SWOT and PEST analyses are similar in that both focus on environmental factors that may affect a company. Both types of analysis use group brainstorming to identifying environmental factors. However, there are several important differences between the analysis frameworks that must be understood before either can be used effectively.
Both SWOT and PEST have become components of a good business plan and are key in evaluating environmental factors. In order to understand how these analysis frameworks are similar, it is important to fully understand each framework individually.
SWOT analysis is a simple framework for evaluating the internal and external environments affecting a company. These environmental factors can be divided into four categories, from which SWOT analysis derives its name. The categories are: strengths, weaknesses, opportunities and threats. Strengths and weaknesses represent the internal environment, whereas opportunities and threats represent the external environment.
PEST is a type of analysis used in strategic management that takes into account Political, Economic, Social and Technological factors. PEST analysis is a useful tool for understanding market demand/decline, current business position and potential opportunities/obstacles. The factors it analyzes should not be solely at the company level. Rather, these external factors must be examined at a company, national and global level.
Both frameworks focus on the environment in which a company operates, but they do so in a different manner. SWOT is concerned with identifying environmental factors that affect a company directly. Obviously, internal environmental factors have a direct impact, but so do external factors SWOT analyzes, such as increased taxes and tariffs or a new competitor.
In contrast, PEST analysis looks at all the external environmental that may have an impact on the company. These factors may include changes in government, popular opinion, fashion trends, weather, budding technology, etc. Further, PEST analysis looks at external environment factors at the company, national and global levels, rather than just looking at the company level as SWOT does.
A significant consideration regarding SWOT and PEST is identifying factors. The factors that affect a business most may not always be the most obvious. Likewise, an issue that is obvious to one person, or one department, may not be obvious to another. It is for this reason that group participation, particularly participation involving a wide variety of participants, is of particular value in these types of analyses.
It is considered best practice to combine SWOT and PEST. By looking at the environmental factors affecting a company from two different frameworks, it is easier to determine those factors that truly have a correlation with company performance, rather than mere coincidence.
Both SWOT and PEST are frequently misused. Some erroneously interpret the two types of analyses as being interchangeable; others view the frameworks as so simplistic that they don't allot ample time and effort to brainstorming.