PESTEL Analysis

What is PESTEL analysis of macro environment?

A PESTEL analysis or more recently named PESTELE is a framework or tool used by

marketers to analyse and monitor the macro-environmental (external marketing
environment) factors that have an impact on an organisation.

PESTLE stands for Political, Economic, Social, Technological, Legal and Environmental factors.

PESTEL analysis is a strategic management tool that helps organizations understand and analyze
the external macro-environmental factors that can impact their operations. The acronym PESTEL
stands for Political, Economic, Social, Technological, Environmental, and Legal factors. Let's
explore each of these factors:

1. Political Factors:
o Government stability and policies
o Taxation policies
o Trade tariffs and barriers
o Political stability
o Government intervention in the economy
o Regulatory framework
2. Economic Factors:
o Economic growth or recession
o Inflation rates
o Exchange rates
o Interest rates
o Unemployment rates
o Consumer disposable income
3. Social Factors:
o Demographic trends
o Cultural attitudes and values
o Social factors affecting consumer behavior
o Lifestyle changes
o Education levels
o Health consciousness
 4. Technological Factors:
o Rate of technological change
o Innovation and research and development activity
o Automation and technological advancements
o Access to new technologies
o Intellectual property protection
5. Environmental Factors:
o Climate change and weather patterns
o Environmental regulations
o Sustainability concerns
o Green initiatives and practices
o Impact on supply chains and production processes
6. Legal Factors:
o Employment laws
o Health and safety regulations
o Antitrust laws
o Intellectual property laws
o Consumer protection laws
o Environmental regulations

Analyzing these factors helps organizations identify opportunities and threats in their external
environment. It allows businesses to adapt to changes, make informed decisions, and develop
strategies that align with the prevailing conditions. PESTEL analysis is often used in conjunction
with other strategic management tools to form a comprehensive understanding of the business
environment.

A PESTEL analysis is an acronym for a tool used to identify the macro (external) forces facing
an organisation. The letters stand for Political, Economic, Social, Technological, Environmental
and Legal. In this blog, we will look at what a PESTEL analysis is used for as well as the
advantages and disadvantages of using it in a business setting.

In marketing, before any kind of strategy or tactical plan can be implemented, it is fundamental
to conduct a full situational analysis. This analysis should be repeated every six months to
identify any changes in the macro-environment. Organisations that successfully monitor and
respond to changes in the macro-environment can differentiate from the competition and thus
have a competitive advantage over others.

The framework is also used to identify potential threats and weaknesses which are used in a
SWOT Analysis when identifying any strengths, weaknesses, opportunities and threats to a
business.
Let’s look at each element of a PESTEL analysis.
Political Factors

These determine the extent to which government and government policy may impact on an
organisation or a specific industry. This would include political policy and stability as well as
trade, fiscal and taxation policies too.

Economic Factors

An economic factor has a direct impact on the economy and its performance, which in turn
directly impacts on the organisation and its profitability. Factors include interest rates,
employment or unemployment rates, raw material costs and foreign exchange rates.

Social Factors

The focus here is on the social environment and identifying emerging trends. This helps a
marketer to further understand consumer needs and wants in a social setting. Factors include
changing family demographics, education levels, cultural trends, attitude changes and changes in
lifestyles.

Technological Factors

Technological factors consider the rate of technological innovation and development that could
affect a market or industry. Factors could include advances in technology, developments in AI,
automation, research and development. There is often a tendency to focus on developments only
in digital technology, but consideration must also be given to new methods of distribution,
manufacturing and logistics.

Environmental Factors

Environmental factors are those that are influenced by the surrounding environment and the
impact of ecological aspects. With the rise in importance of CSR (Corporate
Social Responsibility) and sustainability, this element is becoming more central to how
organisations need to conduct their business. Factors include climate change, government
environmental policies and initiatives, carbon footprint, waste disposal and sustainability
practices.

Legal Factors

An organisation must understand what is legal and allowed within the territories they operate in.
They also must be aware of any change in legislation and the impact this may have on business
operations. Factors include employment legislation, consumer law, healthy and safety,
international as well as trade regulation and restrictions.
Political factors do cross over with legal factors; however, the key difference is that political
factors are led by government policy, whereas legal factors must be complied with.

How to do a PESTEL Analysis?

There are several steps involved when undertaking a PESTEL analysis. At first, it is important to
get a group of people together from different areas of the business and brainstorm ideas.

Next, you will want to consult and seek the opinions of experts from outside your business.
These could be your customers, distributors, suppliers or consultants who know your business
well.

The third stage will involve you researching and gathering evidence for each insight in your
Analysis. Then you will want to evaluate and score each of the items for ‘likelihood’; how likely
it is to happen and ‘impact’; how big an impact it could have on your business.

The final stage involves refining your ideas and repeating the proves until you have a
manageable number of points in each of the six categories.

Advantages and Disadvantages of a PESTEL Analysis

It is an essential analysis tool for any strategist’s toolkit but there are some benefits and
challenges associated with it.
Advantages of a PESTEL Analysis:

• It can provide an advance warning of potential threats and opportunities

• It encourages businesses to consider the external environment in which they operate
• The analysis can help organisations understand external trends

Disadvantages of a PESTEL Analysis:

• Many researchers argued that simplicity of the model that it is a simple list which is not
sufficient and comprehensive
• The most significant disadvantage of the model is it is only based on an assessment of the
external environment

Keeping your PESTEL Analysis updated

Keeping this analysis updated is crucial because the environment organisations operate in is
dynamic and constantly changing external factors can change rapidly and can impact your
analysis and therefore, the outcome you expect. You can keep your PESTEL analysis updated
by:

1. Set up Alerts and Monitoring Systems

Subscribe to news alerts, industry reports, and government publications relevant to your industry
and market.

2. Regularly Review and Revise

Schedule periodic PESTEL analysis reviews, such as quarterly or semi-annually, to assess
changes in the external environment.

3. Engage with Industry Networks and Experts

Attend industry conferences, seminars, and webinars to stay informed about the latest trends and
developments.

Final Thoughts
A PESTEL analysis helps an organisation identify the external forces that could impact their
market and analyse how they could directly impact their business. It’s important when
undertaking such an analysis that the factors affecting the organisation are not just identified but
are also assessed – for example, what impact might they have on the organisation? The outcomes
can then be used to populate the opportunities and threats in a SWOT analysis.
 Porters 5 Forces analysis
Porter's Five Forces is a framework developed by Michael Porter that helps analyze the
competitive forces within an industry. The model identifies five key factors that influence the
level of competition and attractiveness of an industry. Here are the five forces:

1. Threat of New Entrants:

o This force assesses the ease with which new companies can enter an industry and
compete with existing businesses. Barriers to entry include factors such as high
initial investment requirements, economies of scale, brand loyalty, and
government regulations. The higher the barriers, the lower the threat of new
entrants.
2. Bargaining Power of Buyers:
o This force examines the power that buyers (customers) have in the market.
Factors influencing buyer power include the number of buyers, the uniqueness of
the product or service, the availability of substitutes, and the importance of each
buyer to the seller. If buyers have significant power, they can demand lower
prices or higher quality products.
3. Bargaining Power of Suppliers:
o This force assesses the power that suppliers have over the industry. Factors
influencing supplier power include the number of suppliers, the uniqueness of
their products or services, and their ability to forward-integrate. If suppliers have
significant power, they can demand higher prices for inputs or reduce the quality
of the inputs.
4. Threat of Substitute Products or Services:
o This force looks at the availability of alternative products or services that could
potentially replace those offered by the industry. The availability of substitutes
can limit the pricing power of companies within the industry and affect their
profitability.
5. Intensity of Competitive Rivalry:
o This force examines the level of competition among existing firms in the industry.
Factors contributing to high rivalry include the number of competitors, the rate of
industry growth, differentiation among products, and exit barriers. High rivalry
often leads to price competition and reduced profitability.

Analyzing these five forces helps businesses understand the overall competitive environment in
their industry and develop strategies to position themselves effectively. It's important to note that
these forces are interconnected, and changes in one force can affect the dynamics of the others.
Companies can use this analysis to make informed decisions about entering new markets,
developing competitive strategies, or assessing the overall attractiveness of an industry.