PESTEL analysis: what external factors affect your business?

PESTEL is an analysis model that builds on the more familiar PEST analysis. The model examines the independent environment (the firm's environment) that helps to set the framework for the industry. It thus helps us to understand market competition, how it will evolve and how competitors may react to new developments.

PESTEL is an acronym covering the main macro-environmental factors affecting businesses:

P - Political
E - Economic
S - Social
T - Technological
E - Environmental
L - Legal

Political factors determine the extent to which the government and politicians can influence the economy or a particular industry. Most industries are regulated by the government, and will therefore be affected by a new tax or levy that may change the structure of a business.

Examples of political factors:

• Competition regulation
• Regulation of imports/exports
• Environmental legislation
• Trade restrictions
• Population growth
• Tax policy.

Economic factors have a particularly important impact on the ability of companies to do business and on their profitability. For example, the economy can be affected by political factors in the form of regulatory changes, which can have a direct or indirect long-term impact on a company.

Changes in income, prices and savings can affect consumers' purchasing power and supply and demand. This is particularly true for businesses targeting price-sensitive consumers.

Examples of economic factors:

• Exchange rates
• Legal changes concerning economy, taxes etc.
• Renter
• Inflation
• Consumers' income and unemployment.

The most important factor that companies should pay attention to in a macro analysis is the population - it is people who create the market. Society's general beliefs, values and norms define consumers' tastes and preferences. People absorb, often unconsciously, a worldview that defines their relationship with themselves, others, organisations and society.

Examples of social factors:

• Age distribution
• Income
• Population growth in cities, regions and nations
• Regional characteristics
• Religion and belief
• Level of education.

Technology is constantly evolving, which also has an impact on the ability of companies to move in the market. Technology can be seen as both an opportunity and a threat to a firm depending on the circumstances. Technological factors also have an impact on economic factors, which may depend on a country's ability to develop and adapt to new technologies.

The technological factors look at four trends in particular:

• How fast an environment is to change and adapt to change/new technology
• Opportunities for innovation
• Changing R&D budgets (Research and development related to the development/innovation of new products by enterprises)
• Regulating technological change.

Examples of technological factors:

• Digital technology
• Automation
• Innovation
• Access to new technology
• Big data and dynamic pricing.

The environmental factors are not part of the original PEST analysis, as the environment has not had that much impact on business operations in the past. However, with an increased focus on the environment and sustainability, it is a factor that companies need to take into account in their strategic plans, which is why it has become part of the new PESTEL analysis.

Companies need to pay particular attention to four elements when developing their strategy and production:

• Shortage of raw materials, especially water
• Increased energy costs
• Increased level of pollution
• Changing roles/attitudes of governments to environmental issues.

Examples of environmental factors:

• Sustainability
• Environmental policies
• Climate Change
• Natural disasters
• Ethical sourcing (supply chain)
• Pollution and carbon emissions.

Of course, companies must comply with legal factors in order to conduct an ethical business. They involve political and legal environments that can influence and constrain organisations in terms of opportunities and constraints.

Companies should pay particular attention to two trends here:

• New business legislation in the area - for example, EU regulations regarding legal requirements for CO2 emissions from product manufacturing.
• Growth of special interest groups - e.g. an organised movement/group of citizens to strengthen e.g. consumer rights, gender equality, rights of minorities etc.

Examples of regulatory factors:

• Copyright and patent laws
• Minimum Wage
• Health and safety laws
• Data protection laws
• Food control.

Although the PESTEL analysis is good at setting the framework for how external factors affect the market, it also faces criticism along the way. The model is relatively comprehensive, which can be both time-consuming and resource-intensive. In addition, PESTEL only analyses firms at the macro level (the external factors that affect the firm independently).

It is therefore often used in conjunction with Porter's Five Forces or SWOT analysis, which looks at the company at micro level. You can use the SMUK or Minerva model if you are segmenting in a new market.