3.1 What is a PEST analysis?

A PEST analysis, as defined by David Lines is 'Political, Economical, Social and Technological
analysis, a means of analysing the external factors that may present opportunities or threats to a
business.. It is also known as PESTEL analysis when Environmental and Legal factors are
included.

It is used to identify external factors which may affect a company.

The political factors PEST looks at include government stability, taxation policy, foreign trade
regulations and social welfare policies. Foreign trade regulations in particular are important for an
organisation planning on opening up in a different country or trading with a different country as
their laws may differ from those the organisation already employs.

Economical factors include business cycles, interest rates, money supply, inflation,
unemployment and disposable income. An organisation planning on breaking into a new market
would be well advised to look at the economical factors that may affect their proposed business
plans, such as market trends and consumer patterns.

Sociocultural factors, such as population demographics, social mobility, lifestyle changes,

consumerism and levels of education, should also be monitored closely, and example being the
tobacco industry. With people becoming more health conscious and with social pressures on
smokers growing in western countries the sales of tobacco have been adversely affected in this
market. Anti smoking campaigns, restrictions on advertising and packaging and the banning of
smoking in most public places, as well as heavy taxes and court cases, have led tobacco
companies to concentrate their marketing efforts mainly on the developing world.

Technological factors include new discoveries, speed of technological transfer, government

spending on research and rates of obsolescence. These are important factors to watch,
especially for people in the hi-technology industry which changes constantly. For example in the
mobile phones industry new models with bigger memory, new extras and applications and other
technological advances have replaced the original 'mobile'. A mobile phone is no longer just a
mobile phone but a computer, diary, calendar, and in some cases office. With new models
coming out almost every month it is important the mobile phone companies keep up with current
trends to ensure their mobiles do not become obsolete.

3.2 Importance for Organisations.

Organisations are subject to a range of different pressures in the external environment to which
they must respond. For example the cost of raw materials, current legislation or the terms of
international trade.

It is of particular importance that PEST is used to look at future impacts to the organisation as
they may be different to the past. For example, an organisation which is planning to open plants
in different countries should be concerned with government relations and understanding future
policies as it could be operating in countries with different political systems.

Also, in the build up to the millennium one of the concerns for organisations was whether
computers would run properly after 1st of January 2000, so they took action early to ensure that
this eventuality did not occur.

It is important for a company, especially if they are working on a global level, to know what is
happening in another countries economy. For example cheaper labour rates abroad would affect
the competitiveness of UK products nationally and globally. An increase in interest rates in the
USA will affect the share price of UK stocks or adverse weather conditions in India may affect the
price of tea.

An economy which is booming is characterised by certain variables which can be seen when
using the PEST analysis, such as low unemployment and high job confidence. Organisations
have to be ready to take advantage of such events and be able to keep up with increased
demand in such situations. The same can be said when an economy is low, as unemployment
will be high, job security will be low so spending will also be low. An organisation must be ready
to make cut backs, such as in labour and advertising, in such an eventuality to ensure they do not
lose too much money.

4.0 Conclusion.

It can be seen clearly that PEST analysis gives an organisation a clear advantage for the future
by predicting changes in the external environment. This gives them the opportunity to prepare for
the change and, for example in the event of a high economy, take full advantage and capitalise
on this change. The number of macro-environmental factors is virtually unlimited. In practise, an
organisation must prioritise and monitor those factors that influence its industry. Even so, it may
be difficult to predict future trends with an exceptional level of accuracy. However, the
organisation may turn to scenario planning techniques to deal with high levels of uncertainty in
important macro-environmental variables.