The PESTEL Analysis

So far we have looked at the market conditions and factors that directly have an impact on the activities of the business. These micro factors can sometimes be identified through everyday observations of business activity.

However, the surrounding environment where a business operates contains a number of variables that are not necessarily within a business’s control and are at times more difficult to observe because they are easy to overlook. These macro environmental factors concern the generic activities within societies that can provide businesses with opportunities or be a source of potential concern.

The PESTEL model divides these factors into five different categories. It explores the political, economic, social, technological, environmental and legal factors that are of relevance to the business because they directly or indirectly affect its activities. Let’s explore these in further detail.

Governments can shape what businesses do through their political agendas policies. Political factors can include the deregulation of industries or the signing of trade agreements that allow greater competition to enter a market. The government may also take political decisions to increase taxes, which directly affect the profit margins of a business.

During the coronavirus pandemic a lot of governments around the world have placed regions under a lockdown so very little business activity is taking place. These are all examples of decisions that are out of a business’s control but can all have significant impacts on the business.

Economic factors are sometimes conflated with political ones because they are at times the result of political decisions. However, they are treated as an independent factor in the PESTEL model because they concern a very specific area. They explore the general wealth and stage of economic development of a region. For example, the average salary of an area can affect pricing policies for a business, interest rates can affect whether a business can afford to borrow in that region and inflation has an impact on the value of goods and the cost of production.

Social factors explore demographic trends such as age, life stage, family size. All of these factors are important when trying to break down a market and identify potential customers. A social factor analysis can also go further by understanding social attitudes and behaviours. These attitudes and behaviours can often shape perceptions towards businesses as well as consumption habits. For example, there may be a difference in attitudes towards drinking in the UK compared to continental Europe. Not all societies or even cities are the same, so it is important to understand your local or potential region from a social perspective..

Technological factors are not just concerned with information technology although this is among the considerations). The physical infrastructure is also part of the evaluation. For example, the access to internet and broadband will have an impact on whether a company can use those mediums to sell or distribute products and how it communicates with employees.

The availability of transport infrastructure will dictate how products and services can be delivered. We often take technology for granted but the lack of technological development or the infancy of technology in certain parts of the world can have a profound impact on how businesses operate within international and domestic markets.

Environmental factors refer to the impact of natural resource utilisation on the business. For example, the effects of pollution and policy shifts towards reducing carbon emissions might lead to a company seeking alternative methods of production. The impact of plastic waste may change the way a company packages its products. This can generate threats as well as opportunities for businesses to operate in a different way.

Finally, the legal factors refer to legislative frameworks within which companies operate. Changes to legislation in areas such as minimum wage laws, employment procedures and health and safety can all be of concern to a business. Therefore it is important that a business remains aware of any laws that directly affect the business.

The concern a business has with PESTEL factors is that there is little the business itself can do to control the factors. Therefore, having the awareness of key macro environmental issues will at least allow a business to anticipate and prepare itself for potential threats and opportunities. For a PESTEL analysis to be effective, it needs to be carried out and updated regularly.