Understanding the external forces impacting your business can help you make better, more informed decisions. A PEST analysis identifies the various political, economic, social, and technological (PEST) factors shaping your industry. Let’s look at how a PEST analysis works and how to conduct it effectively.
What is a PEST analysis?
A PEST analysis is a strategic tool used to assess the external factors that can affect a business’s performance. Specifically, it looks at how the following factors affect a company’s market share:
- Political: Different political factors, like laws, trade policies, and regulations, can help or hurt your business.
- Economic: Current economic conditions also impact your business and industry. Inflation, interest rates, employment trends, and economic growth are all things to look at.
- Social: Social factors, like consumer trends, cultural trends, and lifestyle changes, can also impact your business’s growth.
- Technological: How can factors like artificial intelligence, research and development activity, and tech adoption impact your industry?
Conducting a PEST analysis helps business owners understand potential risks and opportunities and anticipate market trends. This information helps you make better business decisions going forward, especially when used with other tools like a strengths, weaknesses, opportunities, and threats (SWOT) analysis.
Conducting a PEST analysis helps business owners understand potential risks and opportunities and anticipate market trends. This information helps you make better business decisions going forward, especially when used with other tools like a strengths, weaknesses, opportunities, and threats (SWOT) analysis.
How to conduct a PEST analysis
Here are the steps you’ll take to conduct a PEST analysis:
- Outline your objectives. The first step is to determine why you’re conducting a PEST analysis. For example, you may be trying to enter a new market or launch a new product.
- Include your team. You want many different perspectives involved in reviewing the information you receive. Include team members from different departments to ensure you have many diverse viewpoints.
- Use reliable data sources. Not all data is created equal — for your PEST analysis, use a mix of government data, industry publications, and reputable news sources. Always make sure to check the publication date to ensure the information is still relevant.
- Pay attention to correlations. Keep in mind that certain factors often influence each other. For example, political decisions frequently impact economic conditions.
- Summarize your findings. Once you’ve completed your research, you’ll want to summarize your findings and determine whether they change your business strategy moving forward.
- Look for ways to take action. Look for ways to put the insights you receive into action. That way, your findings translate to concrete business decisions and not just interesting observations.
- Review regularly. A PEST analysis is not a one-and-done event — external factors are constantly shifting, so you’ll want to revisit your analysis regularly.
A PEST vs. a SWOT analysis
A SWOT analysis is another strategic planning tool many business owners use. Instead of looking at how external factors could affect your business, a SWOT analysis looks at a combination of internal and external factors.
Both of these tools are valuable on their own, but combining a PEST and a SWOT analysis is often the most effective strategy. A PEST analysis identifies external factors that then feed into the opportunities and threats sections of your SWOT analysis.
For example, technological advancements identified in your PEST analysis might represent both opportunities and threats. Emerging technologies could be an opportunity if you’re able to capitalize on them, but they could also pose a threat if your competitors adopt them before you do.
When to use a PEST analysis
There are several scenarios when conducting a PEST analysis makes sense. If you’re considering entering a new market or territory, a PEST analysis helps you understand the environment in which you’ll be operating.
If your industry is going through a period of change or uncertainty, a PEST analysis can uncover emerging trends or potential disruptions. This tool is also useful for long-term strategic planning since it forces you to look beyond the immediate market conditions and consider broader factors.
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Published
Jamie Johnson
