Every market, business, and organization is impacted (positively and negatively) by multiple factors, and to study the impacts of such factors, PESTEL Analysis (or PEST analysis) is used. PESTEL analysis provides organizations with a hawk’ s-eye view of the stimulus and scenarios surrounding their business trade and operations. By carefully analyzing the PESTEL factors, organizations can alter their market strategies accordingly and enhance their chances of success when entering a new market or releasing a new product.
This article helps you understand PESTEL analysis and why it is essential when used. It also explains what PESTEL analysis is, with examples and best practices.
What is PESTEL Analysis?
Right off the bat, let’s take a look at the PESTEL analysis definition:
PESTEL analysis (or PEST analysis) is a framework that helps organizations/businesses analyze the impact of ‘external’ factors on their resources, capabilities, and core competencies.
‘PESTEL’ in PESTEL analysis stands for ‘six external factors’ that play a significant role in defining/changing the dynamics for a specific market:
P for Political, E for Economic, S for Social, T for Technological, E for Environmental, and L for Legal.
To aid understanding, take note of the high-level objectives to conduct PESTEL analysis:
- Determine the ‘current’ major external factors that are impacting an organization
- Identify the significant external factors that may affect the organization in the future
- Strategizing how to exploit the current and future external factors to use it to maximum advantage
- Planning how to handle the risks posed by the dynamic external factors
PESTEL analysis is usually performed by Busines Analysts, System Analysts, or Functional Analysts. However, for domains that involve intricate details, the Business Analysts collaborate with the Subject Matter Experts (SMEs) and jointly perform the PESTEL analysis.
Variations of PESTEL Analysis
The PEST framework can take many forms based on the industry or the market a company operates in and the individual factors applicable. Let’s take a look at some of the common variations of the PEST analysis that have taken forms across the years:
- STEP: Social, Technological, Economic, and Political factors
- SLEPT: Social, Legal, Economic, Political, and Technological factors
- STEEPLE: PESTEL + Ethical factors
- PESTLIED: PESTEL + International and Demographic factors
- LoNGPESTEL: PESTEL with geographic categories, i.e., Local, National, and Global
Based on relevant factors that impact an organization the most, the respective PEST analysis is considered.
Situations where PESTEL Analysis is applied
There are various situations where organizations implement PESTEL analysis, and some of the most common ones are elaborated on below:
1. Periodic ‘external’ risk analysis
Internal risks are easy to identify due to plenty of past data available against them within the company. However, external threats are beyond the company’s control and are not always evident enough to track & monitor. If turned into issues, such risks can alter all of the organization’s business planning and strategies. In such scenarios, PESTEL analysis acts as a structured method to identify and open up the areas of hidden risks and challenges.
An essential part of strategic analysis and management technique, PESTEL analysis is a tool for mitigating potential market risks and ensuring the smooth implementation of business plans.
2. As an ‘input’ to SWOT analysis
SWOT analysis involves meticulously listing the Strengths (qualities), Weaknesses (negatives), Opportunities (elements in your favor), and threats (risks) surrounding your project/goal/situation and then analyzing each of these factors to see their impact on your project or activity.
To conduct a practical SWOT analysis, PESTEL analysis is usually performed prior, and the information and learnings from PESTEL analysis are fed to SWOT analysis. Note that PESTEL analyzes ‘external’ factors at a macro or large scale. At the same time, SWOT concentrates on ‘internal’ factors at a micro or individual (product, project, or activity) level.
3. Organizations ascertaining their strategies needed for brand positioning
4. Organizations understand their target market before the launch of any product or service (like planning a marketing campaign)
5. Organizations conducting market planning and strategizing
6. Organizations comprehending market trends
Factors in PESTEL Analysis
Now, let us take a closer look at each of the individual factors in the PESTEL analysis, and provide some examples.
1: Political Factors
Political factors denote a government’s influence on an industry or line of business. For example, Labour laws may define the amount of time the workforce can work in a factory, and fiscal policy may impact how a company is taxed. We are talking about tax policies, welfare policies, labor laws, foreign trade policies, Medicaid, environmental policies, energy policies, and local laws.
In a nutshell, Political factors include any activity related to government policies or administrative practices that may impact businesses and organizations.
Here’s a more comprehensive listing of the Political factors for PESTEL analysis:
- Environment policies
- Energy policy
- Special Economic Zone (SEZ) policy
- Labor laws
- Tax regulations
- Industrial policy
- Trade policy
- Monetary and fiscal policy
- Trade Regulations
- Local and state laws
- Medicaid policies
- Budgets
- Health insurance
- Foreign policy
- Government regulation and deregulation
- Level of government subsidies
- Bilateral relationships
- Immigration rules
- Monetary policy
- Fiscal policy
- Multilateral foreign policy
- Visa policy
- Business Incentives
- Regulation of competition
- Industry regulation
- Elections
- Apprenticeships
- Grants
2: Economic Factors
All organizations and businesses operate within an economy and are affected by its state. Thus, economic factors include any activity that impacts the production and consumption of goods and services. For example, Inflation affects how people choose to spend their money and thus may result in sales fluctuations for a company. Other factors include Exchange rates, Recession, Demand and supply, Taxes, etc.
These economic factors may not directly relate to the businesses but may heavily influence their decisions.
Here’s a more comprehensive listing of the economic factors for PESTEL analysis:
- Tax Rate
- Growth Rate
- Exchange Rate
- Interest rates
- Inflation
- Unemployment
- Level of disposable income
- Labor
- Stock market trends
- Demand/ Supply
- Wages
- Law and Policies
- Governmental Activity
- Recession
- Interest rates
- Monetary policies
- Fiscal policies
- Credit availability
- Trade flows and patterns
- Consumer buying capacity
- Exchange
- GDP
- Emergence of new models
3: Social Factors
Social factors are sometimes known as socio-cultural factors and encompass the social environment, beliefs, and attitudes of the general population of an area, city, or country. Social factors are essential to marketers based on prevalent social customs and behavior. The organizations would want to tweak their marketing strategy to stay ahead of their competition.
These factors include (but are not limited to) cultural beliefs, population distribution, population growth rate, education levels, lifestyle changes, income distribution, etc. For example, McDonald’s adapts and changes its menu based on the local taste and cuisine preferences of the country where it serves.
Here’s a more comprehensive listing of the social factors for PESTEL analysis:
- Population growth rate
- Age profile
- Social classes
- Birth rates
- death rates
- Demographics
- Sex ratio
- Culture and sub-culture
- Ethnicity
- Religion
- Wealth Distribution
- Values and Wisdom
- Life expectancy
- Education levels
- Racial equality
- Education level
- Minorities
- Crime levels
- Per capita income
- Buying habits
- Ethical concerns
- Housing
- Consumer trends
- Behavioral change
- Shifting demographics
- Impact of pressure groups
- Fluctuating public opinions
- GDPR repercussions
- Attitudes toward investing
- Attitudes toward work and leisure
- Attitudes toward foreign-made/local goods
4: Technological Factors
Every 12-18 months, computers double their processing capabilities, as do the technologies powered by them. To keep up with the rapid advancements in technical innovations, every organization and industry should consider the technological factors that will impact their product or services.
For instance, when a new disruptive technology emerges, an organization may launch a new product using that tech to capture the market. Other technological factors include compatibility of the device and platform against technology, Technological awareness of an organization/market, rate of technological change, the complexity of the technology, etc.
When companies perform a thorough analysis, technological factors like the above provide many insights into decisions like ‘buy vs. build’ and ‘enter vs. leave a market’.
Here’s a more comprehensive listing of the technological factors for PESTEL analysis:
- Technology life-cycle
- Pace/rate of technological change
- Industry-wise technology level
- The infrastructure supporting the technology
- Skill pool availability against the technology
- Availability of/access to the technology
- Device and platform compatibility
- New data/information practices
- New technology-led business processes
- Research and development (R&D)
- Spending on research and development
- Technology Incentives
- Legislation/protocol for technology
- Automation
- Technological Awareness
- The complexity of the technology
- Innovative manufacturing processes and tools
- Latest or Upcoming technology trends:
- Cryptography
- Internet of Things (IoT)
- Artificial intelligence (AI)
- Machine Learning (ML)
- Blockchain
- Robotic Process Automation (RPA)
- Virtual Reality
- Intelligent Apps
- Big Data
- Edge Computing
- Cybersecurity
- Cryptocurrency
- Gesture recognition
- Machine vision
5: Environmental Factors
Natural and human-made activities continually modify the surrounding environment and the planet’s overall ecology. As a result, companies are now considering environmental and ecological aspects that impact their business decisions. For example, Due to Coronavirus, sectors like tourism, hospitality, and leisure were forced to change their existing operations.
Other factors, such as climatic changes, extreme weather, and greenhouse effects, increasingly impact localized and nationalized businesses. Organizations now consider these factors much more seriously when planning and making business decisions.
Here’s a more comprehensive listing of the environmental factors for PESTEL analysis:
- Climate
- Weather
- Waste management
- Water management
- Allergens and pathogens
- Viruses
- Recycling
- Environmental protection norms
- Social awareness toward climate
- Pollution levels
- Carbon footprint
- Approach toward green technologies
- Climate change
- Availability/consumption of natural resources
- Attitude toward renewable energy
- Natural disasters
- Laws regulating environmental pollution
- Endangered species
- Conservation efforts
- Sustainability
6: Legal Factors
All organizations, regardless of size, are expected to abide by state and national law. While foraying into a new market or contemplating introducing a new product, companies must ascertain what is legal and permitted per the rules. For instance, Companies might need to revise their internal employment policy and guidelines owing to changes in their country’s employment laws. Other examples of legal factors include Contract Laws, Import/Export laws, Trade regulations, Retirement laws, etc.
Legal factors become critical in international trade cases as the companies must abide by foreign countries’ laws.
Here’s a more comprehensive listing of the legal factors for PESTEL analysis:
- Health and safety regulations
- Employment laws
- Company laws
- Financial regulations
- Privacy laws
- Consumer laws
- Discrimination laws
- Data protection laws
- Copyright and patent laws
- Intellectual property law
- Anti-trust laws
- Education laws
- Trade regulations
- Anti Discrimination law
- Import/Export law
- Fraud laws
- Contract Laws
- Laws regarding health and safety at workplaces
- Immigration Laws
- Government Procurement Laws
- Retirement laws
- Fair and minimal wages regulations
- work environment regulations
Best Practices for PESTEL Analysis
Every successful accomplishment of a company is due to its dedicated team and effective strategic planning. Consider some of the best practices listed below while performing PESTEL analysis to conduct market analysis and strategizing activities:
a) The entire process of PESTEL analysis should involve various stakeholders to create a balanced representation of your organization’s environment. Such practice leads to a greater exchange of ideas from all stakeholders, which is an excellent way to summarize critical insights.
b) PESTEL analysis should consider both the ‘present’ situation and the ‘future’ repercussions of the current actions. It is wise to split the findings under each PESTEL category into ‘current’ factors and (predicted) ‘future’ factors.
c) PESTEL analysis is not limited to recognizing the different political, economic, social, and technological factors or making assumptions about those factors. Instead, efforts should be made to seek information from experts who are aware of current conditions concerning each area. Such information is of immense value in building effective strategies.
d) With all the information gathered, creating a PESTEL diagram will help compare factors. This pictographic approach simplifies leveraging key opportunities while devising ways to counteract threats.
Summary
In today’s ever-changing global markets, being oblivious to the situations around you may be quite detrimental to an organization. While formulating market strategies, organizations need proven analysis techniques to make informed decisions. PESTEL analysis is a dynamic technique that considers every type of macro-environment that might impact a company. These factors can even be altered to suit a particular situation or problem.
To monitor constantly changing external factors, PESTEL Analysis should be utilized frequently (at least every six months) to identify trends that may become external risks or tap into the opportunities that are presented by changing external factors.