PESTEL framework: what is it and how to best use them in your organization?
What is PESTEL framework?
A PESTEL analysis is a management framework and diagnostic tool.
Conducting a PESTEL analysis will help you to understand the factors external to your organization which impact upon your strategy and the achievement of your objectives.
PESTEL is an acronym covering six factors
P stands for Political
E stands for Economic
S stands for Social
T stands for Technological
E stands for Environmental
L stands for Legal
We have created an online tool where you and your organization can build, share and constantly update the PESTLE analysis throughout the year, as new developments and information become available [https://www.swotanalysis.com/2685/PESTEL-Analysis-Template]
What do you need to cover in your assessment?
Your PESTEL analysis needs to analyze the impact of the 6 PESTEL factors on the general economy, on your industry and on your Company.
1. Political factors
These factors determine the extent to which a government may influence the economy or a certain industry.
Political factors include
Government and tax policies (including regulation and deregulation of certain industries), government spending and government budget
Trade tariffs and controls and all types of restrictions / regulations applicable to local and international trade
Political stability or instability (including level of corruption)
Labour laws and government involvement in collective bargaining agreements, with industry bodies and trade unions
2. Economic factors
These factors are determinants of an economy’s performance that directly impacts a Company or an industry.
Economic factors include:
Macro-economic factors: inflation rate, interest rates, foreign exchange rates, economic growth rates (GDP growth), level of foreign direct investments, unemployment rates, unit labour cost
Micro-economic factors: availability of credit and of other sources of capital, level of disposable income per capita, propensity of people to spend or save, labour productivity
3. Social factors
These factors scrutinize the social environment of the market, and assess determinants like
Demographics: population size and growth rate, birth rates, death rates, number of marriages, number of divorces, immigration and emigration rates, life expectancy, age distribution, wealth distribution, family size and structure, education level,…
Cultural trends: attitude towards work, health consciousness, cultural norms and values, sex roles and distribution, religion and beliefs, racial equality, minorities, crime levels, attitudes towards saving, attitude towards investing, attitudes towards retirement, attitudes towards leisure time, attitudes towards foreign people, …
Buying behavior: buying habits, attitudes towards product quality, attitudes towards customer service, ethical and environmental concerns, lifestyles. In recent years it has become particularly important to understand the attitudes towards online buying, social media, online banking and other new consumer technologies
4. Technological factors
Technological factors have been a key driver of change and transformation of several industries in the world over the past 20 years and therefore are particularly important, as they have been very fast-changing.
These factors pertain to innovations in technology that may affect the operations of the industry and the market favourably or unfavourably.
They include automation, research and development, technological change, level of innovation, technological awareness and appetite to access / adopt new technologies
In recent years they have extended to the Internet infrastructure and the broader communication infrastructure, as these have become key enabling factors to industry transformation and changes in consumer preferences
5. Environmental factors
These factors include all those that influence or are determined by the surrounding environment and they are very important in certain industries, such as tourism, farming, agriculture, energy and insurance.
Environmental factors include:
Climate (and climate change) and weather
Natural disasters, air and water pollution
Geographical location, as limiting or enabling factor of certain business activities due to the lack or greater availability of natural resources (water, wind, sun, natural resources, such as oil, other fossil fuels, raw material,…)
Environmental policies (including pressures from citizens and NGOs to change them), recycling standards, attitudes towards green products and support for renewable energy
6. Legal factors
Local laws affect the business environment in a certain country making it easier or more difficult to make business in that country.
Relevant laws to be analysed include:
customer and data protection laws
health and safety laws
copyright and patent laws.
How should you conduct your assessment?
Your PESTEL analysis should be conducted differently depending on whether
you are looking to enter / manufacture in a new market / geography
you are reviewing the environment of geographies where you currently operate
If you are looking to enter / manufacture in a new market / geography
you will need to conduct a full analysis of PESTEL factors, as part of your entry strategy, to understand the constraints under which you need to operate and whether it makes sense for you to enter the new market (“go – no go decision”
the learnings from PESTEL will help you to make the correct assumptions for your financial and business plan for the new market, on items such as import duties, local taxation, local labour and other costs,…
If you are you are reviewing the environment of geographies where you currently operate:
you will only be interested in the changes to the PESTEL factors, which are generally relatively slow and progressive, so you can update your PESTEL analysis once /twice a year, by going through the checklist
you will need to keep up-to-date with upcoming laws and regulations (and expected timeline of implementation) and how they could impact the business both in terms of revenues as well as in terms of additional costs to comply with them
How does PESTEL analysis relate to SWOT analysis?
Performing SWOT analysis at an organization or team level allows you to identify your strengths and weaknesses and set priorities on the opportunities that are available to you.
It also helps you better understand where you are and where you want to go.
Therefore, PESTEL analysis and SWOT analysis complement each other, as PESTEL is mostly focused on the external environment assessment, while SWOT analysis includes both internal and external factors.
For this reason it is recommended that you perform a PESTEL analysis at least once a year, ahead of conducting a SWOT analysis (which is normally conducted as part of the annual strategic review), as it will provide a very valuable input to the SWOT analysis.