A PEST analysis allows businesses to explore how different external factors could affect their strategies. By discussing and filling out the four quadrants, teams can better understand and prioritize the external elements shaping business outcomes.
Once complete, the insights from a PEST analysis can guide strategic planning, budget decisions, market research, and more.
What does PEST stand for?
PEST stands for the four primary external influences that can affect a company’s performance:
- Political factors: These include government policies, regulations, tax laws, and political stability, which can impact business operations and decision-making.
- Economic factors: Elements like interest rates, inflation, economic growth, and exchange rates can shape demand for your products or services and influence profitability.
- Social factors: Cultural trends, population demographics, and changing consumer behaviors fall into this category, helping you understand shifts in market needs and preferences.
- Technological factors: Advancements in technology, innovation trends, and the rate of technological change can offer opportunities for innovation or threaten your business with disruption.
Each quadrant represents forces beyond your control, but with strategic planning, you can adapt, mitigate risks, and even turn these factors to your advantage.
The 4 Factors of a PEST Analysis
The PEST Analysis Template focuses on four key external factors that can influence business strategies and performance. Here's an overview of each:
1. Political
Political elements, such as government policies, labor laws, environmental regulations, trade restrictions, and copyright laws, can significantly impact business operations. Companies should consider how the political environment, including potential instability and foreign policy, could affect their strategic plans.
Key question: Which political elements, policies, or groups could positively or negatively influence our success?
2. Economic
Economic conditions like industry growth, inflation, exchange rates, labor costs, and disposable income levels can all impact business performance. These factors influence pricing, revenue, and profitability.
Key question: What economic trends could affect our company’s costs, pricing, and revenue?
3. Social
Social trends and behaviors, including population demographics, lifestyle changes, cultural values, and attitudes toward work and leisure, shape customer preferences and influence market demand.
Key question: How do customer demographics and social trends affect our products and services?
4. Technological
Technology has a profound impact on how businesses build, market, and deliver products. Technological advancements, infrastructure, legislation, and access to technology all play a role in shaping business strategies. Companies must anticipate how evolving technology could impact their competitive position.
Key question: What current or emerging technologies could impact our growth and product development?
For a broader perspective, the PESTLE model includes Legal and Environmental factors, providing an even more comprehensive analysis.
How to Complete the PEST Analysis Template
Start by adding the PEST Analysis Template to your collaborative FigJam board, then follow these steps:
Step 1: Brainstorm
Begin by brainstorming factors that could affect your business in each PEST category: political, economic, social, and technological. You can hold a group session or have team members bring their own ideas for each factor. Add each idea to the corresponding quadrant on the template.
Step 2: Rank
Once you have a list of factors, rank them based on their potential impact on your organization. Discuss any large discrepancies and adjust the rankings as you reach consensus on which factors are most critical.
Step 3: Share
Share your completed PEST analysis with stakeholders to keep everyone informed of external influences that may affect the business. Presenting your findings clearly will ensure that they can be used effectively in decision-making and strategy development.
Step 4: Repeat
To stay aligned with changing external factors, plan to revisit the PEST analysis regularly. Repeating the analysis helps ensure your strategies remain current and responsive to shifts in the business environment.
Why Conduct a PEST Analysis?
While startups often aim for untapped “greenfield” or “blue ocean” markets, in reality, every business is influenced by external factors. A PEST analysis helps you assess how your strategy aligns with the broader environment, encouraging strategic thinking by placing your project within its real-world context.
By conducting a PEST analysis, you can better plan for marketing, product development, and organizational changes that consider external factors. It serves as a roadmap, highlighting potential challenges and opportunities for growth, ultimately helping you adapt and thrive in a dynamic business landscape.
Common Use Cases for a PEST Analysis
Consider an oil company evaluating a pivot to renewable energy. To explore this shift, the leadership team conducts a PEST analysis:
- Political Factors: Team members discuss the rise of carbon taxes and cap-and-trade policies, which could make oil extraction increasingly costly over time.
- Economic Factors: The current high price of oil presents a potential economic argument for maintaining oil production, weighing against the cost of transition.
- Social Factors: Public opinion is becoming more critical of fossil fuels due to climate change awareness. This social pressure could lead to additional political challenges.
- Technological Factors: Innovations in renewable energy have made solar and wind power more affordable, potentially more economical than traditional oil extraction.
After examining these points, the team recognizes that the factors support a shift toward renewables. They decide to gradually transition into renewable energy production, balancing both approaches.
