PEST analysis stands for “Political, Economic, Social, and Technological analysis“. It is a framework for Strategic analysis of markets to evaluate macro-environmental factors used in the environmental scanning component. Some analysts add the Legal factors to the analysis.
Thus when the PEST analysis is expanded to incorporate legal and environmental factors; this is called a PESTLE analysis or a PESTEL analysis.
- Political factors pertain to how the government intervenes in the economic functioning of the country (market) and more specifically how it affects the firm strategic decision making. Political factors such as tariffs, tax policy, labor laws, trade restrictions,environmental law, and political stability. Political stability is a major factor which affect the firm’s strategic decision making and overall legal framework.
- Economic factors consists of interest rates, government bond rates, risk free rate of interest, economic growth, inflation rate (adjusted) and exchange rates. These factors have major impacts on how a firm can operate in a market. Inflation rate and potential GDP affect the demand and prices of goods.
- Social factors include the cultural dimensions of the population in which the firm will operate and include gender consciousness, gender based product/service bias, population growth rate, age spread, health consciousness, career attitudes and risk appetite of the target segment.
- Technological factors consists of factors such as research and development focus in general industries, intellectual property protection laws, technology adoption rates, change assimilation culture, automation and the rate of technological change. They affect entry barriers, technology enabled products and service assimilation, product prices, quality, and innovation.
- Environmental factors consists of factors like ecological and environmental aspects such as forestry and climatic conditions which may especially affect industries such as tourism, farming, and insurance.
- Legal factors focus on discrimination laws, intellectual property protection laws, labor laws, consumer laws, antitrust laws, employment laws, health laws, safety laws and social security laws which can affect how a firm operates, its bottom-line (cost structure) and the demand and distribution for its products and services.
The PEST framework has been recognized as an extremely popular framework for market analysis. It is a part of the external analysis conducted while demonstrating an in-depth strategic analysis during new market entry or doing market research for a new product launch or even sometimes during a product extension, and gives an overview of the different macroenvironmental factors that the company has to take into consideration. It is a useful theoretical tool for estimating market growth or decline, business position, potential and direction for operations.