One of the most well-known analytical tools of business education is the PEST (or PESTEL) analysis. Every first year student has done his first PEST analysis by the middle of his first semester. This analytical tool is a little bit like Unicum. Those who like it, they love it, those who don’t, they hate it. What is behind this duality?
The PEST analysis is trying to answer a very ill-structured question which is: what does the given country or region look like? There are basically two aspects of why this question is ill-structured: 1) what do we mean by ‘what does it look like’, and 2) how can one apply all this to a country?
The answer to the first question depends very much on the customer and the makes of the analysis. There are a thousand different indicators that can describe what a country looks like. Thus, creating an indicator system already requires a significant amount of attention and customization. The PEST analysis examines the indicators of countries and regions along four dimensions: 1. Political, 2. Economical, 3. Social, and 4. Technological. I wouldn’t go into the particular contents of these dimensions, most of the business economics books (e.g. Chikán 2013) do it for us. The point is that the selection of the indicators that belong to the different dimensions is already a subjective task that can be influenced by the purpose of the analysis (what type of decision will be supported by the analysis) and the set of available information.
To answer the second question, the simpler we will make the analysis, the easier it gets to apply it. To this end, we have to pay attention to use the same indicators when examining the different countries (apple to an apple principle) and highlight the most important ones. The simplest way to present the analysis is to gather all the information and data in a table. As the PEST analysis is quite a boring analytical tool by itself, we should never put it in the main part of our presentation, only on a back-up slide. The management doesn’t care about what our table looks like but about what decision can be made based on that (so what?). Let’s not waste neither the audience’s nor our time by showing long and boring tables, but if they ask about it we ought to give a confident, numerically precise answer.
So let’s test the PEST! Doing the analysis is indispensable in many strategic decision making situations (e.g., entering or exiting a new market), therefore it is important to use and apply this tool in the right way.