PESTEL analysis: know the factors that you cannot influence and react with ad hoc strategies
Creating a complete and comprehensive business plan is essential, because it allows you to make well-thought-out and, therefore, more effective decisions.
The best known strategic planning tool is, probably, the SWOT analysis , which takes into account the strengths and weaknesses within the company and the opportunities and threats of the external environment. You may not know, however, that there is another type of analysis, called PESTEL, dedicated more specifically to external factors capable of impacting the company’s performance.
The time has come to get to know it better: knowing how to perform it is, in fact, very important because it makes you more aware of the obstacles you may encounter along your path, thus giving you the opportunity to also know how to overcome them.
What is PESTEL analysis
The PESTEL analysis is a particular context analysis methodology that takes into consideration the macro-factors coming from the macro-environment that can influence the company’s performance. It is called in this way precisely because of the factors it evaluates: the acronym PESTEL is composed, in fact, of the initials “Political” (political factors), “Economical” (economic factors), “Social” (social factors), “Technological”(technological factors),“Environmental”(environmental factors) and“Legal”(legal factors).
In some cases it is also called PESTLE analysis, due to the inversion of the order of the last two factors. However, you may find references to it also with the name of PEST analysis: this is due to the fact that there are different versions of it, including a less extensive one that does not take into account legal and environmental factors and that, for the precisely, it is therefore called PEST analysis. To have a complete view of all the various possibilities through which the external environment can compromise the success of your business, however, you would do well to know and apply the complete analysis. That’s not all: in more recent times, the model has been further extended with the addition of factors related to education and demographic ones, thus also taking the name of STEEPLE or STEEPLED analysis.
What PESTEL analysis is for
Perhaps you have never thought about it, but you must always remember that your company is not a closed system: it interacts in various ways with the macro-environment that surrounds it and is influenced by it, which is not directly controllable. The PESTEL analysis, as already mentioned, serves precisely to understand how the external environment can negatively affect and/or hinder the company’s business and it thus provides the theoretical tools to implement the appropriate strategies to prevent this from occurring.
Conducting this particular analysis, therefore, constitutes an important step for verifying a business model and for the correct implementation of a business plan. More specifically, the PESTEL analysis allows you to become aware of the feasibility of a business plan and to make more prudent investment decisions. The analysis can refer to the launch of a specific product or service, but also to larger projects.
How PESTEL analysis is done
Now you know what PESTEL analysis is and what it is for. But how is a PESTEL matrix concretely realized? To answer this question you have to start with a series of further questions. It is enough to name a few: how can the historical and political situation of the country in which it operates (or wants to operate) can affect it? What are the prevailing and most determining economic factors? What kind of influence does the culture have on the purchase and use of the product or service you are proposing (or intend to offer) to your customers? What technological innovations capable of shaking the sector are looming on the horizon? What constraints does the legislative system determine? What kind of attention to the environment is there in the country where your company is present?
Finding answers to these questions, which, as you may have noticed, refer specifically to the 6 factors that make up the PESTEL analysis, allows you to define the most suitable model for your company. Keep in mind that, in order to effectively carry out the PESTEL analysis, you must adapt it to your company and that is to take into account, specifically, what are the most and least determining factors for it, also in relation to the particular sector in which it operates or wants operate.
To understand even better how the PESTEL analysis is done, it is now appropriate to analyze the individual factors one by one.
The political factors that you must take into consideration during the PESTEL analysis refer to all the political aspects of the country in which your company operates or wants to operate that may have an influence on it, starting with the political stability of the country itself.
Among the constraints that the political context can pose, for example, are those relating to imports and exports, linked to the possible presence of customs duties. Not only that: another aspect to take into consideration is that related to bureaucracy, which can significantly limit the operations of your business. Other political factors may concern the legislation to protect workers, as well as that to protect the environment, or even the required tax obligations.
At this point it will be clear to you that the political factors, from which you must start to conduct the PESTEL analysis, necessarily also influence the subsequent factors.
Economic factors that can affect your company’s business include a number of aspects, such as the rate of inflation and the unemployment rate, which have an impact on consumers’ purchasing power and consumption, as well as other aspects, such as exchange rates, which have a more direct impact on the costs of producing goods.
A correct analysis of the economic situation of a country allows you to evaluate more precisely the feasibility and sustainability of your entrepreneurial adventure or, more concretely, its convenience.
As just mentioned, the choices related to the purchases and consumption of end consumers have an important impact on the work of a company. Remember, in this regard, that social trends can affect both the demand for products or services and the way in which the company itself operates. Among the social factors to be monitored, the demographic trend of the country stands out, from the standard of living to education, passing through the distribution by age.
Even more than for the other factors, in this case the PESTEL analysis must be shaped on the company, on what it proposes and on the final consumers to whom it is addressed. A country characterized by a low birth rate can represent a difficult market for a company that deals with goods dedicated to children, but a population with a particularly high average age can, on the other hand, prove to be a “plus” for those offering services dedicated specifically to the third age.
Cultural factors must also be monitored carefully: to successfully enter a new market, it is necessary, in fact, to know local customs and traditions. Do not forget, however, that, even within the same country, it is possible to find important cultural differences. So make sure your analysis is as specific as possible.
Technological innovation can influence the business of a company in a favorable or unfavorable way. Observing the attention that a country places on technological investments and digitization processes will help you understand the evolution of the market and its repercussions on the operations of your company. It is clear that, as previously mentioned, also for other factors, the importance of these aspects is linked to the relevant sector of your company.
The environmental question is becoming increasingly important in the world debate. The attention of consumers towards environmental protection by companies, even those that do not deal directly with goods or products related to it, is today at the highest levels. This means that, in addition to the direct impact of the regulations in force in the field of environmental protection, you must also pay attention to the possible repercussions on your business in terms of corporate reputation.
In the analysis of the previous factors, reference has already been made on several occasions to aspects of a legal nature. It is advisable, however, that in conducting your PESTEL analysis you dedicate a specific time to the analysis of the legal factors that can affect your business. This includes specific sector regulations, but also laws on safety at work and other protections for workers, those dedicated to environmental protection and those to protect consumers.
Examples of Pestel analysis
A couple of practical examples of Pestel analysis can make your ideas even clearer. Take the case of Amazon: among the political factors that influence its business, from procurement to logistics, there is the instability of some countries in which it operates. Taxation and bureaucracy in some countries also fall into this category. In addition, in China, state support for direct competitor Alibaba is another relevant political factor in Amazon’s PESTEL analysis.
Among the economic factors is the recent contraction of the world economy, which affects consumption and, therefore, also on Amazon sales. It should be emphasized, however, that Covid-19, in any case, has led to a boom in online commerce in the last few years.
So-called millennials are more likely to shop online. Furthermore, the spread of technological devices has increased the number of people who have access to the Internet and who, therefore, can make purchases on Amazon. These are social factors, with obvious references also to the technological aspect. In this regard, it should be emphasized that Amazon is among the companies that have invested most in technological innovation and business automation. Not only that: the company has also focused heavily on renewable energy and packaging with recyclable material, responding to the growing attention of consumers towards the environment. Finally, Amazon has a team specifically dedicated to the legal implications of its business. Recently, the debate has flared up on the issue of protection for workers.
Now it’s the turn of Apple‘s PESTEL analysis: among the political factors stands out its “dependence” on production and the Chinese market, which exposes it to some threats, linked to the delicate diplomatic relations between this nation and the USA and the rest of the world.
The strength of the US dollar could lead to an increase in exchange rates, making it more difficult for Apple to do business in some of its key markets, such as in the aforementioned China (but also in Europe). Remaining within the context of relations between Apple and China, it is also possible to identify a social factor: ethical concerns related to Apple’s production in the Asian country could undermine the attractiveness of its products among socially aware consumers.
There is no shortage of technological factors in Apple’s PESTEL analysis: specifically, one is linked to the strong ability shown by its competitors, from Samsung to Google, in duplicating the products and services provided by Apple.
The disposal of used and no longer functioning Apple devices is a very delicate environmental factor for the company, which also has to deal with concerns related to the environmental impact of its production plants.
Legal disputes can have devastating consequences for tech giants like Apple. By also offering financial services, the company may also have to deal with even more delicate disputes.
These practical examples may have further clarified the core of the issue we are facing: the external environment presents some factors that cannot be directly controlled by you, but, by studying them thoroughly through a correct PESTEL analysis, you can put in place the right business strategies. to neutralize their impact If you know how to respond promptly and effectively, you don’t need to fear any obstacles to your business.
Remember the words of Neil Patel:
“Don’t look back asking yourself ‘why?’. Look ahead and ask yourself ‘why not?’ “.