Content uploaded by Tanya Sammut-Bonnici
Author content
All content in this area was uploaded by Tanya Sammut-Bonnici on Oct 30, 2017
Content may be subject to copyright.
Content uploaded by Tanya Sammut-Bonnici
Author content
All content in this area was uploaded by Tanya Sammut-Bonnici on Oct 30, 2017
Content may be subject to copyright.
PEST analysis
Tanya Sammut-Bonnici and David Galea
DEFINITION AND SCOPE
PEST is an acronym for four sources of change:
political, economic, social, and technological.
PEST analysis is a powerful and widely used
tool for understanding strategic risk. It identies
the changes and the effects of the external macro
environment on a rm’s competitive position.
The external environment consists of variables
that are beyond the control of a rm, but require
analysis to realign corporate strategy to shifting
business environments. Firms operate as part
of a larger ecosystem. They are vulnerable to
a variety of exogenous factors, which can have
a major impact on the rm’s competitive posi-
tioning. Strategists seek to understand external
factors and evaluate how business models will
have to evolve to adapt to their environment.
The impacts of external factors are mitigated
through preemptive strategy, and opportunities
are exploited in the wake of new competitive
positions that may be created in the process.
CONCEPTUAL OVERVIEW
Variations of the PEST analysis tool are
PESTEL or PESTLE (which adds envi-
ronmental and legal components), STEEPLE
(which takes on a corporate social responsibility
perspective by adding on the ethics dimension)
and STEEPLED (which adds the analysis of
demographic factors). The increase in aware-
ness of environmental or ecological issues has
encouraged the implementation of another
version of the PEST framework, particularly
the STEER analytical tool, which incorporates
regulatory factors.
PEST analysis and its variations form part of
the “evaluation stage” in the strategic manage-
ment process. The process starts with an
in-depth analysis of the rm’s environments.
The external environmental analysis constitutes
the “OT” part of SWOT analysis (internal
strengths and weaknesses, external opportu-
nities and threats). The benets of combining
PEST and SWOT are enhanced further when
using them in conjunction with Porter’s ve
forces model (encompassing the external effects
of suppliers, consumer demand, new entrants,
substitute product, and competitive rivalry).
A PEST analysis comprises components that
could be of great fundamental value to a rm.
The analysis can be conducted for the entire
rm, for its business units, for the respective
products, or for a new venture or partnership.
Figure 1 summarizes the components of a
PEST analysis, when it is used, and the strategic
tools which are employed in conjunction with it
during the strategic management process.
Political factors. The extent to which policy
makers are likely to intervene in the commercial
environment is a crucial factor in a PEST anal-
ysis. Trade, taxation, labor, and environmental
legislation are factors to be taken into account.
Commercial restrictions and political stability
are also imperative factors that could determine
the success or failure of a business. The banning
of tobacco advertising in the European Union,
for instance, had spelt disaster for the Formula
One Industry, which in turn sought refuge in
other parts of the world including Dubai and
Abu Dhabi. Google had to pull out of China
because of censorship restrictions. The Arab
Spring culminating in a widespread revolution
has caused many rms to rethink their strategy to
penetrate markets in the Middle East and North
Africa. The British prime minister’s proposal
to hold a referendum on retaining or exiting the
European Union has signicant implications
on investors who in the past have relied on the
freedom of movement principles on which their
investment decisions had been made.
Political factors are categorized at three main
levels: the supranational, the national, and the
subnational strata. As the business activities
become more globalized, the supranational level
is gaining more importance. In recent years, the
world has seen an evolution of countries orga-
nizing themselves into economic blocks, moving
progressively toward becoming a political union
partly at the expense of their sovereignty. The
United States of America is a case in point.
To a lesser extent, the European Union has
progressively sought to take on more powers
and decision-making authority from its member
states. The ASEAN block is seeking to gain
a more sound footing by courting South East
Asian giants, Japan and China, to join. As
Wiley Encyclopedia of Management, edited by Professor Sir Cary L Cooper.
Copyright © 2014 John Wiley & Sons, Ltd.
2PESTanalysis
PEST: Political, Economic, Social, Technological
PESTLE: adds Environmental and Legal factors
STEEPLE: adds Ethical dimension
STEEPLED: includes Demographics
STEER: includes Regulatory factors
PEST Analysis
External Macro Environment
of the Firm
Level of the corporation
Divisions and business units
Products and brands
New ventures, new marketing
Acquisitions, partnerships
PEST Analysis
Application
SWOT analysis: internal strengths and
weaknesses, external opportunities and threats
Porter’s five forces model - suppliers, consumer
demand, new entrants, substitute product and
competitive rivalry
Complementary
Strategic Tools
Figure 1 Summary of PEST components, application, and complementary strategic tools.
geo-political forces are consolidating into major
political blocks, a political analysis of the country
in which a rm is operating provides, at best,
a myopic view. Business rms may need to
expand their horizons and look beyond their
shores to remain vigilant at what is happening
at a supranational level. In the rst instance,
business rms may join lobby groups to inu-
ence policy making to their advantage. Even
if limited inuence may be exerted, political
surveillance at a supranational level provides
the required business intelligence to develop
the right strategies for adapting to changes in
the political environment that are faced in the
foreseeable future.
Areas of national policy that may have a
signicant impact on the strategy of a rm
include scal policy, national incentives for
enterprise, planning and permitting, procedures
for licensing and approval of new products,
processes and services, perceived level of corrup-
tion and transparency, government priorities
for supporting dened sectors in the economy
amongst others (see Figure 2).
Although most of the world economies have
embraced the free market model, signicant
interventions are made by national governments
in areas with market imperfections. Specic
political interventions in the market are most
likely to happen in branches that affect certain
aspects of the economy. A country’s infrastruc-
ture is still provided by the government directly
or through public-private partnerships. While
a number of operators traditionally owned
by governments have been privatized, they
continue to operate in highly regulated markets.
Telecoms, utilities, and nancial institutions are
good examples.
When the above political factors are consid-
ered, it becomes evident that rms would benet
from scrutinizing and evaluating the political
environment in which they are or will be oper-
ating in the future. Constant monitoring of
some or all of the above factors becomes vital in
ensuring that a rm’s strategy is in tune with the
policy environment. Major changes in the polit-
ical climate may bring about major changes in the
structure and operations of a market or industry.
Economic factors. Economic factors have the
most obvious impact on the protability and
overall attractiveness of a market or industry
(see Figure 3).
The most popular indicator of economic
performance for a national economy or a
specic industry sector that is used is the Gross
PEST analysis 3
Government policies
Government term and change
Trading policies
Local legislation, current and future
International legislation
Regulatory bodies and processes
Funding, grants and initiatives
Lobbying and pressure groups
Fiscal policy
National incentives for enterprise
Planning, permits, licensing
Transparency and control of corruption
Government policy on supporting specific industries
PEST Analysis
Political Factors
(examples)
Figure 2 Political factors in PEST analysis.
Local economy
International economy
Economic trends, inflation
Corporate taxation
Product taxation and duties
Seasonality of economic cycles
Market and trade cycles
Channels of distributions and
access to markets
GDP, consumer purchasing power
Interest and exchange rates
PEST Analysis
Economic Factors
(examples)
Figure 3 Economic factors in PEST analysis.
Domestic Product (GDP) per capita. This
is frequently measured at Purchasing Power
Parity (PPP) to enable equitable comparisons
amongst various countries. Typically, time series
and multilinear regression analysis techniques
are applied to project expected developments
in performance over a dened period in the
future. GDP per capita is a particularly useful
indicator especially for those industries, which
are highly income elastic. Examples of such
industries would include jewelry, construction,
entertainment, tourism, betting, cosmetics, and
various luxury items amongst others. In some
other industries, demand remains more resilient
to uctuations in GDP. These would typically
include staple foods, health services, and basic
commodities.
Although being a useful indicator, GDP
per capita provides only a partial view of the
economic factors that might have a bearing on
a rm. Ination not only erodes the purchasing
power of consumer but it also has an adverse
impact on the prices of raw materials and
other inputs that need to be used by a rm
in providing products or services. Conversely,
4PESTanalysis
uctuations in rates of exchange may translate
into higher or lower prices for the purchase or
sale of products and services. Higher taxes have
a negative impact on the disposable income of
consumers. A high unemployment rate from an
investor’s perspective is a double-edged sword
as on the one hand, it erodes disposable income
of families but on the other hand, it provides
access to a cheaper labor market. Moreover,
increases in bank interest rates have an impact
on both consumers and investors alike. In the
former case, consumers are more likely to save
part of their discretionary income than to spend
it on consumer goods when bank interest rates
increase. They are also likely to borrow less from
banks and nancial institutions to buy capital
goods such as cars, immovable property, and
appliances. Investors are also likely to borrow
less and redirect part of their speculative income
into guilt-edged securities rather than in further
growth of their rm. This is mainly because of
an increase in their cost of capital.
Changes in economic factors will affect
different industries in different ways. It is
imperative for rms to discern a clear behav-
ioral pattern between economic and industry
dynamics. In some cases, there are clear interde-
pendencies not only between industries but also
between the economic performances of different
countries. In recent years, the European Union
has faced a series of ailing economies queuing
up for bail outs, as a viral recession progressively
spread across all European shores with Cyprus,
Greece, Ireland, Portugal, and Spain being
the main victims. The domino effect has also
left its marks on other countries. For instance,
following the news that Cyprus has become
the fth Eurozone country to seek assistance,
the London FTSE 100 index, French CAC,
and German Dax lost 63, 64, and 112 points
respectively. In Milan and Madrid, the drop was
signicantly steeper with the former losing 549
points and the latter 252 points.
Some industries also exhibit positive corre-
lations in performance between each other and
would therefore need to be monitored concur-
rently. For example, a decline in the tourist
industry would typically have an immediate
impact on the entertainment industry and a
long-term impact on the construction industry.
An ailing manufacturing sector would send
shockwaves across the transport and logis-
tics sector. Problems in the nancial services
sector are likely to have a ripple effect on most
industries and economies around the world.
The effects were evident in the recession,
which culminated in 2008. The recession was
intricately linked to the bursting of the US
housing bubble as housing prices plummeted
to unprecedented levels damaging nancial
institutions around the world.
All these economic factors demonstrate the
importance of the need for continuous surveil-
lance of the key economic factors that have a
bearing on an industry. It is not an easy task to
walk through the economic maze and to make
sense of how events are likely to unfold. In this
context, rms may wish to restrict themselves
to analyze only those factors, which have a
critical bearing on their operation rather than
the broader spectrum.
Social factors. Social trends dictate work
patterns and attitudes, consumer tastes and
preferences, and the particular type, form, and
volume of demand for a product or service.
The monitoring of social trends enables a rm
to reposition its products or services to t the
changing expectations of customers. Figure 4
provides a list of examples of social factors, which
have an effect on a rm’s competitive position.
In the previous century, air travel was typically
associated with high-income consumers who
value comfort and premium service. Today, air
travel has become a commodity openly acces-
sible to all social classes. Ryanair has challenged
the traditional view and has repackaged air
travel into a no frills offering, reecting the basic
need of customers to safely and conveniently
travel from one point to another. Meanwhile,
by monitoring changes in their customers’
tastes, Plasmon have modied their products
and produced a variant of the Plasmon Biscuits
targeting adults. Increased health consciousness
of customers across the developed world has
created a market for healthy food.
Higher levels of education have, on the one
hand, provided employers with a healthier
pipeline of potential employees; however,
they now also have a pool of more demanding
customers. Telecom and banking rms have real-
ized that customer preferences and needs have
PEST analysis 5
Demographics
Psychographics and lifestyle
Consumer perception of brands, products
Consumer purchasing behavior
Effect of advertising and public relations
Influencers, role models
Racial, ethnic, religious influences
PEST Analysis
Social Factors
(examples)
Figure 4 Social factors in PEST analysis.
become more diversied. Firms have restruc-
tured their business model from a product
orientation to a consumer orientation. Indeed,
customer centricity is progressively diffusing
across a range of industries. Market segmenta-
tion is progressively moving away from tradi-
tional demographics to focus more on lifestyle.
Insurance companies are developing seg-
mented products for the busy professional,
for the small business owner, and for families.
Banks have customized products for students,
employees, self-employed, and the high net
worth individuals.
Changes in the demographic characteristics of
a population can have an impact on many parts
of the economy. Most developed countries are
facing the challenges of an ageing population as
baby boomers are now 60 years of age and over.
An ageing population creates additional demand
for medicines, healthcare, and support services
and lowers demand for products associated with
the younger generation (such as education). The
older generation, generally, has more leisure time
and is more nancially stable thereby providing
the right mix for consumer spending.
An evaluation of social factors enables a rm
to predict what pressures are likely to be made
byvariousstakeholdersonpolicydecisions
of government, which would in turn have an
impact on the rm.
Technological factors. The rapid pace of tech-
nological change is driven through innovation,
which is in turn created through entrepreneurs
who seek to push the boundaries of present
limitations. As new frontiers are broken, tech-
nology becomes obsolete and any competitive
advantage is short-lived. Technological break-
throughs can either spell the demise of some
industries or create opportunities for new ones.
Figure 5 provides a list of examples of techno-
logical factors, which have an effect on a rm’s
competitive position.
The proliferation of the Internet and e-
commerce has done away with many inter-
mediaries. This has been referred to as disin-
termediation. In the travel industry, consumers
have become their own travel agents. They plan
and book their travel online, using business-to-
consumer platforms that had been previously
restricted to business-to-business members of
the supply chain. Moreover, many retailers have
found an increased intensity in competition as
they are facing rivalry from online stores. On
the other hand, technology has given birth to
new forms of intermediaries. This is referred
to as re-intermediation. Examples of new forms
of intermediaries include Amazon, eBay, and
Expedia to name just a few. They have the
advantage of being effectively integrated within
social networks, which provide new channels
of marketing a product or service. Through
these channels, consumers are able to publish
their unbiased opinions on dened products
or services. The opinions provide added value
in the supply chain. They are highly valued by
other potential customers and inuence their
decision-making process.
In some cases, a new technology has
completely replaced an old one, sending its
demand in free fall toward its demise. In other
cases, technologies wage wars against each other
in an effort to become the recognized standard.
Microsoft is the standard for ofce software.
6PESTanalysis
New materials, machinery,
software and business process
support
Innovations in electronic
processes
Innovations in mechanical
processes
Innovation in product design
New distribution channels (e.g.
internet retailing)
Innovations in pricing (e.g. eBay
actions)
Effect of technology on product
design, production, distribution,
pricing and consumption
PEST Analysis
Technological
Factors
(examples)
Figure 5 Technological factors in PEST analysis.
Blu-ray is the benchmark quality standard used
for modern audiovisual home entertainment,
although iPad is the current standard for tablets
and currently under threat from Samsung.
From a business perspective, technology
can be used to exploit a competitive advan-
tage through a variety of factors. These could
include cheaper production, improved access
to customers, improved branding, product
quality, and higher levels of business intelligence
amongst others.
To thrive in a fast-paced technological change,
a rm must remain vigilant. It has to be
constantly updated on any technological devel-
opments in the industry, and aware of how they
are likely to inuence its future attractiveness
and protability.
PROCESS OF PEST ANALYSIS
The process involved in exploring a rm’s
external macro environment involves ve main
stages listed as under (see Figure 6):
Identify PEST factors
Analyze possible
effects on the firm
Categorize factors into
Opportunities and Threats
(OT factors in SWOT)
Prioritise factors
Develop corrective or
re-emptive strategic
action
Figure 6 Process and stages of PEST analysis.
PEST analysis 7
1. Identication of the current and future
factors in the rm’s external political,
economic, social, and technological environ-
ments.
2. Analysis of the possible effects on the rm’s
competitive position of each factor.
3. Categorization of each factor into opportu-
nities or threats for the rm.
4. Prioritization of the strategic importance of
each set of PEST opportunities and threats.
Ranking is based on the extent and the
period of the impact on the rm.
5. Development of strategic action to correct
or preempt negative effects and build on
positive effects.
It is recommended that the environmental
factors would be analyzed with respect to their
effect on the rm’s resources, capabilities, and
core competences:
•Resources are the inputs required to produce
a product or service. Examples of tangible
resources are raw materials, premises,
machinery, and equipment. Examples of
intangible resources are nancing, tech-
nology, human capital, supplier networks,
sales force structure, distribution networks,
patents, trademarks, established customer
base, brand equity, and rm reputation.
Resources can be combined and developed
into capabilities, which in turn create core
competences.
•Capabilities are the rm’s capacity to make
efcient use of its internal resources and
the ability to combine them into compet-
itive products and processes. Examples of
strategic capabilities are: developing innova-
tive technology products, reducing the time
to market, creating more efcient distribu-
tion channels and retail outlets, capturing
the consumer’s attention through marketing,
and managing customer relationships for
long-term brand loyalty. Capabilities are
developed from a complex set of internal
resources and become embedded in a tacit
manner into the rm’s internal processes.
They are difcult to document as procedures
and therefore difcult to copy. Intangible
resources tend to be the main source of
inimitable strategic capabilities.
A PEST analysis seeks to provide strategists
with a framework through which to increase
their awareness of the external environment.
However, it is not intended to constrain the
analysis in a straitjacket. There are clear inter-
dependencies amongst the various elements of
the framework. For example, an increase in taxes
by government is likely to erode the disposable
income of consumers. On the other hand, the
introduction of new incentives for industry is
likely to attract further investment in a country
thereby increasing employment and wealth.
Moreover, a growing environmental awareness
from citizens is likely to push governments to
legislate in favor of environmental conservation.
Users of the framework are advised that if not
used judiciously, a PEST analysis may become
an endless evaluation of Political, Economic,
Social, and Technological, which may result in
an inconclusive analysis. The fundamental prin-
ciple of the framework is that only those factors
that have a direct bearing on the attractiveness
of the industry and which are likely to change
in the foreseeable future should be included.
This would enable a rm to focus its effort
solely on the factors that are pivotal for a rm’s
competitive position.
See also R&D strategy;SWOT analysis
Bibliography
Campbell, D. and Craig, T. (2005) Organizations and
the Business Environment, 2nd edn, Butterworth-
Heinemann, Oxford.
Cheverton, P. (2004) Key Marketing Skills, 2nd edn,
Kogan Page Ltd., London.
Gillespie, A. (2007) Foundations of Economics, Oxford
University Press, Oxford.
McGee, J., Thomas, H. and Wilson, D. (2010) Strategy:
Analysis and Practice, McGraw-Hill, Maidenhead.
Sirmon, D.G., Hitt, M.A., Arregle, J.L. and Camp-
bell, J.T. (2010) The dynamic interplay of capability
strengths and weaknesses: investigating the bases of
temporary competitive advantage. Strategic Manage-
ment Journal,31 (13), 1386 –1409.
