Introduction to the PEST analysis

Whether your company is exposed to major upheavals or not, you must be aware of changes in your environment—and you must be able to react to them. The PEST analysis can help guide you.

 By CfL, updated June 2024

What is a PEST analysis?

The PEST analysis can help structure the broad societal conditions under which your company operates. PEST is an acronym derived from English, standing for Political, Economical, Social, and Technological factors.

When conducting a PEST analysis, it quickly becomes clear that the factors it includes are complex and interconnected. Political changes, for example, can have social consequences. A political reform might trigger an economic reform, and economic changes can, in turn, drive technological changes.

The PEST model has two main purposes:

• To identify the most critical external factors that affect your company.
• To determine in what way these factors impact the company.

Below is an explanation of the individual elements in the PEST model:

Political factors

A government or another political constellation has the power to stop or dissolve monopolies, to prohibit or allow mergers, to protect industries from international competition, to set tax policy, to protect the environment, and to legislate the use of labor. Directly or indirectly, the government has a significant influence on the national economy and the operation of businesses. To protect themselves, many organizations often establish relationships with politicians and officials through lobbyists and trade associations.

Elections and political changes are often significant factors that influence strategic planning in a given industry. In Europe, there are multiple political levels—from Brussels down to the city council in each municipality.

Geopolitical stability or instability is also playing an increasingly important role in everything from supply security and power balances to international regulations.

Economic factors

Most organizations monitor the economic development in their home country, but international developments play an increasingly significant role.

Key factors might include:

• Trends such as inflation and economic growth
• Gross Domestic Product and standard of living
• The economic structure
• National advantages in global competition
• Global trade patterns and geopolitics

Sociocultural factors

This area covers a wide range of factors, including:

• Demographic development
• Lifestyle
• Income distribution
• Values and attitudes towards work and business
• Education and skill levels

Take demographic development as an example. When a population's average lifespan increases, the demand for service offerings grows, and a larger number of elderly people will affect, among others, the healthcare sector, financial services, and the leisure and tourism industry

Since many countries cannot afford to pay pensions to a growing elderly population, the retirement age—as is the case in Denmark—will rise, affecting the labor market and the approach to workforce management

Technological factors

Technological development increasingly influences societal progress, and thereby the competitive conditions of individual countries and companies. And it is happening fast:

• Since Microsoft launched its ChatGPT in November 2022, the use of personal AI assistants has exploded—and this is just the beginning. Experts speak of a potential exponential development.
• Internet usage is skyrocketing on PCs, tablets, and smartphones.
• Digital communication makes us independent of time and place.
• Online commerce and alternative distribution methods are turning industries upside down.

In the wake of the digital transformation, there is also heightened political awareness in the form of both stricter regulations and support for technological improvements and innovation.

How to use the PEST model

Broadly speaking, you can use a PEST analysis first to identify which opportunities and threats the future holds. Then, you can use the analysis to construct a range of future scenarios that illustrate the impact if various external events occur.

To derive value from the PEST analysis, it should be conducted for each individual business area. A single analysis cannot be carried out in companies with several different business units or in vastly different countries or regions.

A useful PEST analysis is much more than a simple checklist. It is easy to compile a long list of external factors that might affect your company in the future, but such a list is only data and not immediately actionable knowledge. Additional analysis is required.

What to be aware of when conducting a PEST analysis

With the vast amounts of data available today, it is a good question how to delimit the focus area of a PEST analysis.

In some situations, a few factors dominate and become the natural focus. In other situations, a stakeholder analysis can help narrow the focus. Expert opinions can also be used.

Another method to focus the PEST analysis is first to identify the critical success factors for the industry – that is, the factors that are important for the organization’s ability to survive and grow.

Critical success factors are identified by answering two questions:

• What do the customers want?
• How should the company perform in the competition?

Once the critical success factors have been identified, the PEST analysis can focus on the broad external factors and development trends that affect them. And remember that these factors are both complex and interrelated.

As in all other contexts, CfL’s recommendation is: Adapt the use of the method to your company’s specific situation.