Scanning the Environment: PESTEL Analysis

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 may have a profound impact on an organization’s performance. This tool is especially useful when starting a new business or entering a foreign market. It is often used in collaboration with other analytical business tools such as the SWOT analysis and Porter’s Five Forces to give a clear understanding of a situation and related internal and external factors. PESTEL is an acronym that stands for Political, Economic, Social, Technological, Environmental and Legal factors. However, throughout the years people have expanded the framework with factors such as Demographics, Intercultural, Ethical and Ecological resulting in variants such as STEEPLED, DESTEP and SLEPIT. In this article, we will stick simply to PESTEL since it encompasses the most relevant factors in general business. Each factor will be elaborated on below:

1. Political Factors

These factors are all about how and to what degree a government intervenes in the economy or a certain industry. Basically all the influences that a government has on your business could be classified here. This can include government policy, political stability or instability, corruption, foreign trade policy, tax policy, labour law, environmental law and trade restrictions. Furthermore, the government may have a profound impact on a nation’s education system, infrastructure and health regulations. These are all factors that need to be taken into account when assessing the attractiveness of a potential market.

2. Economic Factors

Economic factors are determinants of a certain economy’s performance. Factors include economic growth, exchange rates, inflation rates, interest rates, disposable income of consumers and unemployment rates. These factors may have a direct or indirect long term impact on a company, since it affects the purchasing power of consumers and could possibly change demand/supply models in the economy. Consequently it also affects the way company’s price their products and services.

3. Social Factors

This dimension of the general environment represents the demographic characteristics, norms, customs and values of the population within which the organization operates. This includes population trends such as the population growth rate, age distribution, income distribution, career attitudes, safety emphasis, health consciousness, lifestyle attitudes and cultural barriers. These factors are especially important for marketers when targeting certain customers. In addition, it also says something about the local workforce and its willingness to work under certain conditions.

4. Technological Factors

These factors pertain to innovations in technology that may affect the operations of the industry and the market favorably or unfavorably. This refers to technology incentives, the level of innovation, automation, research and development (R&D) activity, technological change and the amount of technological awareness that a market possesses. These factors may influence decisions to enter or not enter certain industries, to launch or not launch certain products or to outsource production activities abroad. By knowing what is going on technology-wise, you may be able to prevent your company from spending a lot of money on developing a technology that would become obsolete very soon due to disruptive technological changes elsewhere.

5. Environmental Factors

Environmental factors have come to the forefront only relatively recently. They have become important due to the increasing scarcity of raw materials, pollution targets and carbon footprint targets set by governments. These factors include ecological and environmental aspects such as weather, climate, environmental offsets and climate change which may especially affect industries such as tourism, farming, agriculture and insurance. Furthermore, growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer. This has led to many companies getting more and more involved in practices such as corporate social responsibility (CSR) and sustainability.

6. Legal Factors

Although these factors may have some overlap with the political factors, they include more specific laws such as discrimination laws, antitrust laws, employment laws, consumer protection laws, copyright and patent laws, and health and safety laws. It is clear that companies need to know what is and what is not legal in order to trade successfully and ethically. If an organization trades globally this becomes especially tricky 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 kinds of things.

1. Political factors

• Government stability/instability

• Corruption level

• Tax policies

• Freedom of press

• Government regulation and deregulation

• Special tariffs

• Political action committees

• Government involvement in trade unions and agreements

• Competition regulation

• Voter participation rates

• Amount of government protests

• Defense expenditures

• Level of government subsidies

• Bilateral relationships

• Import-export regulation/restrictions

• Trade control

• Lobbying activities

• Size of government budgets

2. Economic factors

• Growth rate

• Interest rate

• Inflation rate

• Exchange rate

• Availability of credit

• Level of disposable income

• Propensity of people to spend

• Federal government budget deficits

• Gross domestic product trend

• Unemployment trend

• Stock market trends

• Price fluctuations

3. Social factors

• Population size and growth rate

• Birth rates

• Death rates

• Number of marriages

• Number of divorces

• Immigration and emigration rates

• Life expectancy rates

• Age distribution

• Wealth distribution

• Social classes

• Per capita income

• Family size and structure

• Lifestyles

• Health consciousness

• Average disposable income

• Attitude towards government

• Attitude towards work Buying habits

• Ethical concerns

• Cultural norms and values

• Sex roles and distribution

• Religion and beliefs

• Racial equality

• Use of birth control

• Education level

• Minorities

• Crime levels

• Attitudes towards saving

• Attitude towards investing

• Attitudes towards retirement

• Attitudes towards leisure time

• Attitudes towards product quality

• Attitudes towards customer service

• Attitudes towards foreign people

4. Technological factors

• Technology incentives

• Automation

• R&D activity

• Technological change

• Access to new technology

• Level of innovation

• Technological awareness

• Internet infrastructure

• Communication infrastructure

• Life cycle of technology

5. Environmental factors

• Weather Climate

• Environmental policies

• Climate change

• Pressures from NGO’s

• Natural disasters

• Air and water pollution

• Recycling standards

• Attitudes towards green products

• Support for renewable energy

 6. Legal factors

• Discrimination laws

• Antitrust laws

• Employment laws

• Consumer protection laws

• Copyright and patent laws

• Health and safety laws

• Education laws

• Consumer protection laws

• Data protection laws