PESTEL analysis

In marketing theory, we dif­fer­en­ti­ate between a mi­cro­eco­nom­ic and a macro­eco­nom­ic business en­vi­ron­ment, also known as the micro- and macro-en­vi­ron­ment. The micro-en­vi­ron­ment refers to the immediate business en­vi­ron­ment: the par­tic­u­lar industry, com­peti­tors and all stake­hold­ers of a company.

Mi­cro­eco­nom­ic business en­vi­ron­ment factors cannot always be directly con­trolled, but they can always be in­flu­enced. In this sense, they are differ from macro-en­vi­ron­men­tal factors which also affect the company but cannot be con­trolled or in­flu­enced by it.

Re­search­ing the micro-en­vi­ron­ment usually involves analyzing the stake­hold­ers, com­pe­ti­tion and industry. A popular method for re­search­ing the macro-en­vi­ron­ment is PESTEL analysis.

In the following article, you will discover what PESTEL is all about, what the acronym stands for and what sorts of factors you should consider when con­duct­ing PESTEL analysis.

In PESTEL analysis, you develop a detailed de­scrip­tion of a company’s macro-en­vi­ron­ment in terms of political, economic, socio-cultural, tech­no­log­i­cal, en­vi­ron­men­tal and legal factors as well as their effects.

In practice, analyses based on the PESTEL model are used in con­junc­tion with studies on the micro-en­vi­ron­ment as part of the overall en­vi­ron­men­tal analysis. Their objective is to identify any op­por­tu­ni­ties or risks which may arise from the business en­vi­ron­ment.

This risk-reward catalogue compiled from the en­vi­ron­men­tal analysis can then be compared with the company’s internal strengths and weak­ness­es through a SWOT analysis. This helps to determine the scope of action and to develop measures for strategic man­age­ment.

PESTEL analysis is an extension of STEP analysis. While STEP refers only to

• socio-cultural,
• tech­no­log­i­cal,
• economic and
• political

factors, PESTEL analysis adds to that

• envi­ron­men­tal and
• legal factors

PESTEL analysis’s political factors include all gov­ern­men­tal aspects which directly or in­di­rect­ly affect your company’s business ac­tiv­i­ties. These factors include but are not limited to:

• the country’s economic system,
• current and future foreign policy,
• bilateral relations,
• the stability of the political system,
• freedom of press,
• the level of bu­reau­cra­cy and cor­rup­tion,
• lobbying,
• security policy,
• trade policy and
• gov­ern­men­tal reg­u­la­tion and dereg­u­la­tion.

Analyzing political factors mainly helps identify tariff and non-tariff trade barriers which might make it more difficult for you to enter a target market, posing risks to your business model.

The tariff trade barriers which might affect how you are allowed to run your business op­er­a­tions include but are not limited to:

• customs policy (import and export duties),
• export subsidies and
• tax guide­lines.

Examples of non-tariff trade barriers include:

• import sur­veil­lance measures,
• bans and re­stric­tions on exports and
• setting minimum import prices.

Ad­di­tion­al­ly, political factors which affect the economic de­vel­op­ment of the market can also be an op­por­tu­ni­ty for companies, such as with:

• funding and
• subsidies.

Economic factors can provide insight into the economic de­vel­op­ment of the markets your company is in­ter­est­ed in. These factors include but are not limited to:

• economic growth,
• gross domestic product,
• pop­u­la­tion,
• pro­duc­tion con­di­tions,
• consumer behavior,
• capital flow,
• import/export,
• stock market trends and
• credit avail­abil­i­ty.

These factors can have a sig­nif­i­cant impact on your company’s per­for­mance and prof­itabil­i­ty. The following factors can pose economic risks:

• interest rate fluc­tu­a­tions,
• price fluc­tu­a­tions,
• re­ces­sions,
• exchange rate fluc­tu­a­tions,
• inflation,
• the un­em­ploy­ment rate,
• rising labor costs and
• resource scarcity.

The following economic factors can lead to economic op­por­tu­ni­ties:

• rising average income,
• an increase in in­vest­ments in the target sector and
• rising demand.

When de­scrib­ing the socio-cultural factors, you should first consider de­mo­graph­ics:

• age dis­tri­b­u­tion,
• social classes,
• life ex­pectan­cy,
• pop­u­la­tion growth rate,
• language,
• wealth dis­tri­b­u­tion,
• level of education and
• family size and structure.

Standards, values and attitudes can also have a sig­nif­i­cant impact on your business ac­tiv­i­ties. Examples of this include:

• health con­scious­ness,
• shopping habits,
• un­der­stand­ing of one’s role (gender roles),
• religion and
• trends.

Tech­no­log­i­cal de­vel­op­ments can also lead to both op­por­tu­ni­ties and risks for your business model. The tech­no­log­i­cal factors you should consider in a PESTEL analysis include:

• gov­ern­ment ex­pen­di­ture on research and de­vel­op­ment,
• the level of in­no­va­tion,
• access to new tech­nolo­gies and
• dis­rup­tive tech­nolo­gies.

The second “E” in the acronym “PESTEL” stands for en­vi­ron­men­tal.

The en­vi­ron­men­tal factors include physical and ge­o­graph­i­cal features such as:

• climate,
• topog­ra­phy,
• country size,
• in­fra­struc­ture and
• the avail­abil­i­ty of natural resources (raw materials, mineral resources).

More and more companies are also focusing on en­vi­ron­men­tal aspects when making business decisions. The following factors play a key role:

• en­vi­ron­men­tal pollution (emissions, waste),
• en­vi­ron­men­tal awareness,
• pressure from NGOs,
• adoption of sus­tain­able products and
• recycling standards.

Your company’s scope of action in a targeted market largely depends on the legal system of the country in question as well as the legal awareness of the general pop­u­la­tion. In a PESTEL analysis, you will examine which of the following factors, among others, impact your company:

• com­pe­ti­tion laws,
• antitrust laws,
• en­vi­ron­men­tal reg­u­la­tions,
• consumer pro­tec­tion laws,
• oc­cu­pa­tion­al health and safety re­quire­ments,
• merger and ac­qui­si­tion laws,
• data pro­tec­tion,
• copyright and patent laws,
• li­a­bil­i­ties,
• man­u­fac­tur­ing standards and
• labeling reg­u­la­tions.

The factors described above are sometimes in­ter­con­nect­ed. A change in an en­vi­ron­men­tal factor, such as an increased en­vi­ron­men­tal issues in a region, usually also has legal or socio-cultural im­pli­ca­tions, such as en­vi­ron­men­tal reg­u­la­tions being imposed and a growing en­vi­ron­men­tal awareness among the pop­u­la­tion. Tech­no­log­i­cal de­vel­op­ments as well as political decisions also often influence the economic scope of action.

Nev­er­the­less, you should examine the pre­vi­ous­ly mentioned factors sep­a­rate­ly in the PESTEL analysis and determine the status quo as well as current trends. What changes should be expected and when? Can you identify the driving forces which will bring about these changes? Also, what are the op­por­tu­ni­ties and risks for your business op­er­a­tions, such as in terms of demand or the market behavior of customers, suppliers and com­peti­tors?

Both primary and secondary sources of in­for­ma­tion are available for use in the PESTEL analysis. You can obtain a great deal of in­for­ma­tion free of charge from gov­ern­ment in­sti­tu­tions and trade as­so­ci­a­tions.

You should limit your analysis to only include en­vi­ron­men­tal factors which actually impact your company and its op­er­a­tions. This is the only way to ensure that you will be able to develop practical strate­gies and action plans from the risk-reward catalogue you drew up during the SWOT analysis.

The following video was produced through a col­lab­o­ra­tion between Leiden Uni­ver­si­ty, Delft Uni­ver­si­ty of Tech­nol­o­gy and Erasmus Uni­ver­si­ty Rotterdam. It il­lus­trates the con­nec­tion between PESTEL and SWOT analysis in three and a half minutes.

Click here for important legal dis­claimers.