Unlike SWOT analysis which looks at both internal and external environments, PEST analysis examines the external factors that affect a business. PEST stands for political, economic, social, and technological factors. Each of these categories identifies forces that affect the business and to what varying degrees.
Political factors can either be a benefit and a burden to an organization. These factors refer to regulations, legal issues, and political climates that affect how an organization operates in the following areas: consumer relations, health and safety, trade regulations, tax policies, labor, and environmental laws and foreign trade. While these factors can restrict an organization negatively, such as not conducting business in a country under political unrest; they can also have a positive impact, such as tax incentives for companies that move into a new area.
Economic factors greatly impact an organization’s profitability, how they operate, and the decisions that they make. These are outside factors such as inflation, recession, unemployment rates, gross domestic product (GDP), consumer spending, and interest rates. For example, if the buying capacity of consumers has declined, this would force an organization to make important decisions. They would need to decide whether or not to decrease their prices or production, and if so, for how long. These factors also affect nonprofit organizations. A decrease in consumer spending may prompt nonprofit organizations to reduce their staff size as consumer’s willingness and ability to donate decrease.
Social factors that affect an organization are population growth, age distribution, education and career levels, lifestyle attitudes, buying habits, health consciousness and customer attitude towards saving and investing, the environment, and imported products to name a few. It is important that an organization understands the socioeconomic environment that they are operating in, as these factors drive consumer purchases. An organization that is able to analyze and understand these factors is in a better position to make decisions that shape the direction and the future of their business. This knowledge also allows them to target certain markets and make decisions on how and where to operate. For example, in an environment where people are becoming more health-conscious, businesses may see a growth in demand for organic produce and fitness centers.
Technological factors affect how an organization produces, distributes, and market their products or services, as well as its infrastructure. These factors can include advancements and innovations in technology, automating processes, research and development (R&D), and internet connectivity. Technology can also aid an organization in making decisions through the use of knowledge-based systems, which results in streamlining processes and reduced cost. While organizations with cutting-edge technology usually have a competitive advantage, they must balance this with the cost of adopting technology that is rapidly ever-changing. By carefully researching technological advancements in their industry, a company can protect itself from spending money on technology that will soon be out-of-date.