PEST Analysis

A PEST analysis is an analysis of the external macro-environment that affects all firms. P.E.S.T. is an acronym for the Political, Economic, Social, and Technological factors of the external macro-environment. Such external factors usually are beyond the firm's control and sometimes present themselves as threats. For this reason, some say that "pest" is an appropriate term for these factors. However, changes in the external environment also create new opportunities and the letters sometimes are rearranged to construct the more optimistic term of STEP analysis.

Many macro-environmental factors are country-specific and a PEST analysis will need to be performed for all countries of interest. The following are examples of some of the factors that might be considered in a PEST analysis.

Political Analysis

Political stability
Risk of military invasion
Legal framework for contract enforcement
Intellectual property protection
Trade regulations & tariffs
Favored trading partners
Anti-trust laws
Pricing regulations
Taxation - tax rates and incentives
Wage legislation - minimum wage and overtime
Work week
Mandatory employee benefits
Industrial safety regulations
Product labeling requirements

Economic Analysis

Type of economic system in countries of operation
Government intervention in the free market
Comparative advantages of host country
Exchange rates & stability of host country currency
Efficiency of financial markets
Infrastructure quality
Skill level of workforce
Labor costs
Business cycle stage (e.g. prosperity, recession, recovery)
Economic growth rate
Discretionary income
Unemployment rate
Inflation rate
Interest rates

Social Analysis

Demographics
Class structure
Education
Culture (gender roles, etc.)
Entrepreneurial spirit
Attitudes (health, environmental consciousness, etc.)
Leisure interests

Technological Analysis

Recent technological developments
Technology's impact on product offering
Impact on cost structure
Impact on value chain structure
Rate of technological diffusion

The number of macro-environmental factors is virtually unlimited. In practice, the firm must prioritize and monitor those factors that influence its industry. Even so, it may be difficult to forecast future trends with an acceptable level of accuracy. In this regard, the firm may turn to scenario planning techniques to deal with high levels of uncertainty in important macro-environmental variables.

Strategic Management > PEST Analysis