A PESTEL analysis or PESTLE analysis (formerly known as PEST analysis) is a framework or tool used to analyze and monitor the macro-environmental factors that can have a significant impact on your business performance. This tool is very useful when starting a new company or expanding into a new market. It is often used in collaboration with other analytical business tools such as the SWOT analysis. The PESTEL analysis provides clarity around situational and related internal and external factors. PESTEL stands for Political, Economic, Social, Technological, Environmental and Legal factors.
A PESTEL analysis involves digging a little deeper into each of the factors impacting your organization.
“A SWOT analysis can help you to determine what you are doing well and where you may need to focus efforts in order to get better.”
What makes up PESTEL?
These factors pertain to the degree the government meddles in the economy or a certain industry. Government regulation and involvement can have a significant impact on education, healthcare and infrastructure. This can include government policy, political stability or instability, corruption, foreign trade policy, tax policy, labour law, environmental law and trade restrictions. All of these are factors for consideration when evaluating the attractiveness of a potential market.
Economic factors are determinants of economic performance. Such factors include economic growth, exchange rates, inflation rates, interest rates, consumer disposable income and unemployment rates. These factors influence the purchasing power of consumers and therefore impact supply and demand in the economy. Economic factors also impact how you can price your product and services.
Social factors include the demographic characteristics, norms, customs and values of the population that you serve. Considerations include population trends such as the population growth rate, age distribution, income distribution, career attitudes, safety emphasis, health consciousness, lifestyle attitudes and cultural barriers. All of these factors make up your target market and specific segments of each market. Understanding these factors is important for personalization, competitive positioning and brand engagement. Social factors are also important considerations when hiring, training and engaging your employees; key drivers of your culture.
Technological factors involve innovations in technology that influence (favorably or unfavorably) the operations of your industry. Technology incentives, innovation, automation, research and development (R&D) activity, technological change and the amount of technological awareness of a market segment are all technological factors. Technology is highly influential in people, products and processes and a key driver of cybersecurity risk management. By knowing what is going on technology-wise, you may be able to prevent your company financial and risk exposure with new development, cyber exposure, internal efficiencies and client engagement.
Sustainability is an important social and environmental influence in today's environment. Environmental factors have become important due to the increasing scarcity of raw materials and sustainability targets set by governments. Ecological and environmental aspects such as weather, climate, environmental offsets and climate change impact tourism, farming, agriculture and insurance. Climate change, corporate social responsibility (CSR) and sustainability impact how you operate and the products you offer.
Legal factors are comprised of specific laws such as discrimination laws, antitrust laws, employment laws, consumer protection laws, copyright and patent laws, and health and safety laws. If you do business globally it's important to consider legal and ethical practices 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.
If you want to dig deeper into the external factors challenging your business, contact me to learn more about my Business plan accountability program.