A PEST analysis (also sometimes called STEP, STEEP or PESTLE analysis) looks at the external business environment.

In fact, it would be better to call this kind of analysis a business environmental analysis but the acronym PEST is easy to remember and so has stuck. PEST stands for Political, Economic, Sociocultural and Technological. (Technological factors in this case, include ecological and environmental aspects - the second E in STEEP and PESTLE, while the L in PESTLE stands for legal or legislative). The analysis examines the impact of each of these factors (and their interplay with each other) on the business. The results can then be used to take advantage of opportunities and to make contingency plans for threats when preparing business and strategic plans.

You need to consider each PEST factor as they all play a part in determining your overall business environment. Thus, when looking at political factors you should consider the impact of any political or legislative changes that could affect your business. If you are operating in more than one country then you will need to look at each country in turn. Political factors include aspects such as laws on maternity rights, data protection and even environmental policy: these three examples alone have an on impact employment terms, information access, product specification and business processes in many businesses globally.

Obviously politicians don't operate in a vacuum, and many political changes result from changes in the economy or in social and cultural mores, for example. Thus although tax rates are generally decided by politicians, tax decisions generally also include economic considerations such as what is the state of the economy. In Europe, the politicians drove the introduction of the euro currency but the impacts include economic factors: cross-border pricing, European interest rates, bank charges, price transparency and so on. Other economic factors include exchange rates, inflation levels, income growth, debt & saving levels (which impact available money) and consumer & business confidence. There can also be narrow industry measures that become important. Issues such as the availability of skilled labour or raw-material costs can impact industries in different ways.

Advances in technology can have a major impact on business success, with companies that fail to keep up often going out of business. Technological change also affects political and economic aspects, and plays a part in how people view their world. Just as one example, the Internet has had a major influence on the ways consumers and businesses research and purchase products. Whereas in the early and mid-1990s, it was rare for consumers to consider cross-border purchases this is now becoming common via services such as eBay, with the result that even small businesses can now serve a global market. Politicians are still coming to grips with the tax issues involved. Meanwhile the music industry has still not found an effective solution to the threat posed by the successors to Napster, and the cinema/movie industry is also being challenged by the availability of peer-to-peer networks facilitating easy and free downloads of the latest blockbuster films. Environmental factors to consider here include the impact of climate change: water and winter fuel costs could change dramatically if the world warms by only a couple of degrees.

Ultimately, however, the various PEST factors are governed by the socio-cultural factors. These are the elements that build society. Social factors influence people's choices and include societal beliefs, values and attitudes. So understanding changes in this area can be crucial, as they lead to political and societal change. When looking at socio-cultural factors, you need to consider

• demographic changes and also consumer views on your product & industry;
• environmental issues (especially if your product involves hazardous or potentially damaging production processes);
• lifestyle changes and attitudes to health, wealth age (children, the elderly, etc.), gender, work and leisure.

Added complications when looking at social and cultural factors are differences in ethnic and social groups. Not all groups have the same attitudes - and this influences how they view various products and services.

This is quite a brief answer. We've prepared a more in-depth white paper on both PEST and SWOT analysis and also given additional information in question 24 which looks at both techniques. We can also help you with your organization's SWOT and business environmental analyses by providing an external and objective view point.

Note: This FAQ was originally published in the Society of Competitive Intelligence Professional's membership magazine (Competitive Intelligence Magazine - Jul-Aug 2002)