A PEST analysis is an extremely useful business tool. It helps a company to understand where it ‘fits in’ and the framework in which it operates.

PEST stands for:

• Political Factors,

• Economic Factors,

• Social Factors and

• Technological Factors.

All these factors are external and as such they are not within the direct control of any company or business and yet business has to be carried out within the framework of these factors, which is why it is so important to be familiar with them. In some cases it can actually feel like you are getting to know your enemy, but any identified factors in a PEST analysis can either be an opportunity or a threat, sometimes both and this has to be identified in the process.

Political Factors:

Political factors include the Government and its political persuasion as well as legislation. This could be legislation about the environment, legislation about employment, Health and Safety laws or even changes to tax laws. Due to the fact that Governments change and political ‘hot topics’ change so frequently, it is important to stay aware of the current political factors.

Now issues such as the environment and reducing CO 2 emissions affects many businesses and yet a few years ago, few companies even bothered to consider the environment, so staying in touch with political factors makes good business sense.

Political factors are not always a threat. Sometimes changes to tax laws or even help for some types of business can be beneficial to businesses, so it is important to keep an open mind.

Economic Factors:

The recession that gripped the UK in 2008-2009 certainly demonstrated that you should ignore economic factors at your peril. The key economic factors include the exchange rate and how that impacts on the business, the level of inflation and the level of interest rates. In addition, the Government’s level of spending and of economic stimulus should also be considered.

In the UK the Bank of England’s current monetary policy should also be taken into account as well as general levels of economic confidence within the public; are they happy to spend or so scared that they want to save?

Again, economic factors are not always a threat, but during a recession they usually are identified more as a threat than an opportunity.

Social Factors:

Social factors are the factors that simply indicate the general social moods and attitudes of the time. These also take into account the levels of wealth within Society or a specific region as well as the employment rates, levels of disposable income etc.

Many of the social factors will change according to where a business operates and any assessment of social factors needs to take into account the local demographics and prevailing attitudes within a locality. Depending on the locality, these factors can either be opportunities or threats.

Technological Factors:

Technological factors are important because technology changes so rapidly that there is a need to stay abreast with technology. Some of these factors relate to innovation in technology and future trends. Others relate to the expected life cycle of technological equipment and when items will have to be replaced. IT innovation as well as energy use and even energy saving should also be considered in any PEST analysis.

Many of the new concepts and innovations offer real opportunities for businesses, whilst the life cycle and obsolescence issues do present threats or at least challenges.