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Strategy

How to Use Pestel Analysis To See The Big Picture

Harvard professor Francis Aguilar created a paradigm for getting the big picture in his  1967 book, “Scanning the Business Environment” that endures to this day. Not being skilled in acronyms, he called it ETPS, which was subsequently rearranged to PEST for pronounceability and later augmented with a couple new components, bringing us to the modern iteration: PESTEL. Each letter represents an area of analysis to get a broad overview of macro-environmental factors that may impact a company. P for political, E for economic, S for social, T for technological, another E for environmental, and L for legal factors.  

Benefits of PESTEL Analysis

By stepping back and taking a look around to see the big picture, you give yourself a chance to recognize both opportunities and threats created by big outside forces. Applying the PESTEL framework helps you identify trends so that you can adjust your strategy to work with the change instead of working against a gradual but unstoppable force. You can spot likely roadblocks that would ensure failure for projects that you may have otherwise undertaken. Finally, if you are venturing into a new area, taking a close look at the real world helps you avoid bringing wrong assumptions based on prior experience in a different context and get a clear view of your new environment. Let’s take a quick look at each area to get a better understanding of how to apply the PESTEL framework.   

Political Factors

Government policies can have a big impact on business. Things like labor laws, tariffs, and tax policy can have a very direct effect. So can things that are not policy, like political instability, incompetence, and corruption.  Furthermore, the government may have a profound impact on a nation’s education system, infrastructure and health regulations. These are all factors that need to be taken into account when assessing the attractiveness of a potential market. Government action or inaction affects consumers. If the government is not teaching people to read, you can’t sell them something with text advertising. To conduct this part of your PESTEL analysis, consider questions like: Who is in power and what are their policies? Is there a challenger and are they likely to succeed? If so, what new policies will they bring? How is the government handling the rule of law overall? Are you operating in an environment where contracts are enforceable? Is the government keeping crime under control or is there a form of crime that could impact your business? What new and existing legislation is there that affects your business, including indirectly by affecting your consumers?  

Economic Factors

To get a clear understanding of your environment, you need to have a grasp of the macroeconomy. Statistics like GDP growth, inflation, interest rates, foreign currency exchange rates, unemployment rates, and consumer disposable income can all be important determinants of success or failure. Operating in a booming economy is very different from operating in a contracting economy. Develop an understanding of the current situation and predictions for the near future to help determine your strategy.  

Social Factors

Social factors also shape outcomes for businesses. Considerations like changing demographic characteristics can be important. Some of these can be quantified, like population growth, age groups and income distribution. More abstract ideas like customs and norms in a society are harder to pin down, but hugely important. Understanding lifestyle aspirations, cultural values and traditions, rebellion as a force in consumer psychology, desire for risk versus safety is essential for effective business strategy and marketing.  

Technological Factors:

Technology is moving at the speed of…well..technology. It seems like nothing is changing quite as fast. You really have to keep your eye on the ball. Are there incentives for technology development that could impact your market? How much innovation is there? Are your competitors spending a lot on research and development? Is there some new automation coming down the pipeline that will turn everything upside down? If you are planning to disrupt a market with tech, it’s important to make sure your disruption does not get disrupted too. If you are not the disruptor, be on the lookout for a technological development that could disrupt your plans. Assess whether this problem is likely or a long shot.   

Environmental Factors

This element of PESTEL analysis has only recently become important. Scarcity of materials and regulations to curb pollution can be significant problems…or opportunities for people with plans to solve those problems. Consumers may be very environmentally aware. Most large enterprises have corporate social responsibility departments that are heavily focused on being good environmental citizens. Be aware of potential regulatory and resource pricing impacts as problems you may face. At the same time, you may find opportunities in the form of positive actions your company can take to protect the environment and win the support of customers who recognize that is important.   

Legal Factors

This is a narrower aspect of the political category. If you are operating globally, you need to understand the relevant laws in all jurisdictions. For some companies, antitrust laws will be important. Other important areas of law to consider in designing your business strategy may include consumer protection laws, copyright law, patent law, labor law, copyright and patent law. As noted in the political factor section, it’s not enough to know what is going on now. You need to get a grasp of what changes are likely to come.   

Use The PESTEL Framework To Assess Your Strategy

You can use this powerful perspective to analyze your current strategy or develop a new one. Like every tool for business analysis, it is only useful if you actually use it. So make a plan and then execute it. Hone your strategy with the PESTEL analysis framework. 

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DISCOVER THE EXCELLENCE
ViralOctopus
Editor
... Learn more
YOU MIGHT LIKE
Porter’s Five Forces Model – How To Understand the Competitive Landscape
By ViralOctopus
Learn more
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