PESTEL Analysis – External Business Environments

20.10.20 Theories & Concepts Time to read: 7min

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A PESTEL analysis is a business tool used by organizations looking to introduce a new product or service to the market. It is an important tool featuring external factors which will be discussed in this post.

FAQs: PESTEL Analysis

PEST and PESTEL analyses are both economic tools. They are used to evaluate certain aspects of a business or corporate environment. The primary distinguishing factor between the two tools is that a PESTEL analysis includes two additional factors. A PEST analysis looks into political, economic, social, and technological aspects. PESTEL tackles all the aspects mentioned above, plus legal and economic factors. Other than the two additional factors, there isn’t much of a difference between the two economic tools as they perform the same function.

Both PESTEL analyses and SWOT analyses are used to analyze the environment in which a product is meant to take its place. The differences between the two tools are that PESTEL analyzes external factors while a SWOT analysis focuses on both internal and external factors. They are both incredible tools with benefits and downsides.

The main advantage of a PESTEL analysis is that it simplifies the analysis process by using major macro-environment factors. The tool also helps to identify potential threats through external factors. It, therefore, allows businesses to develop strategies to counter the potential issues. On the other hand, the primary benefit of a SWOT analysis is that it presents data in the simplest way for easier comprehension. It also covers significant areas like competition and potential weaknesses that need to be addressed.

The downside of PESTEL is that it only covers external factors. On the other hand, the downside of a SWOT analysis is that it lacks prioritization of key problem areas. When deciding which of the two is the better option, consider the advantages and downsides of each.

In 1967, a Harvard professor called Francis Aguilar created an analysis tool called ETPS. It was later renamed to the acronym PESTEL that we know today.

Definition: PESTEL Analysis

PESTEL is a mnemonic for Political, Economic, Social, Technological, Environmental and Legal. A PESTEL analysis is a concept applied in marketing principles. It is used by companies as a tool to track environmental factors and how they affect the operation of a business. Businesses conduct PESTEL analyses when they are planning to launch a new product or expand their services or projects.

PESTEL Analysis Factors

The PESTEL analysis features 6 main factors that affect the performance and growth of a business. The factors include:


Political factors

This is the first of the PESTEL factors. This one deals with the way legal and political factors affect the business environment as well as the trade markets. Some political factors that affect the business environment include political stability, tax guidelines, trade and safety regulations, and employment laws.

Consider businesses in particular countries and think about how the government may intervene in economic activity.  Governments have a substantial influence on the health, education and other public sectors of a nation. With elections come new pieces of legislation which in turn effect business activity.


Economic Factors

This element looks into how economic factors affect the performance of a business. Some of these factors include inflation, unemployment and exchange rates, economic growth, and consumer disposable income, among others. Each of these factors has a direct impact on the performance of a company.

For instance, elements like economic growth and unemployment rates affect the purchasing power of the consumers. This means that the demand for a product will decrease. The decrease in demand also affects the supply and the prices of products and services provided by a company.


Social Factors

The social environment also affects elements like demographic characteristics, customs, norms, and the values of the population. All these elements affect the operations of the business. The population is also a social factor that affects the operation of a business.

Elements like age distribution, income, growth, and career attitudes affect the performance of a business. For instance, population growth affects the demand for a product. This in turn affects the prices and the quantity of supply of a product. All these elements affect the overall growth of the business. When analysing social trends, you should be able to ensure the reliability and validity of your information.


 Technological Factors

Technological factors influence the way a business operates. Some factors that affect the operations of the tech market can either affect the performance of a business positively or negatively. These aspects also influence the decision of a business to introduce a new product in certain markets. It also influences the decision of a business to invest in a certain product.

The knowledge of technological trends may either promote or prevent a business from spending money on it. For instance, if a certain tech product that assists in the success of a business is expected to become obsolete in the near future, then why would a company spend money on it? The same can be said about apps and linked technologies.


 Environmental Factors

Environmental factors significantly affect the performance and operations of a business. They include factors like shortage of raw materials, pollution, and carbon footprints. Ecological elements like climate, weather, and changes in environmental offsets also affect businesses. The businesses that are affected fall in categories like farming, tourism, insurance and agriculture.

For instance, changes in weather and the climate affect the success of the farming industry. Which in turn influences the number of raw materials, which in turn affects the supply. The supply affects the prices of the products, which in turn influence the willingness of clients to purchase.


 Legal Factors

The last element of the PESTEL analysis is the legal factors. Legal factors are in many ways similar to political factors. However, they are more specific. They include labour laws, discrimination laws, consumer protection, patent and safety laws, among others. This aspect shows that companies need some intel on legal affairs that affect their operations.

For instance, laws about trademarking may affect the growth of a company that is looking to trademark and introduce new products. Laws surrounding the rights of workers will impact the HR department of a company. Additionally, the performance of a business is influenced by issues like following public safety regulations and ingredient regulations.


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How to Conduct a PESTEL Analysis

When conducting the PESTEL analysis, consider the following steps:

Understand the categories- The first thing you have to do is study and understand each of the factors in the PESTEL analysis. Look into each of the factors and understand them in depth.

Conduct your research- After understanding the categories, you ought to conduct adequate research. For instance, look into the information you need to include and where you can find the information.

Write the PESTEL analysis- The next step is to create the analysis. Come up with six sections featuring the six factors. In each section, include factors that are relevant to your business or product. You can split the sections further into subsections.

Why is a PESTEL Analysis Important

A PESTEL analysis can play a great roll in the success and growth of a business. The tool helps business owners to identify significant changes in political, economic, social, technological, environmental and legal factors. Additionally, it can help business owners to plan the expansion of their business into different or foreign markets. By conducting a PESTEL analysis, business owners will be able to ensure they’re sufficiently controlling all business departments and in turn will be able to generate more revenue.

Furthermore, PESTEL analyses can be combined with SWOT analyses to ensure that opportunities are maximized whilst threats are minimized. First conduct a PESTEL analysis and then use the external business opportunities and threats to assist you with your SWOT analysis. The results of both analyses greatly assist businesses with smart decision making. Once the decision has been made and the changes are implemented, it’s important to carry out benchmarking to ensure continuous improvement in the business processes.

In a Nutshell

A PESTEL analysis is an important business tool. It is used to determine how external factors affect the performance or operations of a business. The PESTEL analysis focuses mainly on 6 factors (political, economic, social, technological, environmental and legal). The tool is important for the success of a business. However, it only focuses on external factors.