ANALYSING YOUR ENVIRONMENT – THE PEST ANALYSIS

18 07 2011

Earlier this month, I revisited the SWOT Analysis and discussed how it might be used with some purpose rather than used and forgotten. In this blog I look at the SWOT Analysis’ close relation; the PEST Analysis. Often mistakenly considered to cover similar ground, where the SWOT analyses your organisation, the PEST analysis the environment in which you operate.

The PEST analysis is not as widely used as the SWOT analysis but is nonetheless an extremely valuable tool which, when applied in tandem with a SWOT analysis can provide a more in-depth understanding of the overall environment your organisation is operating within and might face in the future; vital considerations when developing strategy.

The PEST analysis considers the external macro environment (i.e. the ‘big picture’) in which a business operates and considers factors which are beyond the direct control or influence of the organisation but are important to be aware of when doing product development, business or strategy planning.

PEST breaks the environment into four sections to enable more focused analysis; Political, Economic, Social, Technological.

The PEST analysis enables you to consider the implications of changes to the environment in which you operate (whether current or future) and thus can assist in planning to address them in place of becoming a victim of them.

These are some examples of PEST factors that may affect your organisation although you should ensure you conduct your own comprehensive analysis:

POLITICAL:

  • A change in government
  • A change in government policy towards the sector(s) in which you operate
  • Local Authority priorities, such as funding and investment
  • Legal aspects such as tax policies, labour laws, environmental law, health and safety, employment law, etc. (sometimes analysed separately, see below)

ECONOMIC:

  • Interest rates and their effect on (e.g.) the cost of capital items
  • Inflation and its effect on (e.g.) different spending priorities of consumers
  • Exchange rates and currency values around the globe (e.g. in countries where you manufacture or to whom you export)
  • Unemployment rates and the availability of cheap(er) labour

SOCIAL:

  • Demographic shifts in the population (e.g. geographical ‘expertise clusters’ seen in high-tech industries)
  • An aging population could impact (e.g.) on the cost of labour
  • Attitudes towards careers and career progression
  • Lifestyles, fashions and trends
  • Standard of education
  • Attitudes to the work/life balance
  • Entrepreneurial attitudes and opportunities

TECHNOLOGICAL:

  • Rate of technological obsolescence (e.g. mobile phones in the communications sector)
  • Government investment in research and development
  • Access to and changes in technology (e.g. IT, mobile, internet, etc.)

In recent times some consultants have stretched (and rearranged) PEST into SLEPT and then PESTEL. In the first of these (SLEPT) the L represents Legal, traditionally included within political under PEST but not necessarily. The second, PESTEL (sometimes written as PESTLE) adds Environmental to the acronym. Still another step on is STEEPLE which adds in Ethical, for example the issue of child labour would be considered under this heading where the traditional model (PEST) would include both environmental and ethical within political and social. The growing importance of both has seen their introduction under separate headers to ensure they are covered.

None of these variations are wrong and none are better or worse than others. The key is that you use a model which assists you in gaining the information you need to the required depth and quality.

And, as Hill & Westbrook reminded us in 1997, having invested time and other resource in your SWOT and PEST analyses, don’t then forget to use the intelligence you have gained to inform your strategy!

© Jim Cowan, Cowan Global Limited, 2011

info@cowanglobal.net

Twitter @cowanglobal

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5 responses

20 07 2011
Emma Insley

Nice blog post Jim. I wholeheartedly agree with the usefulness of the SWOT and PEST.

In my experience lots of organisations do the SWOT and PEST and leave it there; they then move on to developing the plan, without stopping to think about the implications of the environmental analysis. It’s vital that an organisation stops to think ‘so what’ at this stage … i.e. so what does it mean if our funding is at risk, so what should we do about it, how should we respond?

22 07 2011
cowanglobal

Hi Emma,

Thank you for taking the time to comment.

I think you highlight a very real problem with analyses of the type of SWOT and PEST and their ilk. Although the problem was first recognised 14 years ago (‘The SWOT Analysis – Is It Time For A Product Recall?’ Hill & Westbrook, 1997), it appears that a significant majority of organisations go to the time and effort of conducting these analyses and then do not apply what they learn.

One of the issues might be be (based on experience not any indepth research) that most strategies base a large degree of their content on hope in place of reality. What do I mean?

Take your example of “our funding is at risk.” Many organisations will know this and fail to consider the reality it presents because the only way they have ever learned strategy was via vision-based template oriented planning methodology. In this instance the very real threat of losing funding and potentially, in the third sector, economic viability calls for a highly personalised issue-based strategy.

The current landscape in sport is a great example. The current funding agreements/levels run to 2013 when there is high expectation that in the post Olympic, new economic reality funding will be greatly reduced. Although they know (or expect) this very few sports organisations have considered the implications this will have on their future capacity and viability. The later they leave it the more drastic and limited the options available become.

The third sector, the police, local authorities and many others have recently discovered that planning based on hope rather than (expected) reality comes back to bite you pretty hard!

19 08 2012
Micheal Samuel

My question is, how will a PEST analysis develop strategic mechanisims to remedy these forces in a local authority organisation?

20 08 2012
cowanglobal

Hi Michael,

Thank you for posting your question. The answer will vary for every local authority and their PEST analysis however, without going into too much depth, here are some examples:

Political: A change in government legislation which makes increased demands on authority resources such as adding to areas for which LA’s are responsible for statutory protection. In the current climate it is worth considering changing attitudes from government to public services, including those routinely provided by LAs. For LA officers the local political landscape is worth considering especially in those areas where the political hue changes at almost every election.
Economic: In recent memory are those LAs who invested (saved) heavily with Icelandic banks without considering the wider economic factors and therefore not adequately spreading risk. The ongoing problems in the EuroZone are worth monitoring closely for there is still the likelihood of significant local economic impact from this regional (global) issue. At a more local level, where a LA has a reliance on significant economic benefit from one source (eg tourism), what would be the effect of a reduction in this area? This is not always predictable (eg volcanoes) but is often more predictable than people would like to admit (eg tourism downturn during the Olympics).
Social: Changes in industry, especially in areas of high specialism or single industry dominance, can (should) have a serious effect on LA planning. This is not only in the reduction in industry but also in the attraction of new industry whereby demographics may change, housing demands vary, leisure wants alter, etc. New industry doesn’t necessarily increase employment in local communities, it can mean an influx of ‘outsiders’ with the relevant skills, especially if not thought through and planned properly. High unemployment, high levels of low paid employment, areas of high ratios of single parents, etc – the range of social considerations for different issues is vast and too often planned for reactively rather than proactively.
Technological: Many LAs were slow to adopt social media and even now are not great at making best use of it. Many LAs also have the hardest to navigate websites and (despite being at the forefront on many equality issues) poor accessibility. On the flip side, many have embraced IT as an easy (read lazy) solution to consultation and end up ignoring many who either are not online or do not use online communications out of preference (as high as 40% in some parts of the country).

I hope that very undetailed response helps, if you have more specific questions, please feel free to email me.

21 08 2012
Micheal Samuel

This makes a lot of sense, especially the Technological part. Thank you

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