PESTEL Analysis

Have you completed an effective PESTEL analysis?
A. No. Isn’t a SWOT analysis enough?
B. We analysed some aspects of a PESTEL analysis.
C. We have completed a superficial PESTEL analysis.
D. We have completed a detailed and thorough PESTEL analysis.
E. We have completed a detailed, thorough and independently facilitated PESTEL analysis.
[Score:  A=0, B=1, C=2, D=3 and E=4]
Why is this question important?

There are many factors in the macro-environment that will affect the decisions of managers in any business. Tax changes, new legislation, trade barriers, demographic change and government policy changes are some examples of macro change.

To analyse these factors managers categorise them using the PESTEL model. This classification distinguishes between:

Political factors.

  • These refer to government policy such as the degree of intervention in the economy. What goods and services does a government want to provide?
  • To what extent does it believe in subsidising business?
  • What are its priorities in terms of business support?
  • Political decisions can impact on many vital areas for business such as the education of the workforce, health system and the quality of the infrastructure of the economy such as the road and rail system.

Economic factors.

  • These include interest rates, taxation changes, economic growth, inflation and exchange rates.
  • Government intervention in the free market
  • Business cycle stage – prosperity, recession, recovery
  • Discretionary income
  • Unemployment rate
  • Economic change can have major impacts – for example:
  • Higher interest rates may deter investment because it costs more to borrow
  • A strong currency may make exporting more difficult because it may raise the price in terms of foreign currency
  • Inflation may provoke higher wage demands from employees and raise costs
  • Higher national income growth may boost demand for a firm’s products

Social factors.

Changes in social trends can impact on the demand for businesses’ products and services.  Consider the following which may impact:

  • Demographics
  • Class structure
  • Education
  • Culture
  • Entrepreneurial spirit
  • Attitudes – sentiment, health, environmental consciousness, nutrition
  • Leisure issues

Technological factors.

  • New technologies create new products and new processes.
  • iPads, phone apps, online gambling and high definition TVs are all recent markets created by technological advances.
  • Online shopping, bar coding and computer aided design are all improvements to the way we do business as a result of better technology.
  • Technology can reduce costs, improve quality and lead to innovation.

These developments can benefit consumers as well as the organisations providing the products.

Environmental factors.

Environmental factors include the weather and climate change – greenhouse gas emissions, overall environmental footprint.

  • Changes in temperature can impact on many industries including farming, tourism and insurance.
  • With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider.
  • The growing desire to protect the environment is having an impact on many industries such as the travel and transportation industries (for example, more taxes being placed on air travel and the success of hybrid cars) and the general move towards more environmentally friendly products and processes is affecting demand patterns and creating business opportunities.
  • Energy consumption
  • Recyclability
  • Clean water consumption

Legal factors.

These are related to the legal environment in which firms operate. In recent years there have been many significant legal changes that have affected business emanating from the EU.

The introduction of age discrimination and disability discrimination legislation, the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that affect businesses.

Legal changes can affect a firm’s costs (if new systems and procedures have to be developed) and demand (if the law affects the likelihood of customers buying the good or using the service).

Different categories of law include:

Consumer Laws.

These are designed to protect customers against unfair practices such as misleading descriptions of the product

Competition Laws.

These are aimed at protecting small firms against unfair practices by larger firms and ensuring customers are not exploited by firms with monopoly positions.

Employment Laws.

These cover areas such as redundancy, dismissal, working hours and minimum wages. They aim to protect employees against the abuse of power by managers

Health and Safety Legislation.

These laws are aimed at ensuring the workplace is as safe as is reasonably practical. They cover issues such as training, reporting accidents and the appropriate provision of safety training, systems and equipment.

More …

Listing PESTEL factors does not in itself tell you very much.  You need to do is to think about which factors are most likely to change and which ones will have the greatest impact.

It is also important when using PESTEL analysis to consider the level at which it is applied. For instance you may want to differentiate between factors which are local, other which are national and finally those which are global.

For example, a retailer undertaking PESTEL analysis may consider:

  • Local factors such as infrastructure, planning permission and local bye-laws
  • National factors such as economic growth rates, discretionary income
  • Global factors such as the general state of the world economy, currency rates, emergence of China and India as global players.

This version of PESTEL analysis is called LoNGPESTEL.