How a PEST analysis fits into the environmental scan. Provides some examples of the political, economic, social, and technological factors of the external macroenvironment.

A scan of the external macro-environment in which the firm operates can be expressed in terms of the following factors:

• Political
• Economic
• Social
• Technological

The acronym PEST (or sometimes rearranged as "STEP") is used to describe a framework for the analysis of these macroenvironmental factors. A PEST analysis fits into an overall environmental scan as shown in the following diagram:

Political Factors

Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate. Some examples include:

• tax policy
• employment laws
• environmental regulations
• trade restrictions and tariffs
• political stability

Economic factors affect the purchasing power of potential customers and the firm's cost of capital. The following are examples of factors in the macroeconomy:

• economic growth
• interest rates
• exchange rates
• inflation rate

Social factors include the demographic and cultural aspects of the external macroenvironment. These factors affect customer needs and the size of potential markets. Some social factors include:

• health consciousness
• population growth rate
• age distribution
• career attitudes
• emphasis on safety

Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. Some technological factors include:

• R&D activity
• automation
• technology incentives
• rate of technological change

External Opportunities and Threats

The PEST factors combined with external microenvironmental factors can be classified as opportunities and threats in a SWOT analysis.

Recommended Reading

John Middleton, The Ultimate Strategy Library : The 50 Most Influential Strategic Ideas of All Time