What is a PEST Analysis?

The PEST Analysis is a Tool that Helps Companies analyze External Factors and How they can Impact their Business.

 

To do this, it Proposes that the Markets are affected mainly by 4 important Agents.

  • And that Companies must take them into account to be Successful.
    • Adapting their Business to Different Markets.

 

Its name is an acronym for the 4 Agents Proposed:

  • Political.
  • Economic.
  • Social.
  • Technological.

The Four Components of a PEST Analysis

1. Political: What are the Main Political Concerns in a certain Market.

  • Environmental Policies, Unions, National sentiment… Can shape Markets.

 

2. Economic: How is the Economy and Wealth Distribution in a Market.

  • Purchasing Power, Middle Class size, Percentage of Poor People, etc.

 

3. Social: What are the Traditions and Sociocultural Values in a Market.

  • Family Structure, Beliefs, Average Behavior, Social Cohesion, etc.

 

4. Technological: Everything related to Technology in that Market.

  • Improvements, Availability, Future Trends, Access to Internet, etc.

PEST Analysis Template

 

Some People Add 2 more Factors to this Analysis:

  • Environment.
  • Legal.

What is Called a PESTEL Analysis.

However, you can analyze these Agents as PEST’s Political Factors.

 

* We have a Brief Publication talking about it.

 

Now, let’s see the first example so that you understand Why this Tool is Useful:

PEST Analysis example - Small Business

 

Let’s imagine that you are Starting you Own Business.

  • A Small Business, of course.

 

You may think that you don’t need a PEST Analysis  but…

  • You would definitely need it.

 

Why?

Let’s imagine that you Started a Wine e-commerce.

 

Political

When selling a Food Consumption Product, you would be affected by several Policies:

  • Some countries may have Bans on foreign Wine.
  • The label you use (Organic, Gluten-Free, etc) should adapt to each Country.
  • You should be aware of legal issues like “Taxes on Alcohol”.

 

Economic

The type of Wine you could Sell would vary according to each Country:

  • You would find it difficult to sell $ 300 wines in Poor Countries.
  • In Rich countries, you would have many more Competitors.
  •  Some Countries experience a large fluctuation in their National Currency.

 

Social

Some Countries don’t like wine. In others, their Culture don’t allow to drink it:

  • You would have a great acceptance in Spain or France but none in Iran.
  • Some Countries prefer Beer and are unwilling to Spend money on Wine.
  • Wine Consumption depends enormously on the Country.

 

Technological

Even if this is a Traditional Product, there are Improvements you should be aware of:

  • New Wine making Procedures: Wine matured in Clay barrels, etc.
  • New Ways of blending different Strains.
  • New Conservation Techniques that allow to develop Organic Wines.

 

As you can see, there is much more to consider besides the Price of the Bottle.

  • If you wanted a Successful Business, you would have to Take all of this into account.

Now, before we see more examples, we want to Clarify one thing that tends to Confuse People:

  • The Difference between a SWOT and a PEST Analysis.

 

Let’s see How these 2 Analysis methods differ:

Difference between PEST and SWOT Analysis

 

The PEST Analysis focuses exclusively on External Factors.

  • Factors that don’t depend on the Company.

 

The SWOT Analysis focuses on External and Internal Factors.

  • Internal Factors: Strengths and Weaknesses.

 

The PEST Analysis is a pure Descriptive Analysis.

  • It doesn’t say whether an External Agent is good or bad.

 

The SWOT Analysis Judges External Events from the Perspective of the Company.

  • Opportunities and Threats are Judgments.

 

A PEST Analysis is Common for all Companies in a Market.

  • External Facts are common (or should be) to everybody.

 

The SWOT Analysis is particular for each Company.

  • All its Factors depend on the Company analyzed.

 

* If you are Interested about SWOT Analysis, check our Page:

The best way to understand the PEST Analysis and How you can use it is by sharing some examples with you:

PEST Analysis examples

We have chosen 3 examples of Industries in which a PEST Analysis is essential.

  • Since these industries can be greatly affected by External Agents.

 

Let’s see what we can learn:

Food Industry - PEST Analysis example

 

Imagine that you work in the Food Industry.

  • And your Company is thinking about expanding its Operations.

Therefore, you decide to develop a PEST Analysis.

 

What Factors (among many) should you consider?

 

Political

You should consider the following Political Issues:

  • Legislation regarding Intensive Farming.
  • Trends in aid to the agricultural Sector.
  • Taxes and Import Prohibitions on food Products.

 

Economic

You should consider the following Economic Factors:

  • The Wealth of the Population (not everybody can afford a $100 Steak).
  • Economic Trend; Will people have more Purchasing Power in the near future?
  • How Big is the Food Industry in that Market and main Competitors.

 

Social

You should consider the following Social Factors:

  • What Traditional Foods are consumed in that Country / Market.
  • How People perceive Food; As something Luxurious, as something Utilitarian, etc.
  • How food is consumed; Most typical cuts of meat, if Meat is consumed minced, etc.

 

Technological

You should consider the following Technological Variables:

  • How is the Preservation Technology in that Country.
  • What is Supply Chain Technology like in your target market
  • What Access does this Market have to the Technology you would need.

Clothing Industry - PEST Analysis example

 

Now, we’ll imagine that you work in the Clothing Industry.

  • And your Company is also thinking about expanding its Operations.

Again, you decide to develop a PEST Analysis.

 

What Factors should you consider?

 

Political

You should consider the following Political Issues:

  • Labor Contracts (minimum wage, flexibility, etc); if you want to produce there.
  • Taxes and Bans to foreign Products.
  • If there is any Law that obliges to Demonstrate where Products were developed.

 

Economic

You should consider:

  • The Purchasing power of the Population and its distribution.
  • If there is any Crisis that may come soon; Fashion is the first Sector affected.
  • How Big is the Clothing Sector in that Market and Its Competitors.

 

Social

You should consider the following Social Issues:

  • Traditional Clothes people use.
  • How people regard Clothes; Is it something they Value, or not?
  • How flexible are People to adopt new Fashion Trends.

 

Technological

You should consider:

  • How Fast is the Supply Chain in that Market; Important for New Trends.
  • How advanced is the Manufacturing Technology; If you produce there.
  • How Implemented are Social Networks; They are the best fashion showcase.

Hotel - PEST Analysis example

 

Finally, we’ll imagine that you work for a Hotel Chain.

  • And the Company is thinking about expanding its Operations.

Again, you decide to develop a PEST Analysis.

 

What Factors should you consider?

 

Political

You should Consider:

  • Political “feeling” towards Hotels; In Touristic cities, people don’t want more Hotels.
  • How is the Legislation regarding Hotel Density in the Target Market.
  • Efficiency of the Bureaucracy: How long does it take to obtain building permits.

 

Economic

You should consider the following Economic Factors:

  • Average Price per Night in your Target Market.
  • How Big are the Luxurious, Mid-Priced and Cheap Hotel Segments.
  • Is there any Economic Event that may alter the Market?

 

Social

You should consider:

  • What is the Aspect of a Traditional Home in that Market?
  • What People Value; For example: In Japan, people love “smart” toilets.
  • Cultural aspects to consider: What food do people Eat in that country?

 

Technological

Technological Factors to consider:

  • What do people expect from Technology in their Room? Wifi, TV, AC, etc.
  • How advanced is the Construction Technology in that country?
  • Is people used to use Management Software? To control Spending and Income.

Summarizing

The PEST Analysis is a Tool that Helps Companies analyze External Factors and How they can Impact their Business.

 

It Proposes that the Markets are affected mainly by 4 important Agents.

  1. Political: What are the Main Political Concerns in a certain Market.
  2. Economic: How is the Economy and Wealth Distribution in a Market.
  3. Social: What are the Traditions and Sociocultural Values in a Market.
  4. Technological: Everything related to Technology in that Market.

 

Difference between PEST and SWOT Analysis:

  • The PEST Analysis focuses exclusively on External Factors.
  • The SWOT Analysis focuses on External and Internal Factors.
  • The PEST Analysis is a pure Descriptive Analysis.
  • The SWOT Analysis Judges External Events from the Perspective of the Company.
  • A PEST Analysis is Common for all Companies in a Market.
  • The SWOT Analysis is particular for each Company.

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