Scanning the Environment: PESTEL Analysis

A PESTEL analysis (formerly known as PEST analysis) is a framework or tool used to analyse and monitor the macro-environmental factors that may have a profound impact on an organisation’s performance. This tool is especially useful when starting a new business or entering a foreign market. It is often used in collaboration with other analytical business tools such as the SWOT analysis and Porter’s Five Forces to give a clear understanding of a situation and related internal and external factors. PESTEL is an acronym that stand for Political, Economic, Social, Technological, Environmental and Legal factors. However, throughout the years people have expanded the framework with factors such as Demographics, Intercultural, Ethical and Ecological resulting in variants such as STEEPLED, DESTEP and SLEPIT. In this article, we will stick simply to PESTEL since it encompasses the most relevant factors in general business. Each factor will be elaborated on below:

PESTEL ANALYSIS
Political Factors:

These factors are all about how and to what degree a government intervenes in the economy or a certain industry. This can include government policy, political stability or instability, corruption, foreign trade policy, tax policy, labour law, environmental law and trade restrictions. Furthermore, the government may have a profound impact on a nation’s education system, infrastructure and health regulations. These are all factors that need to be taken into account when assessing the attractiveness of a potential market.

Economic Factors:

Economic factors are determinants of a certain economy’s performance. Factors include economic growth, exchange rates, inflation rates, interest rates, disposable income of consumers and unemployment rates. These factors may have a direct or indirect long term impact on a company, since it affects the purchasing power of consumers and could possibly change demand/supply models in the economy. Consequently it also affects the way companies price their products and services.

Social Factors:

This dimension of the general environment represents the demographic characteristics, norms, customs and values of the population within which the organization operates. This inlcudes population trends such as the population growth rate, age distribution, income distribution, career attitudes, safety emphasis, health consciousness, lifestyle attitudes and cultural barriers. These factors are especially important for marketers when targeting certain customers. In addition, it also says something about the local workforce and its willingness to work under certain conditions.

Technological Factors:

These factors pertain to innovations in technology that may affect the operations of the industry and the market favorably or unfavorably. This refers to technology incentives, the level of innovation, automation, research and development (R&D) activity, technological change and the amount of technological awareness that a market possesses. These factors may influence decisions to enter or not enter certain industries, to launch or not launch certain products or to outsource production activities abroad. By knowing what is going on technology-wise, you may be able to prevent your company from spending a lot of money on developing a technology that would become obsolete very soon due to disruptive technological changes elsewhere.

Environmental Factors:

Environmental factors have come to the forefront only relatively recently. They have become important due to the increasing scarcity of raw materials, polution targets and carbon footprint targets set by governments. These factors include ecological and environmental aspects such as weather, climate, environmental offsets and climate change which may especially affect industries such as tourism, farming, agriculture and insurance. Furthermore, growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer. This has led to many companies getting more and more involved in practices such as corprate social responsibility (CSR) and sustainability.

Legal Factors:

Although these factors may have some overlap with the political factors, they include more specific laws such as discrimination laws, antitrust laws, employment laws, consumer protection laws, copyright and patent laws, and health and safety laws. It is clear that companies need to know what is and what is not legal in order to trade successfully and ethically. If an organisation trades globally this becomes especially tricky since each country has its own set of rules and regulations.

This article covers only some examples of general external factors that companies may want to take into account. There are probably many more factors that could influence a certain business. Besides it really varies from industry to industry and from nation to nation how important certain factors are. The software industry might for example have less to do with environmental and ecological factors than the oil or automotive industry. A lot of data on the aformentioned factors can be found on websites such as tradingeconomics.comtheglobaleconomy.com, and data.worldbank.org.

pestel

Full list of PESTEL factors:

Political factors

  • Government stability/instability
  • Corruption level
  • Tax policies
  • Freedom of press
  • Government regulation and deregulation
  • Special tariffs
  • Political action committees
  • Government involvement in trade unions and agreements
  • Competition regulation
  • Voter participation rates
  • Amount of government protests
  • Defense expenditures
  • Level of government subsidies
  • Bilateral relationships
  • Import-export regulation/resctrictions
  • Trade control
  • Lobbying activities
  • Size of government budgets

Economic factors

  • Growth rate
  • Interest rate
  • Inflation rate
  • Exchange rate
  • Availability of credit
  • Level of disposible income
  • Propensity of people to spend
  • Federal government budget deficits
  • Gross domestic product trend
  • Unemployment trend
  • Stock market trends
  • Price fluctuations

Social factors

  • Population size and growth rate
  • Birth rates
  • Death rates
  • Number of mariages
  • Number of divorces
  • Immigration and emigration rates
  • Life expectancy rates
  • Age distribution
  • Wealth distribution
  • Social classes
  • Per capita income
  • Family size and structure
  • Lifestyles
  • Health consciousness
  • Average disposable income
  • Attitude towards government
  • Attitude towards work
  • Buying habits
  • Ethical concerns
  • Cultural norms and values
  • Sex roles and distribution
  • Religion and beliefs
  • Racial equality
  • Use of birth control
  • Education level
  • Minorities
  • Crime levels
  • Attitudes towards saving
  • Attitude towards investing
  • Attitudes towards retirement
  • Attitudes towards leisure time
  • Attitudes towards product quality
  • Attitudes towards customer service
  • Attitudes towards foreign people

Technological factors

  • Technology incentives
  • Automation
  • R&D activity
  • Technological change
  • Access to new technology
  • Level of innovation
  • Technological awareness
  • Internet infrastructure
  • Communication infrastructure
  • Life cycle of technology

Environmental factors

  • Weather
  • Climate
  • Environmental policies
  • Climate change
  • Pressures from NGO’s
  • Natural disasters
  • Air and water pollution
  • Recycling standards
  • Attitudes towards green products
  • Support for renewable energy

Legal factors

  • Discrimination laws
  • Antitrust laws
  • Employment laws
  • Consumer protection laws
  • Copyright and patent laws
  • Health and safety laws
  • Education laws
  • Consumer protection laws
  • Data protection laws