How is PEST Analysis complement SWOT Analysis

PEST Analysis as defined in Wikipedia?

In an attempt to evaluate the difference between SWOT Analysis and PEST Analysis, I did a research in Wikipedia to understand their definition.  It states that PEST Analysis is an acronym for “Political, Economic, Social, and Technological analysis” and it describes a framework of macro-environmental factors used in the environmental scanning component of strategic management – source: Wikipedia PEST Analysis.

How is PEST Analysis complement SWOT Analysis?

With the definition of PEST analysis along with my own application experience with SWOT analysis, this article attempt to seek their inter-relationship between the two.

As SWOT analysis is an essential too in Strategic Planning, it take into consideration of the four SWOT factors as outlined in the SWOT Analysis template. The four SWOT factors are :-

1. STRENGTHS
2. WEAKNESSES
3. OPPORTUNITIES
4. THREATS

In my previous SWOT analysis posts, I advocate to use brainstorming to establish these four SWOT factors. In this article, I introduce my own application experience of PEST Analysis and show you how to fit them into the external SWOT factor i.e. the OPPORTUNITIES and THREATS.

With PEST Analysis, it can take effect in several ways depending on the user’s experience and exposure to the macro environment. Below are typical interpretation of the four factors of PEST Analysis:-

1)  Political

The Political factor refers to the governmental policies which are much influenced by the economic situation in a country. It is a macro aspect of analyse which deal with major changes to the government policies of a country. It has great influence to the business outlook and confidence. Some of the major policies are Investment Policies ( Incentives, tax, quota, etc ) .  In general, the political stability in the country has the most influence to the confidence of investor be it local for foreign.

How to fit Political factor into SWOT Analysis?

An example of a Political factor is an investment policy for a generic or a specific industry which can have a positive or negative effect to that industry.

Example: Reduced import duty of recycle paper for paper industry. What is the effect to the local paper mill? Positive – and it is an opportunity in the SWOT Analysis Template.

Rationale: To a local paper mill, lower import duty means they can have  better option to import more as opposed to but from local  as the price may be more competitive.

2)  Economic

The Economic factor is an area where macro economic environment can affect the outlook and competitiveness of any business sectors in the country. Some major contributing factors of macro economic influence are economic growth, exchange rate, interest rate,  etc,  All these factors have an impact to the profitability of the business as it has direct impact to the cost of doing business.

Example: High interest rate would cost more for its borrowings hence cost more to do business.  Exchange rate is another key factors for export oriented business sectors.

Rationale: Unstable exchange rate can have a negative impact to the business. Therefore, to a certain extend,  it is a Threats in the SWOT Analysis Template

3)  Social

The Social factors refers to the cultural aspects of the country. It include population growth, age distribution, retirement policy, job preference,  safety and health consciousness. All these factors affect how the business sectors operate.

Example:  Highly educated population in safety and health consciousness may avoid working in a non conducive or air conditioned work environment such as factories.

Rationale: Shortage of skill workforce or lost of skill to another industry interrupt business operation. Due to scarcity of certain skill in certain industry sector, it form a Threats in the SWOT Analysis Template

4)  Technological

Technological factor is more tangible and easy to validate. It includes ecological and environmental aspects, technology incentives such as Research & Development incentives, automation reinvestment, high capital setup and rate of technological change in certain business.

Example: Changes of consumer preference toward higher end product which can be produced with higher technology. Existing business set up may need high capital to catch up with this technology.

Rationale: The changes in technological aspect of the products may have Positive and Negative aspect to a business sector.  Positive : Financial strong business can take the advantage to upgrade their business to cope with the trend.  Negative: Business who is constraint by financial standing my feel the pressure of loosing customer.  Both of these can fit into the Opportunity (for Positive) and Threats (for Negative) in the SWOT Analysis Template

In conclusion, using PEST Analysis to derive the Opportunities and Threats in the SWOT factors can be quite systematic as opposed to mere brainstorming method. As the list of Opportunities and Threats in the SWOT Analysis themplate, it may be endup quite many of them, therefore a proper selection tools is needed to select them to fit into the SWOT Analysis Template

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