identified driver can be analyzed further. This example relates to the business of housing finance.

 

Diver:

·        pending changes in legislation on housing finance and mortgage finance in Turkey (P – political factor): The Turkish government plans to deregulate mortgage financing in order to harmonize this industry with international standards

 Questions to think about:

·        Which business opportunities will be legally feasible for foreign banks? (P – political issue)

·        Is this market economically attractive, e.g. is the market large enough to achieve economies of scales; will it be possible to realize sufficient margins? (E – economical issue)

·        Will the players in the Turkish market (especially retail customers) accept foreign financial services providers? (S – socio-cultural issue)

·        Which international competitors might enter the Turkish market? What kind of services will they probably offer and how will they do so? (E – economical issue – competitor analysis)

·        Should our own organization enter the Turkish market? (strategic option)

 

The application of the PEST-format (allocation of external factors to four categories) has proven useful in practice in two ways:

·        For compiling and structuring of information
Normally, huge amounts of information are compiled in early stages of the analysis of new markets or business segments. Pre-sorting this information into the four PEST-categories can help to get the general idea and will serve as a starting point for further structuring of the relevant pieces of information. Used in this way, the PEST will naturally comprise comprehensive and detailed lists.

·        As a means of presentation
The PEST-scheme is a helpful structure for presentations, e.g. of the results of market analyses. Here it can serve as an executive summary. The first slide would cover the most important findings under the four PEST-headlines. At this stage, no category should comprise more than two to four distinct findings. The following slides would discuss these findings in more detail; political, economical etc. issues on one or two slides each. The PEST offers an easily comprehensible presentation structure since it is widely known and easy to understand.

  

© Dagmar Recklies, 2006

 

 

 

 
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Status: 10. April 2012