If I ask you ‘what’s the relationship between PEST and SWOT’ no matter whether you know what the two words mean or not, what would you answer? Well, it’s an interesting subject rather than a complicated one. You may say that both of them are acronyms, or that both of them have a letter ‘T’ at the end, or some who have learnt the two concepts may say they are both analyzing tools. All of these answers are not false, but provide no valuable insights.

In this article, I hope I’m going to be able to give you some of the essential concepts of PEST and SWOT analysis and the relationship between them.

Competitive strategy

To answer this question, we have to move a step backward to see a broader landscape where the two concepts are utilized. That is the competitive strategy with its author: the great scholar Michael Porter. Remember, not Harry Potter.

What is competitive strategy?

Well, according to Michael Porter, competitive strategy is the positioning of a company in its competitive environment. That positioning means more than just product positioning or the marketing concept. it's the total positioning of a company involving all the functions - production, distribution, logistics, service that total picture of an enterprise is placing to the competitive environment.

Two fundamental questions

Now, how do we go about developing a strategy?

Well, in developing a strategy, there are two fundamental questions that we've got to address.

The first is the structure or attractiveness of the industry in which we are competing. Some industries owe a lot more profit than others, year in and year out. And we simply must understand why, because one of the essential parts of developing a strategy is to know how good the game is in which we are trying to compete. The second essential question in strategy is a company's position within its industry. Again if we look at many industries we see that no matter whether the industry's profits are high or low, companies in the same business have widely different levels of profit ability. Some, year in and year out, make a lot more money than others. And any strategists must understand what it takes to be a superior performer in the industry and not be the one below the average.

Both of these questions are vital in developing industries.

PEST analysis

Let’s slow down to review what I have just said.

The first question, the structure or attractiveness of the industry, means we have to conduct industry analysis by using a technique called environmental scanning. For the company, the industry or the environment actually is a set of many external factors. Therefore, in order to conduct a profound environmental scanning, we must specify what external factors are to be scanned and then analyzed. The PEST helps here.

PEST stands for “political, economic, social, and technological” and describes a framework of macro-environmental or external factors. PEST gives an overview of the different external factors that the company has to take into consideration. Political factors are how and to what degree a government intervenes in the economy and some law affairs. Economic factors include economic growth, interest rates, exchange rates and inflation rate. And social and technological factors are not hard to identify. It’s quite understandable that all these factors may have major impacts on how business operate and make decisions. As a matter of fact, PEST, which indicates the external and macro-environmental factors, sets the rule of the game or the industry to be taken into account.

SWOT analysis

The second question reveals that the company’s position explains the different levels of profit ability among companies in the same industry. But how do we decide to choose a certain position? This is a difficult choice that we have to take more factors, not only external but also internal factors, into account. Here we use SWOT analysis.

SWOT analysis seems much more famous than PEST. You may think that SWAT which stands for the Special Weapons and Tactics, an affiliation of Los Angeles Police Department, is quite cool. But I think SWOT is much cooler in business world. SWOT analysis is a strategic planning method used to evaluate strengths, weaknesses, opportunities and threats involved in a business venture. To take a SWOT analysis, we are supposed to specify the objective of the business venture and identify the internal and external factors that are favorable and unfavorable to achieve that objective. Here we can see that strengths and weaknesses are internal factors which relate to the company itself, and opportunities and threats are external factors which relate to the industry or environment where the company competes in.

The relationship between PEST and SWOT

Now, you have enough knowledge to see the relationship between PEST and SWOT analysis.

In general, PEST and SWOT are closely related approaches. Their background is Michael Porter’s competitive strategy, with a common utilization of facilitating a better decision making on industry analysis and position choice. The difference here is that PEST focuses on external factors whereas SWOT focuses both external and internal factors.

More specifically, let’s see the letter “T” we have mentioned in the beginning. It is coincidence that PEST and SWOT both end with a "T," but it is the "T" in SWOT that provides the greatest connection between these two strategic assessments. SWOT takes a more balanced approach and allows the company to consider internal factors it has control over alongside external influences over which it has no control, but needs to prepare for. Performing a thorough PEST analysis helps companies to more deeply analyze the threats section in SWOT.

And let’s also see the letter “O”. The "O" in SWOT also has some correlation to PEST. Examining external political, economic, social and technological factors can also help companies uncover potential business opportunities it could pursue. For example, companies that rely heavily on technology in logistics or customer service must always consider opportunities to upgrade their technology for business improvement.

Conclusion

So, in the end, I’d like to draw a conclusion about what we have discussed.

There is overlap between PEST and SWOT, because similar factors would appear in each. PEST analysis is useful for producing a SWOT; a good PEST analysis will identify all of the components of the SWOT analysis.

Strategic planning is not a precise science - no tool is mandatory - it's not an academic debate on which one is better than the other. Instead, it’s a matter of pragmatic choice as to what helps best to identify and analyze the issues. In practice, many consultants use these two tools simultaneously. Maybe they are twin brothers.