PEST Analysis is a basic tool that helps to analyze the macro-environmental factors that may have a considerable influence on the performance of an organization. PEST is an acronym for Political, Economic, Social and Technological. It was created by Harvard professor Francis Aguilar over fifty years ago. A PEST analysis is often expanded with the factors Legal and Environmental to PESTLE.
This relates to how government regulations and legal issues have an impact on how profitable and successful a company can be. Basically, all that has an impact will be considered here, like government policy, political stability, policy on transparency, foreign trade policy, tax policy, labor laws, environmental policy, trade regulations, education level, etc.
For example, the negotiations on trade agreements between countries can have a big impact on import tariffs.
Here are the external economic factors examined that influence the success of a company. This includes interest rates, exchange rates, inflation rates, unemployment rate, gross domestic product and credit availability.
These factors may have a direct or indirect long-term impact on the business operation. For example, the interest rate will have an impact on the ‘Cost of Capital’ and therefore on the business performance and possibility to expand.
The social factor analyzes the socioeconomic environment of a market and considers the demographic characteristics, norms, customs, age distribution and values of the population within the marketplace. These factors are especially important for marketers when targeting certain customers.
Socioeconomic changes could be a focus on healthier food products or environmentally friendlier energy consumption, but also the need to work longer as a result of a longer life expectancy.
This relates to innovations in technology that could have an impact on the market and therefore the company involved. Technology could be of major importance to the success and strategy of company. Understanding the potential and also the risks involved of a technology are therefore of key importance.
In many studies we also add a Legal and Environmental component. It's then called PESTLE or PESTEL analysis.