The PESTEL analysis can be instrumental in evaluating the characteristics and changes in the environment that can affect a company’s success, from which the right decisions can be made at the right time.
If you want to know precisely what it consists of, what its advantages are and how to develop it step by step, in this article, we have compiled all the information you need to know.
What is PESTEL analysis?
A PESTEL analysis is a tool that allows organizations to discover and evaluate the factors that may affect the business in the present and in the future.
PESTEL is an acronym for Political, Economic, Social, Technological, Legal, and Environment. This unit of analysis assesses these four external factors concerning the business situation. The analysis examines opportunities and threats arising from these four factors.
With the results offered by the PEST analysis, it is possible to have a favorable view when carrying out market research, creating marketing strategies, developing products, and making better decisions for the organization.
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Factors involved in PESTEL analysis
As we mentioned before, PESTEL is the acronym for Political, Economic, Social, Technological, Legal, and Environment. Next, we have the definition of some of these points that will help you to make a better market analysis:
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Political
Government regulations and legal issues affect a company’s ability to be profitable and successful. The PEST analysis is responsible for evaluating how this can happen.
Topics to be considered include tax guidelines, copyright, and intellectual property law enforcement, political stability, trade regulations, social and environmental analysis policy, labor laws, and safety regulations.
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Companies should also consider their local and federal power structure and discuss how anticipated changes in power might affect their business.
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Economic
It consists of examining the external economic problems that can affect a company’s success.
This factor consists of evaluating different aspects such as interest rates, the change in inflation, unemployment, the gross domestic product and credit availability.
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Social
With the social factor, companies can assess the socioeconomic environment of the market, which allows them to understand how the needs of consumers are formed and what motivates them to make a purchase.
Items to be assessed include population growth rates, age distribution, attitudes toward work, and labor market trends.
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Technology
Technology is essential in business as it can affect them negatively or positively.
With the introduction of new products, new technologies, and services, a certain market may find it difficult to adapt, so it is important to evaluate it from all angles.
Specific items to be analyzed include government spending on technology research, current technology’s life cycle, the Internet’s role, and the impact of potential information technology.
Steps to perform a PESTEL analysis
Carrying out a PESTEL analysis is a task that every organization that wants to ensure its success must carry out. Here are the steps that will help you achieve it:
1. Brainstorm
Brainstorm the 4 PEST factors: Political, Economic, Social, and Technological.
You can have an initial with a large group of people or break into smaller units and then share their contributions to get an overview.
Among the questions to be answered for each element of the PEST analysis during brainstorming are:
Political factor
- What government policies or political groups could benefit or harm our success?
- Is the political environment stable, or is it likely to change?
- When are the following local, state, or national elections in the country? How might this change government or regional policy?
- Who are the most likely contenders for power? What are your views on trade policy and other policies that affect the organization?
- How well developed are property rights and the rule of law, and how widespread are corruption and organized crime? How are these situations likely to change, and how is this likely to affect you?
- Could any pending legislation or tax changes affect your business positively or negatively?
- How will business regulation, along with any planned changes, affect your business? And is there a trend towards regulation or deregulation?
- How does the government address corporate policy, corporate social responsibility, environmental issues, and customer protection legislation? What impact does this have, and is it likely to change?
- What is the likely timeline for the proposed legislative changes?
- Are there other political factors that could change?
Economic factor
- What economic factors will affect us in the future?
- How does the performance of the economy affect us right now?
- How are our prices, income, and costs affected by each economic factor?
- How stable is the current economy? Is it growing, stagnant, or declining?
- Are the key exchange rates stable, or do they vary significantly?
- Are customers’ disposable income levels rising or falling? How is this likely to change in the coming years?
- What is the unemployment rate? Will it be easy to build a skilled workforce? Or will it be expensive to hire skilled labor?
- Do consumers and businesses have easy access to credit? If not, how will this affect your organization?
- How is globalization affecting the economic environment?
- Are there other economic factors I should consider?
Social factor
- How do the beliefs and values of our customers influence their buying habits?
- How do cultural trends and human behavior play a role in our business?
- What are the population growth rate and age profile? How likely is this to change?
- Are generational changes in attitude likely to affect what you’re doing?
- What are the levels of health, education, and social mobility in your society? How are they changing and what impact does this have?
- What employment patterns, labor market trends, and attitudes toward work can you observe? Are they different for each age group?
- What social attitudes and taboos could affect the business? Have there been recent socio-cultural changes that could affect this?
- How do religious beliefs and lifestyle choices affect the population?
- Are other sociocultural factors likely to drive change for your business?
Technological factor
- What technological advances and innovations are available or in the works?
- How will this technology impact our operations?
- Is there any new technology you may be using?
- Are new technologies on the horizon that could radically affect your work or industry?
- Do any competitors have access to new technologies that could redefine their products?
- In what areas do governments and educational institutions focus their research? Is there anything I can do to take advantage of this?
- How have infrastructure changes affected work patterns (for example, levels of remote work)?
- Are there existing tech hubs you could work with or learn from?
- Are there other technology factors I should consider?
2. Identify Opportunities
Once you have identified the changes that are taking place in the business environment, it is time to visualize each of them and brainstorm the opportunities that this could open up for your organization.
This step allows the relevant people to get involved and offer their opinion. Subsequently, group similar ideas and eliminate duplicates. You will be able to draw significant conclusions.
3. Identify the threats
It’s essential to think about how these changes might affect your business. If you understand this early enough, you can avoid these problems or minimize their impact.
For example, if a core part of the market is in demographic decline, could you open up other market areas? Or if the technology threatens an essential product, can you harness that technology and improve the product?
Let your employees rate each idea based on the impact they think it will have on the organization.
Discuss the significant differences in ratings and ask them to explain their reasoning, and test those ideas again if they have changed their minds.
When everyone thinks about the various factors, they are aligned and will better recognize and understand the challenges others face.
4. Implement the measures
Create the actions you will take to exploit significant opportunities in your business plan, and take appropriate steps to identify significant risks, manage them, and eliminate them.
Where you have identified significant risks, take appropriate steps to manage or eliminate them.
The PESTEL analysis provides a comprehensive overview of the organization’s opportunities and threats now and in the future. Share the results with relevant stakeholders and use the report to monitor progress.
It is necessary to repeat the process regularly to stay abreast of changes in the external environment and keep strategies and plans up to date.
Tips for performing a PESTEL analysis
After knowing what the PEST analysis is and the steps to carry it out, we have some tips for you that will help you execute this process effectively:
- Carefully select participants to provide expert knowledge but also a fresh customer perspective.
- Use technology to engage essential people in different places and not lose their input.
- Minimize groupthink by brainstorming individually and combining the problems to get the big picture.
- Offer specific ideas rather than general ideas.
- Use quantitative data when possible to focus on a specific issue.
- Provide adequate time in the session to sort and prioritize ideas.
- Communicates the results to stakeholders and regularly updates the analysis process.
Advantages of PESTEL analysis
Below, we mention the main benefits of carrying out a PEST analysis, one of the components of market analysis:
- It helps you spot trading opportunities and gives you a warning of significant threats.
- It reveals the change of direction within the organization. This helps you shape your actions to work with the change rather than against it.
- Avoid starting projects that are likely to fail for reasons you can’t control.
- It helps you leave assumptions behind when you enter a new market, allowing you to develop an objective view of this new environment.
- It provides an overview of all the crucial external influences on the organization.
- It supports more decisive and well-informed decision-making.
- Assists in planning, marketing, organizational change initiatives, business and product development, project management, and research papers.
Conclusion on PESTEL analysis
PESTEL analysis is ideal for all organizations that want to understand and measure current and future markets. It is essential to mention that an organization’s approach to each factor in the PESTEL analysis depends on the sector in which they focus.
With a PESTEL analysis, companies can visualize the risks and make the most of the business opportunities in the market. If you want to know the best methodologies and tools for decision-making, we invite you to learn everything you need to identify the best opportunities for business success.
