The growth of any organization or business firm depends on multiple factors. Almost all of these relate to the environment in which they choose to function. In addition, the micro and macro factors of the community can decide the trajectory of the firm. Thus, regular analysis and monitor all the factors that may affect them. This is achieved by PESTEL Analysis.
Often business owners perform a PESTEL Analysis as an accompaniment to SWOT Analysis. Wish to understand the strengths and weaknesses of your business better? A regular PESTEL Analysis will help you in that case. This analysis proves helpful in a large number of industries. The results of PESTEL permits organizations to carry out a SWOT Analysis more efficiently.
Have you ever wondered how agricultural industries regulate and forecast their harvest periods? They analyze the environment to understand the dry seasons in the particular area. This allows them to determine the crop and its growth as well. Ever heard of a food chain shutting doors to customers? Chances are that they did not meet the food quality standards. You can understand more about food choices, cultural and religious reservations, and food safety standards through PESTEL Analysis.
In this article, we shall understand why PESTEL Analysis is a necessary step for you and our business. We shall also take a look at how the external analysis by PESTEL works to affect an organization.
Table of Contents
What is PESTEL Analysis?
PESTEL Analysis or PESTLE Analysis is a tool in business that helps to observe and analyze the external factors that impact the organization’s performance. This framework or tool comes in handy, especially when starting a business from scratch or venturing into foreign markets. The external forces that an organization or business can face are of multiple types. Thus, as an acronym, PESTEL stands for all of them.
- P: Political
- E: Economic
- S: Social
- T: Technological
- E: Environmental
- L: Legal
The purpose of PESTEL Analysis is that it allows business owners to conduct a circumstantial analysis. Suppose one comes up with a well-defined strategy like a market positioning strategy or business plan for implementation. However, the need for PESTEL does not end there. Repetitions of PESTEL Analysis at intervals of six months at least is ideal. This is because macro-environmental factors show change abruptly and quickly.
How is it possible to keep track of the changes in the environment? It is challenging to keep track of the changes unless there is regular monitoring. The organizations that make use of PESTEL can thereby successfully monitor the changes and respond to them accurately. PESTEL framework offers a competitive edge to businesses that can analyze their environment and differentiate themselves from the competition in the market.
Is it PESTEL or PESTLE Analysis?
You might have heard both variations and gotten confused as to which out of the two may be accurate. The answer to this doubt is that both are – PESTEL and PESTLE are used interchangeably. The switch occurs in the last letter in the acronym. However, there is no real reason behind this apart from preference. Both variations refer to vital macro-environmental factors but the order in which environmental and legal factors are arranged varies.
You may have noticed the usage of PEST – this is a condensed version of PESTEL Analysis. The need of your brand decides the factors which are applicable in the case of analysis. This, in turn, decides what variation of PESTEL is used. As far as the correct usage of PESTEL and PESTLE is considered, both are correct.
PESTEL Model Analysis
As mentioned earlier, PESTEL Analysis leaves a significant impact on the performance of the organization. PESTEL Analysis is the first step to ensuring mindful steps towards good business. People have brought in changes concerning demographic, ethical, intercultural, and ecological factors. Consequently, the variations to the framework result in DESTEP, SLEPIT, and STEEPLED.
PESTEL analysis is a straightforward tool that can give rise to both risks and opportunities for an organization. The objectives of this framework are:
- Realizing the external factors that are currently affecting your business.
- To keep track of the external factors that may undergo some change in the future. The impact on organizations changes quite naturally.
- Making full use of the trends in change to reap the best opportunities for your business.
- Better defense practices against the risks as observed from the changes in the external factors.
- Overall, the PESTEL tool provides an assessment of a new market for the growth of a business.
It is evident that a higher number of opposing forces will only affect the growth of a business in the market. However, when you have to deal with the negative factors, it becomes more challenging to focus on the marketing and growth strategies of the business. Therefore, there is a reduction in the profits as well as the profit potential overall.
In the next section, we shall ignore other variations and break down the standard PESTEL model to understand the acronym’s individual letters.
PESTEL Factors in Business – PESTEL Model Explained
PESTEL can be broken down into political, economic, social, technological, environmental, and legal factors.
Political Factors
An area’s politics is one of the most important factors that decide how well the market prospers. So what do political factors include?
- Taxation policies
- labor laws
- trade restrictions
- environmental regulations
- corruption
- foreign trade policies and
- Standard government policies.
These factors are all about how the government and its laws interact with the economy.
However, the stability or instability of the government heavily impacts industries as well. Apart from deciding the way organizations do business, you can also predict future legislative events. The course of legislation and policy-making in an environment, thus, shapes the marketing policies of a business. Government policies determine a demographic’s education, health, and infrastructure, which requires a thorough analysis of potential risks. Thus, PESTEL comes in handy to businesses in this case.
Economic Factors
Economic factors determine the performance of a particular economy. The most common factors include:
- economic growth
- interest rates
- exchange rates
- inflation rates
- unemployment trends, and
- Net income of users.
It must be evident to you that none other than these factors drive businesses in any industry.
Observations made through the PESTEL model will bring into light the supply-demand models of the environment. The economic factors will tell you all about the purchasing power of the population. This, in turn, affects the way you set your prices for the products.
The economic indicators of an environment are primarily reported by the government agencies and Central Banks. However, to gain perspective on a local level, external analysis by PESTEL offers good results. Moreover, the economic factors will let you refinance your debts every time there is a drop in the interest rates.
Social Factors
When considering the environment for a new business, what is the first thing you would notice? Of course, the characteristics of the demographic such as cultures, norms, values, lifestyles, and religious trends play a huge role. Apart from that, the other social factors that add value to the analytics are income distribution, age groups, population growth rate, and residents’ occupation.
Who would not like to know more about their target audience? It becomes increasingly essential for business owners to know whom their organization may be interacting with. In addition, the advertisements and marketing strategies require specific knowledge of the target groups as time passes. Besides, you can also judge the nature of the customers, their consuming capacity, and their willingness to seek employment under certain conditions.
Once you know what drives the demographic around your business, there is no stopping you!
Technological Factors
Innovation and economy work hand in hand. The greater the number of technological advancements, the greater the scope of your business gets in the environment. Some of the technological factors that push any organization forth are:
- Automation
- Technological Incentives
- Research and Development
- Rate of technological changes
How often do you depend on digital media to advertise your brand? While the world shifts to a digitized version of itself, manual labor is downward due to automation. With innovation, you can store files on a computer, sort them with a click, and keep records for years to come.
The technological landscape offers you more than you can imagine. The PESTEL framework will allow you to understand new and improved ways of management. You can figure out better ways of communication, delivery, and production of goods and services. Target the right markets and target them well with the best of the digital world with you.
Environmental Factors
This is something that has gained momentum in the last fifteen years – for the betterment of one and all. The environmental factors will allow business owners to re-assess their ecological impacts on their environment. This is a check for the organization so that there is a reduction in the number of pollutants in the ecosystem.
Corporate Sustainability Responsibility enforces brands and organizations to pay attention to their carbon footprint. The environmental factors under the PESTEL framework include climate actions, recycling procedures, safe disposal of waste, safe generation of gases, and annual sustainable targets for businesses.
Wondering why environmental factors are important at all? Over the years, businesses have been facing scarcity in the procurement of raw materials, resources, and manpower. A poorly managed environment affects health – physical and mental. These days consumers have been actively looking for ethically sourced sustainable products over ones that can be harmful to the environment. Thus, recklessness in this area can lead to falling back on more significant opportunities and responsibilities as a whole.
Legal Factors
PESTEL analysis includes monitoring and observation of legal factors as they determine the laws that govern the functioning of an organization. These factors include:
- Employment laws
- Discrimination laws
- Consumer protection laws
- Copyright and patent laws
- Anti-trust laws
- Health and safety laws.
Wouldn’t you wish for your business to conduct legal and ethical trade? Each company requires sound knowledge to protect the rights – of the company, consumers, and employers. Thus, sound legal knowledge of the environment will keep you updated about any changes in the legislation.
This analysis is fundamental if you are conducting business in a foreign land. Every country has its own set of trade laws that govern industries. As a result, it is necessary to have an attorney or a legal representative to guide you through trade ethics.
Conclusion
External environment analysis is a crucial step in conducting business in any part of the world. Be it PESTEL Analysis, SWOT Analysis, or DCF Model, the results will help you gather awareness about your consumers and your performance. The factors under PESTEL ranges far and wide to accommodate every possible study group in an environment. However, the importance of each factor depends from one industry to another.
The advantages of PESTEL Analysis include data protection, improved infrastructure, better attitude at work, effective marketing strategies, and sustainable approaches to trade. As a brand owner, you will be ensuring the welfare of the employees as well as the customers when you factor in the influences in the environment.
Using PESTEL Analysis, you can restructure your marketing strategies and sell your brand better. Do you wish to identify opportunities and risks better for your organization? Learn more on PESTEL Analysis and put it to use to gain an edge over the competitors.