4 steps of the PEST analysis process

Change can be scary. Oftentimes, the best way to deal with change is to understand it. Breaking down the causes for—and potential effects of—any unexpected changes can help your team digest what's happening and come up with an action plan that fits your needs.

That's where a PEST analysis comes in. Use this tool to better understand how external changes are impacting your business—and what you should do about it.

What is a PEST analysis?

A PEST analysis is a research tool that helps you analyze the external political, economic, socio-cultural, and technological changes that can affect your business. This is a shortened version, as sometimes the acronym is lengthened to PESTEL to include legal and environmental factors in addition to the first four. 

The PEST analysis tool is useful for four main reasons:

1. Helps spot business opportunities and provides a warning in advance of any dangers or threats to your business.

2. Reveals how the external business environment is changing so your team can practice workplace adaptability.

3. Analyzes risks in your current environment so your business can avoid any projects that are likely to fail.

4. Creates an objective view of new or different markets based on quantifiable facts, instead of pre-existing assumptions on a specific region or market.

PEST analysis vs. SWOT analysis

A PEST analysis is often associated with a SWOT analysis, but these two tools focus on different parts of your strategy.

A PEST analysis is a tool to help analyze the external environment so your team can create more accurate decisions for big picture financial decisions. This is the tool you would use when you are considering any economic factors or potential changes to your business strategy.

A SWOT analysis narrows in on a more project-specific level. SWOT analysis helps to find strengths, weaknesses, opportunities, and threats for a specific project or business plan. You can use information from a PEST analysis to inform a SWOT analysis.

When to use a PEST analysis

A PEST analysis can help you break down and understand external conditions and changes that are impacting your business. You can use a PEST analysis reactively to understand unexpected changes or proactively to evaluate whether a market or decision is right for your company. Take a look at some specific instances where a PEST analysis can be beneficial.

When external forces drastically change

Sometimes external forces can change the business landscape drastically with no warning. This type of change happens quickly and, without the right tools to evaluate what's happening, they can feel really overwhelming.

A PEST analysis can help you break down the external political, economic, socio-cultural, and technological (plus environmental and legal) changes to quickly understand how they will influence your team. Use this tool to evaluate the impact these external factors will have on your team and pivot accordingly. 

For example, in April of 2022, COVID-19 lockdowns in China led to worldwide shipping delays. This type of delay impacts a huge swath of companies, and it’s hard to understand how—or when—your company will be impacted. A PEST analysis can help you extrapolate and predict how current external changes will impact your future strategy, so you can adjust accordingly.

Expanding into a new market

You can use a PEST analysis to look at topics you may not typically consider, such as economic and cultural factors, when you’re expanding into a new demographic or market. It’s helpful to have someone on your team who’s familiar with the new market to assist with developing strategy. If you don’t have someone who’s familiar with the new market, you may run into some cultural roadblocks you may not have considered as an outsider of that culture.

For example, in the 1960s, General Mills expanded their cake mix market into Japan after a successful run in America. They advertised being able to cook a cake in a rice cooker, since many Japanese households at the time did not have an oven. In Japan, rice is considered a sacred food, so the rice cooker was often solely used for that purpose—cooking rice. The thought was that mixing other ingredients into the rice cooker would change the taste of the rice itself. This oversight was one of the biggest reasons why cake mix sales did not meet expectations. This is a good example of how a PEST analysis could have prevented this cultural misstep.

Developing a new product

When you’re developing a new product, there’s a lot of research involved, including figuring out the ideal customer profile (ICP). A PEST analysis can help you think more about the external factors that affect your ICP and how that would influence their decision making process. 

On the business side, a PEST analysis can also help you understand how external factors affect the development of a new product. For example, an independent coffee company may be interested in finding a new source for their coffee beans. The sourcer would want to consider the political, economic, socio-cultural, and technological factors to ensure that their business practices are ethical and a good match for their business model.

4 steps of PEST analysis

While a PEST analysis covers large, overarching topics, the format for creating one is quite simple. Here are the four steps you take to complete a PEST analysis. 

Step 1: Brainstorm potential factors

In this first step, you’ll want to think about all of the environmental factors that affect your business as a whole. This is where the acronym PEST comes in. PEST stands for:

• Political: Are there any elections coming up that may affect your business? Any initiatives on this ballot that may affect how your business performs? Are there any government regulations you need to consider before moving forward with your project?

• Economic: What does the current economy look like—is it growing, plateauing, or declining? If you conduct business internationally, are exchange rates affected at all? Is the economy affecting your target market’s purchasing habits? Are there any tariffs or trade restrictions you should be aware of? What does the unemployment rate look like right now—will this affect your hiring plans?

• Socio-cultural: Are there any societal attitudes that may affect your business? Are there employment trends in the areas you’re looking to hire? Are there any generational differences that may affect a customer's decision making process? Are there any social movements that are affecting potential career attitudes?

• Technological: Are there any new technological innovations that can affect the way you conduct business? Do your competitors have access to a new technology that you may not have access to? Are you looking to add a new type of technology to your business that may affect how you conduct business?

• Environmental: What impact will your new business venture have on the environment? What impact will the environment have on your business? Will weather greatly affect how your business operates?       

• Legal: Are there any current laws or regulations that are affecting how your business operates? Should your team get into legal trouble, do you have a strategy in place for how to handle it? 

Step 2: Brainstorm opportunities

After you analyze the four different factors within the PEST acronym, consider any potential opportunities that your business can branch into. This is where a SWOT analysis comes in handy—after you brainstorm these four factors, you can use this analysis to inform how you can create a SWOT analysis as you expand your business. 

Consider the COVID-19 pandemic as an example. There were many different political, economic, socio-cultural, and technological changes that came with the lockdown. As a result, companies like Zoom experienced huge growth as teams turned to remote solutions that focused on collaboration and real-time connection.

Step 3: Brainstorm threats

Similar to how you would analyze threats for a SWOT analysis, this is where you consider any potential threats based on the information you gathered in step one. While you are assessing potential business threats, consider creating contingency plans in the event that a potential risk does happen. 

A common example of this scenario is an election year—how will you conduct business depending on the outcome of the election? Since election cycles happen consistently, your business has enough time to craft potential plans if an election can greatly disrupt your business.

Step 4: Take action

Based on all of the information you’ve gathered, now is the time to start the strategic planning process and establish your business goals. Understanding these potential threats, factors, and opportunities will help your team through the decision-making process and will inform your future strategy. 

Tip: Highlight key areas of your business plan and explain which external factor is affecting this decision. For example, you could highlight the fact that your business is located in a college town to explain why you’re looking to hire more entry-level employees to your team.