Every business operates in an environment where multiple factors are affecting its success. In other words, businesses do not exist in isolation and there are things they cannot control. Hence, every business should constantly analyze how these external factors might affect its operations and act accordingly. To do this, a framework called PESTEL analysis comes in very handy.
What is the PESTEL Analysis?
PESTEL analysis is a tool that helps businesses assess the macroeconomic factors that can influence their operations. It stands for political, economic, social, technological, environmental, and legal changes. Even though the general version of the framework is PEST, which does not include environmental and legal aspects, PESTEL is also used often and is more comprehensive.
According to the framework, businesses must carefully analyze these six key areas and try to understand the implications of each on their competitive position within the industry. Then, using the outputs, they must take the necessary steps to align their strategy to the changing environment. It allows businesses to identify potential opportunities and threats on time and adjust their strategic plans. It is often used together with the SWOT Analysis.
Political
Political factors that have the potential to influence the business environment include government policies, trade regulations, political stability, tax guidelines, employment laws, and safety regulations.
Economic
The most important economic factors are interest rates, exchange rates, inflation, unemployment, and availability of credits. These factors are highly effective in the decision-making processes of all businesses.
Social
Social factors include information about the people in the target market. The factors to be considered are demographics, cultural attitudes, lifestyle, family size, health consciousness, and population growth rates.
Technological
Technological factors focus on R&D activity, distribution and supply chains, the life cycle of current technology, and the rate of technological change. Understanding the likely implications of these factors on the industry is crucial in identifying and exploiting the trends.
Environmental
Environmental factors gained significance because of the scarcity of raw materials and the regulations set by governments around the world. They include climate change, air and water pollution, recycling, waste management, attitudes toward ecological products.
Legal
In order to succeed in the business environments, companies need to know whether their activities are completely legal. Furthermore, they need to be ready for any possible changes regarding the legislation that might affect them. These legal factors generally include anti-trust law, discrimination law, intellectual property law, consumer protection, and employment law.
How to Apply the PESTEL Analysis?
To apply the PESTEL analysis, you should start by asking the research questions related to each factor. Then, research is carried out by storing existing information and data. For each factor, related questions should be answered and the correlations between variables should be analyzed. As a result, this analysis will help you evaluate the opportunities and threats for your business and determine the right strategies.
To examine political factors, you should ask:
- When is the local or general election in the country?
- How does the election process and results affect the country’s local, regional, and international policy?
- Who are the closest candidates to power?
- What are the opinions of these candidates that will affect the policies of the businesses and your business?
To examine economic factors, you should ask:
- Is the economy stable? Is it growing, stagnating, or shrinking?
- Are the exchange rates fixed? What is the trend of change in exchange rates?
- What is the unemployment rate? How much does it cost you to hire a worker?
- What are the ongoing and possible economic trends?
To examine social factors, you should ask:
- How can demographic variables change? (Population growth rate, age etc.)
- How do facts that change from generation to generation affect your work? Can you adapt to new trends?
- How are social health conditions changing? (For example, the possible effects of the pandemic on your business)
- How does employment vary by age groups?
- How do cultural attitudes affect your business? How do you adapt to cultural trends? (See: Hofstede, Theory of Cultural Dimensions)
To examine technological factors, you should ask:
- What are the technological trends? What could be the technological gains that could affect your business?
- Which technologies can competitors use?
- Do you have enough infrastructure and equipment for workers to work? (For example, the remote working model)
To examine environmental factors, you should ask:
- Is it easy to access raw materials?
- What are the possible effects of climate change on your business?
- What are the benefits of recycling, waste management and ecological products for your business and the environment?
To examine legal factors, you should ask:
- Does the legal atmosphere in the country offer opportunities for businesses? (Rule of law, property rights, customer protection, labor law etc.)
- How does a possible change of legislation, taxation or law affect your business?
Conclusion
PESTEL analysis provides a structured way of assessing the impact of several different factors on the business environment. By dividing it into six central pieces, it makes the identification process easier. Besides, it allows businesses to exploit the opportunities and warns them against any potential threats.
Contact us to evaluate the opportunities for your business and develop strategies against possible threats.
