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Scanning the Environment: PESTEL Analysis

Lars de Bruin
Business Environment

A PESTEL analysis or PESTLE 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:


Political Factors:

These factors are all about how and to what degree a government intervenes in the economy or a certain industry. Basically all the influences that a government has on your business could be classified here. 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.

PESTEL Analysis Video Tutorial

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 marketeers 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. In addition, you want to be aware of any potential changes in legislation and the impact it may have on your business in the future. Recommended is to have a legal advisor or attorney to help you with these kind of things.

 

PESTEL Analysis In Sum

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.com, theglobaleconomy.com,  data.oecd.org and data.worldbank.org.

Performing a PESTEL Analysis in PowerPoint

A great way to present a PESTEL Analysis for a school project or a work assignment, is by using a PowerPoint framework in which the six PESTEL categories with corresponding variables are being shown visually. Below you will find an example of a format that can be used in a PowerPoint presentation. For every PESTEL category there is room to show off one or more PESTEL factors and indicate whether it has a positive or a negative effect on the focal company (and to what degree). If you would like to use this PowerPoint template for your project and are willing to support our website a little bit, you could purchase the template in our store here. Good luck with your assignment!

 

Full list of PESTEL factors:

Political factors

Economic factors

Social factors

Technological factors

Environmental factors

Legal factors

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