Description, use-cases and examples
Whether you’re a multinational conglomerate or a small one-person business, there are inevitably external factors that are beyond your control. These factors, whether good or bad, can have far-reaching effects on your business. They have to be accounted for to give your company the best chance of success. Essentially, this is what a PESTEL analysis is for.
In this blog post, we will examine what these factors refer to and how they can impact your business.
How to use a PESTEL analysis
A PESTEL analysis examines the external factors that impact your business. The PESTEL name itself is an acronym for these factors: Political, Economic, Social, Technological, Environmental and Legal. By detailing how each element will influence your company, you can make informed business decisions.
Organisations can use the PESTEL analysis as a tool when entering new markets, offering new products or targeting new customer personas. It can also be especially useful when starting a new business or entering a foreign market. When used in conjunction with other analytical business tools such as the SWOT analysis or Porter’s Five Forces, it can give a clear understanding of a company’s chances of success and the forces at play that affect those chances.
As mentioned before, ‘PESTEL’ stands for Political, Economic, Social, Technological, Environmental and Legal factors. Let’s examine each in detail.
The political factors refer to how governments intervene in the economy or a particular industry. Any influence that a government may have on your business or customers should be accounted for here.
These factors may include, but are not limited to:
- Corruption level
- Freedom of the press
- Trade control
- Competition regulation
- Regulation and deregulation
- Tax policy (tax rates and incentives)
- Government stability and related changes
- Government involvement in trade unions and agreements
- Import restrictions on the quality and quantity of product
- Intellectual property law (Copyright, patents)
- Consumer protection and e-commerce
- Laws that regulate environment pollution
All of these factors are usually in play in some capacity in most countries. Different government decisions have three significant effects on businesses that operate the country that they affect, either positively or negatively:
Impact on economy - as in how much money people are spending. Often a greater level of government spending leads to a stimulated economy.
Changes in regulation - as in the responsibilities of businesses who operate under the government’s jurisdiction.
Political stability - as in how safe and stable the location of business operations is. Elements such as a violent overthrow of government, riots and looting refer to the political stability of a region.
The state of the economy is an essential factor for businesses to consider when conducting a PESTEL analysis. The economy of a location can determine customer buying power, the price of raw materials, import and export costs, foreign exchange rates, and inflation. All of these factors could have long-lasting effects on businesses and their operation strategy. A location’s economy also accounts for foreign direct investment, which is a primary concern for specific industries.
Economic factors that affect businesses include:
- Interest rates - of particular interest to companies who take out large loans.
- Exchange rates - important for companies who import or export goods and services.
- Recession - affects the purchasing appetite of customers.
- Inflation - affects prices overall.
- Taxes - impacts the prices of suppliers and the costs of services.
- Demand / Supply - what businesses can charge for specific items or services.
The social factors that a PESTEL analysis takes into account represent the demographic characteristics, norms, values, customs and beliefs of the population who resides where an organisation operates.
Of course, there is no doubt that society is continually changing, Tastes, fashion, values, and popular opinion constantly shift. For example, mobile phones and computers have changed the way we work, social media has changed the way we socialise, and the increasing levels of education have altered the opinion of each new generation.
Businesses have to contend with, adapt to or otherwise take advantage of these changes. Market research is a critical aspect of analysing the social factors that impact businesses. The trends and patterns of society will impact consumer attitudes, expectations and lifestyle changes that will affect every business.
Here are a few social factors which impact customer needs and market sizes:
- Buying habits
- Education level
- Emphasis on safety
- Religion and beliefs
- Health consciousness
- Social classes
- Family size and structure
- Attitudes toward saving and investing
- Attitudes toward green or ecological products
- Attitudes toward renewable energy
- Population growth rate
- Immigration and emigration rates
- Age distribution and life expectancy rates
- Attitudes toward foreign products and services
- Attitudes toward work, career, leisure and retirement
Innovations in technology may change the way a business operates or even render a business obsolete. For example, the advent of DVDs replaced VHS, and streaming services have all but eliminated the consumer demand for DVDs. Cloud-based services have revolutionised the way businesses use services, and the internet has opened up a whole new opportunity for other services and products.
Today’s primary concerns include automation, technological awareness and AI. It should also be noted that internet connectivity and computer calculation speed are continually expanding, speeding up development and opening up new markets to explore.
Some readers may remember that PESTEL used to be referred to as a PEST or PESTL analysis. This because the E for environmental factors has only become a significant concern for generations as time went on.
Environmental factors have always been a critical element for specific industries such as tourism, farming and agriculture. However, today most businesses are judged by public opinion and regulations on their impact on aspects such as climate and environmental preservation.
In a broader sense, factors such as weather, geographical location, changes in climate and environmental offsets must be considered. For example, products that are designed to combat heat won’t fare very well in cold areas, and certain steps must be undertaken to preserve products that are temperature sensitive.
Abiding by the laws that affect businesses and individuals is an obligation that every organisation needs to abide by. Although legal factors may overlap with some political elements, they refer more to specific laws such as discrimination laws, employment laws, copyright and patent laws, health and safety and consumer protection.
Every business has specific laws and regulations they must take into account for their operations. Still, the two rules that most companies will have to deal with are consumer and employment laws that govern the country in which they operate.
Use PESTEL for your own business
Conducting a PESTEL analysis for your own business takes reflection, research and consideration. However, businesses who take the time to conduct one are more likely to develop a fully rounded strategy for their organisation.
If you would like to partner with a digital marketing consultant that understands PESTEL and the affects the factors of it can have on your business, consider Demodia. Demodia has decades of experience in digital marketing and the various elements that impact businesses online and on the ground.
Contact Demodia today, and discover the difference in having an experienced digital marketing expert on your side.