Discover the importance of PESTEL analysis in business strategy. Learn how it helps assess external factors for informed decisions. No business exists in isolation. Any factors that can influence and/or impact the performance of a business directly or indirectly must be taken into consideration when forming business strategies. It is important to understand the influencers in your business ecosystem.
As much as it is important to be unique in business, adequate care must be taken to always bear in mind that your business cannot survive on its own. It needs to actively interact with the ecosystem and environmental factors that can determine its overall performance in the market.
When you put your heart and soul into building and running a business making it successful really matters! Both large and small business owners must conduct various forms of analysis throughout the lifecycle of the business.
If you are kept awake at night by questions such as;
- what does this regulatory change mean for my business?
- or how will the environmental impact of my business affect sales?
- how can I take advantage of the changing political environment?
(and more) then you need to analyse the influencing factors impacting your business and understand how to position them to your advantage.
There are a couple of key standard methods which help to inform about your business’s status before making decisions. This blog focuses on the PESTEL technique. Another recommended method is SWOT analysis which is the subject of a further blog “SWOT analysis – how and when to apply it“
These two types of analysis provide informative decision making data which is important as placing your business in the wrong ecosystem will limit its growth and ability to produce the desired returns on investment (as well as denting your ego and/or hurting your shareholders financially).
In this short informative blog I’ll cover;
- What is PESTEL analysis?
- What are the factors covered in PESTEL analysis?
- Why is PESTEL analysis important?
- How to undertake a PESTEL analysis
What is PESTEL ANALYSIS?
PEST stands for: Political, Economic, Social and Technology. A popular variation extends the PEST analysis to include Environmental and Legal factors, also known as the PESTEL (or PESTLE) Model. The PEST analysis method is believed to have been invented by Harvard Professor, Francis Aguilar, who introduced a scanning tool called ETPS in his 1967 book, “Scanning the Business Environment”. Other analysis factors have been added to the method over time resulting in the PESTEL name approach used extensively today.
The PESTEL analysis is a tool used in the study and evaluation of how some macro-environmental factors may elicit their impacts on the performance of an organization. PESTEL analysis shares some similarities with SWOT analysis since they are both involved in assisting a company gain a competitive advantage. In line with this, Shabanova and his team of researchers identified that the duo (PESTEL and SWOT analysis) were the most important tools for competitive analysis in business.
Lets first just briefly look at SWOT and its connection with PESTEL. SWOT assesses the basics of a business and it is important as it evaluates a business venture’s strengths, weaknesses, opportunities and threats. A PESTEL analysis aids understanding of how select factors in a SWOT impact a business. It focuses in much more detail specifically on the opportunities and threats section of the SWOT.
PESTEL analysis has been used over the years as a framework for strategic growth. New businesses can utilize it to access and assess market conditions before entering a foreign/new market or developing a new business offering.
Due to its importance and vast level of application, the PESTEL analysis has developed to include Demographics, Intercultural, Ethical and eEcological factors. This has brought variants of PESTEL analysis like SLEPIT, DESTEP and STEEPLED.
What are the factors involved in PESTEL ANALYSIS?
These are political factors capable of affecting business growth or operations. They consist of formal and informal rules relating to government interventions. They include;
- anti-corruption policy
- tax policy
- foreign trade policy
- employment law
- environmental regulations
- trade restrictions and tariffs
- political stability
These factors need to be considered to understand how well your business or product is placed in relation to government policies and laws.
These factors are determined by the economic performance of the country or region. Economic factors can elicit a direct or indirect long term impact on a company through changing purchasing power of the consumers. This changes the demands/supply models in the economy. These factors influence the business’s cost of capital and economic environment. The factors include;
- exchange rates,
- interest rates,
- inflation rest,
- unemployment rates
- economic growth.
The social factors involve cultural and demographic aspects of the external macro-environment. They are expressed in terms of the global environment, its norms, customs, values and other demographic centric characteristics. Factors that affect market size and customer needs are;
- income distribution
- safety emphasis
- health consciousness
- population growth rate
- age distribution
- career attitudes
- cultural issues
- Technological factors:
These factors are important in determining how technological innovations may affect the operation of the industry. They may remove or lower barriers to entry, reduce minimum efficient production levels or sway outsourcing decisions. These factors serve as pointers for investors who are ready to dive into a market. More importantly, a rise of AI has given rise to technological factors affect marketing and the operation of industries giving rise to more automations in businesses. The constant evolution of technology introduces new tools, platforms, and communication channels that businesses must leverage to remain competitive.
- innovation level
- research and development (R&D) investment,
- technological research incentives,
- level of automation
This is one of the most important factors to be considered during competitive analysis. These environmental targets have become important all thanks to the increasing cost incurred from the scarcity of raw materials, pollution and global warming. They are usually expressed as weather, climate. Climate change, and environmental offsets which can affect tourism, agriculture, and insurance.
Environment is one of the most important factors to be considered during competitive analysis. These targets have become important due to the cost and environmental impact of sourcing raw materials and in the production and distribution processes.
- pollution index
- global warming index
- soil energy
- environmental regulations.
Legal factors are used to refer to specific laws such as those relating to antitrust, discrimination, employment, copyright and patent, consumer protection and health laws. All companies need to have a clear idea of what is legally acceptable in their chosen location to avoid breaking the law.
These are factors, which deal with legal constraints or complications in your industry or jurisdiction. All companies need to have a clear idea of what is legally acceptable in their chosen location to avoid breaking the law.
- antitrust laws
- discrimination laws
- consumer protection
- health and safety laws
- local employment law
- copyright law
- patent law
Why is PESTEL analysis important?
It is important to understand the influencers in your business ecosystem. As noted previously, PESTEL and SWOT analyses serve as important tools to be utilized in a systematic and thorough evaluation of businesses. The factors addressed by the PESTEL analysis gives you first hand information about the business climate, the laws surrounding it, how it can affect the people and the impact they can have on the product. PESTEL analysis focuses more on balancing the business idea and model with external factors to produce a comprehensive evaluation.
Carrying out PESTEL analysis keeps you prepared against any form of obstacle coming your way during the execution of your business strategy. When applied properly it should also prepare you for how best to overcome them. Some of the common benefits of conducting PESTEL analysis are;
- Strengthening internal relationship in a company or firm
- Encouraging employees to adopt creative thinking and strategic planning
- Evaluates the impact of various decisions even before their implementation.
- Creating the best method of finding and exploiting new business opportunities.
- Identifying potential threats to the organization and how it can be reduced to the barest minimum.
4 steps to undertake a PESTEL analysis
Here is a simple 4 step guide on how to conduct the best PESTEL analysis for any business and understand the influencers in your business ecosystem.
STEP 1 – Note the External PESTEL Factors
Take note of the external PESTEL factors capable of affecting the business project and list them under the right PESTEL headings. Also take note of investors and stakeholders perspectives and the opportunity to create a balanced representation of your company’s environment. Conduct a survey as part of this step. Use experts such as consultants, environmentalists and lawyers to provide specialist input on the factors for the chosen market.
STEP 2 Identify the implications of each PESTLE factor on the business.
Decide the implications of the each of the external factors by using a rank or rating. This would involve assessing them by type (positive or negative), time (short medium or long term) and the significance of a change in each type occurring – increasing or decreasing (or remaining static).
STEP 3 Rate the impact on the business and likelihood of occurrence
For each listed item per factor determine the impact (high or low) and the likelihood (high/low)
STEP 4 Scenario Building and What-If’s
You can then undertake further analysis scenario building and developing ‘what if’ scenarios. This enables you to visualize different alternative futures for the business based on how you address the factors.
For example, Company X specializes in supplying western brand groceries to expatriate communities around the world. It is interested in servicing the grocery needs of expatriate western workers living in Saudi Arabia. The company believes there is a significant market opportunity to supply those loved and cherished foods and beverages to this community at a premium. They intend to market and sell a broad range of western groceries and drinks including pork based products and alcohol.
A market investigation indicated a strong localized market for demand but also clear government policies against production, selling and use pork and alcohol based products broadly due to religious beliefs. Company X would list these factors under legal, environmental and social factors.
Assessing the implications of each of the factors makes it clear that there are some highly negative factors with short term implications and potential to destabilize any offering that does not infringe the local government policies.
Assessing the impact of these factors indicates that the ecosystem created by the laws and government sanctions will not be favorable to Company X. Its current product strategy will have a high likelihood of high impact. high impact and likelihood
The Company either needs to locate customers and stakeholders in a conducive ecosystem or adjust their proposition to take account of the local constraints.
When is PESTEL analysis necessary?
PESTEL analysis is important whenever a business or company intends to launch a new product or service into the market. It gives the decision-making body enough information on what to do and how best to do it by understanding the influencers in your business ecosystem. Some of the major advantages of conducting PESTEL analysis have been listed below;
- Exploiting new opportunities: It is the goal of every business to exploit new opportunities and become the first to enter a productive market. PESTEL analysis serves as your eyes to the market. It gives you enough information on how best to introduce new products and services that will be embraced by the teaming populace.
- Alertness to development: by taking these important factors into due consideration, PESTEL analysis allows companies to have all the information they need to create an outstanding service or product that can be acceptable to everyone. Its ability to narrow down products is quite commendable.
- Understanding customer behavior and market trends: customer behavior is controlled by environmental, legal, political and social factors (to mention a few) which can be accessed with PESTEL analysis. By understanding your external marketing environment, you can control the market with irresistible products and services.
- Cost-effectiveness: PESTEL analysis will only cost you time. It is easy to carry out, and it is free of charge. Just answer the right questions, and you are good to go. This will give you a chance to save more or cut down business cost.
Operating a business can consume a lot of time and energy. Keeping an eye on where it is going will ensure your operational efforts provide the best return. Be sure to develop the right strategy to remain relevant in congested markets. Take out time to study your business and understand where it can function best in order to create the best ecosystem for it. Always evaluate your plans and know their impact on the target audience before launching out into the market.
Combining our Strategy Journey Framework, SWOT and PESTEL analysis will go a long way in assisting the company to have a clear understanding of the market situations related to the internal and external factors.