PEST(EL) analysis

PEST(EL) is a model used in strategic planning.

The PEST model was developed first and looks at the macro-environment, as part of a strategic analysis of the external environment, using the following headings:

• Political. The political environment includes taxation policy, government stability and foreign trade regulations.
• Economic. The economic environment includes interest rates, inflation, business cycles, unemployment, disposable income and energy availability and cost.
• Social. The social/cultural environment includes population demographics, social mobility, income distribution, lifestyle changes, attitudes to work and leisure, levels of education and consumerism.
• Technological. The technological environment is influenced by government spending on research, new discoveries and development, government and industry focus of technological effort, speed of technological transfer and rates of obsolescence.

Some writers have extended this to a PESTEL analysis by separating out the following additional factors:

• Ecological/environmental. The ecological environment, sometimes just referred to as 'the environment', considers ways in which the organisation can produce its goods or services with the minimum environmental damage.
• Legal. The legal environment covers influences such as taxation, employment law, monopoly legislation and environmental protection laws.

Overall, the model should allow a business to assess the growth prospects for the industry within which the organisation operates.

Some of the PESTEL influences may affect every industry, but industries will vary in how much they are affected.

For example, an interest rate rise is likely to affect a business selling cars (car purchase can be postponed) more than it will affect a supermarket (food purchase cannot be postponed).

The PESTEL model

Political / legal factors

The addition or removal of legislative or regulatory constraints can pose major strategic threats and opportunities. The organisation needs to know:

• What changes in regulations are possible and what will their impact be?
• What tax or other incentives are being developed that might affect strategy?

Economic factors

Economic factors include interest rates and exchange rates, as well as the general state of the economy (e.g. entering or emerging from a recession). The organisation needs to know what the economic prospects and inflation rates are for the countries that it operates in and how will they affect strategy.

Social / cultural factors

Social / cultural factors include changes in tastes and lifestyles. They may also include changes in the demographic make-up of a population.

For example in Western Europe people are living longer and in most countries the birth rate is falling, leading to an ageing population. This has obvious implications for the types of products and services which businesses and other organisations may plan to offer.

Typical questions that need to be answered include:

• What are the current and emerging trends in lifestyles and fashion?
• What demographic trends will affect the size of the market or its sub-markets?
• Does the trend represent opportunities or threats?

Technological factors

Technological factors may include changes in retailing methods (such as direct selling via the Internet), changes in production methods (greater use of automation), and greater integration between buyers and suppliers via computer link-ups.

The managers would need to know to what extent the existing technologies are maturing and what technological developments or trends are affecting or could affect the industry.

Environmental factors

Environmental factors include product stewardship, which considers all raw materials, components and energy sources used in the product and how more environmentally friendly substitutes could be used.

They also include ways in which product and product waste could be more effectively recycled.

Typical questions that need to be answered include:

• Are we adhering to the existing environmental legislation?
• Are there any new product opportunities that could be exploited that would have a favourable environmental impact on the market?
• What impact will future environmental legislation have?

Criticisms

A PEST analysis is useful for identifying sources of change in an industry and hence highlighting growth opportunities. However, just because a market is growing, it does not necessarily follow that a firm can make profits within that industry.

This was the main reasoning behind Porter developing his five forces model.

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