Categories: PEST Analysis

The PESTEL Framework Explained: 6 Important Factors

A PESTEL analysis is a tool or framework for marketers. You can use it if you are seeking to analyze and screen the external marketing environment of your company. The strategic management tool gauges macro-environmental factors. The results make decision-making much easier.

Different macro-environmental factors can affect business strategies. So, it is vital to follow the PESTEL framework. The aim is to assess how exactly the factors influence business performance.

You can judge 6 types of environmental influences in the PESTEL framework. PESTEL is broken down into six categories referencing factors that can or will affect the topic chosen for the analysis.

They are:

  • Political
  • Economic
  • Sociocultural
  • Technological
  • Environmental
  • Legal

You should not see these factors as independent factors. They are all interdependent. For example, technological advances can affect the economy in different markets.

The 6 factors I mentioned above make up the acronym PESTEL. Each letter represents one factor. It is often called PESTLE. PEST follows the first four categories and excludes ‘environmental’ and ‘legal’ factors. PESTLE includes all categories but swaps the ‘E’ and ‘L’ (environmental and legal factors) around.

You may these factors using other tests too. PEST, STEEP, and STEEPLE are similar analyses. Some other variations are STEPJE, STEP, and LEPEST. Managers can choose any, based on the nature of the firm and the factors they wish to study. PESTEL analysis helps to identify key factors to acknowledge, understand, and potentially use to your advantage.

I have discussed some characteristics of these environmental factors below. The article will help you find which factors are more important to your company’s strategy. This might serve as a preliminary inspiration. You will have to dig deeper into the details to take accurate decisions.

What exactly do the categories in the PESTEL framework consist of? Each is unique and offers a broad understanding related to factors involving politics, economy, social traits, tech uses, environment, and legalities.

Political Factors in the PESTEL Framework

Politics plays an important role in business. This is because there is a balance between systems of control and free markets. As global economics supersedes domestic economies, companies must consider numerous opportunities and threats before expanding into new regions. It also applies to firms identifying optimal areas for production or sales. Political factors may even help determine the location of corporate headquarters.

This category can sometimes combine laws (from the legal group) since the government and their bills are closely linked.

Some of the political factors you need to watch are:

  • Tax policies
  • Stability of government
  • Entry mode regulations
  • Social policies (e.g. social welfare etc.)
  • Trade regulations (e.g. the EU & NAFTA)
  • Trade traffics
  • Labor regulations
  • Health & Safety

Economic Factors in the PESTEL Framework

Economic factors are metrics that measure the health of any economic region. The economic state will change a lot of times during the firm’s lifetime. You have to compare the current levels of inflation, unemployment, economic growth, and international trade. This way, you can carry out your strategic plan better.

Any business or product will be affected by general economic factors such as goods, services, monetary value or currency. Indicators like exchange rates, GDP, and inflation are critical to management. They can tell when it is a good time to borrow. These factors help find out how an economy might react to certain changes.

Some examples of economic factors you can take into account in your PESTLE analysis are:

  • Disposable income of buyers
  • Credit accessibility
  • Unemployment rates
  • Interest rates
  • Inflation
  • Exchange rates

Social Factors in the PESTEL Framework

Social factors assess the mentality of individuals or consumers in a given market. These are also known as demographic factors. This category focuses on buying behavior and how consumer needs can affect the value and necessity of a product or service.

The following are some social factors to focus on:

  • Population demographics: (e.g. aging population)
  • Distribution of Wealth
  • Changes in lifestyles and trends
  • Educational levels
  • Cultural differences
  • Ethnicities
  • Employment
  • Location

Technological Factors in the PESTEL Framework

This step entails recognizing the potential technologies that are available. Technological advancements can optimize internal efficiency and help a product or service from becoming technologically obsolete. The role of technology in business is increasing each year. This trend will continue because R&D drives new innovations.

Recognizing evolving technologies to optimize internal efficiency is a great asset in management. But, there are a few threats. Disruptive innovations such as Netflix affect business for DVD players. The best strategy is to adapt according to the changes. Your strategies should sidestep threats and embrace opportunities.

Technology is continuously evolving — and not just digital technology, although the use of applications, websites, and similar products is on the rise. But even technology related to manufacturing, distributing, or communicating with consumers/employees must be considered too.

This is a large challenge for management. Below is a list of common technological factors:

  • New discoveries and innovations
  • Rate of technological advances and innovations
  • Rate of technological obsolescence
  • New technological platforms (e.g. VHS and DVD)

Environmental Factors in the PESTEL Framework

Sometimes referred to as ‘ecological’ factors, these factors involve physical changes. Think less of the workplace environment — which would apply to communication amongst employees — and more about the way in which locations are affected.

Both consumers and governments penalize firms for having an adverse effect on the environment. Governments levy huge fines upon companies for polluting. Companies are also rewarded for having a positive impact on the environment. Consumers are willing to switch brands if they find a business is ignoring its environmental duties.

The impact on the environment is a rising concern. Note that the environment benefits the company too. Running water for a hydro-power plant is an example.

A few common environmental factors of the PESTEL framework are:

  • Waste disposal laws
  • Environmental protection laws
  • Energy consumption regulation
  • Popular attitude towards the environment

Legal Factors in the PESTEL Framework

This step involves learning about the laws and regulations in your region, in other words, ways in which particular laws may affect business, ideas, or concepts. It is critical for avoiding unnecessary legal costs. They’re created by the government, which is why they are sometimes weaved within the political section of PESTEL analysis. But the regulations here focus on the well-being of the consumers or society rather than benefiting the agencies who crafted the laws.

This is the last factor in the PESTEL framework. These factors overview the legal elements. Often, start-ups link these elements to the political framework. Many legal issues can affect a company that does not act responsibly. This step helps to avoid legal pitfalls. You should always remain within the confines of established regulations.

Common legal factors that companies focus on include:

  • Employment regulations
  • Competitive regulations
  • Health and safety regulations
  • Product regulations
  • Antitrust laws
  • Patent and Copyright infringements
  • Import/Export laws

Why use the PESTEL Framework?

When you go through each of the six categories and apply the research to your business, product, or concept, you will understand what is standing in the way of its success. It is common to conduct a PESTEL analysis before serious decisions. Managers might conduct it before any large projects are undertaken. Understanding all the influencing factors is the first step to addressing them.

You can’t override copyright laws, just as you can’t lower taxes or inflation rates. But you can understand what percentage of taxes will cost your business each quarter. Or what it means for the economy, as a whole, if inflation rates skyrocket.

With this understanding in place, you can use it to your advantage. Especially compared to competitors who don’t use the PESTEL framework.

Remember, there are many factors other than these which can have an effect on business success.  The evaluation is a one-to-one process. Each company should do it for themselves and find the key drivers of change. You must identify the factors which have strategic and competitive consequences.

Analyzing the total macro-environment is an extensive task. Even though, it is complex, understanding the PESTEL framework of basic influences will allow you to maintain an organized and strategic approach. These will isolate each opportunity or threat.

After writing down the PESTEL framework, company managers can create strategies. The macro-environmental factors will shape the strategies. I am sure that the thinking process will be as sensitive as current and future environmental factors.

If you are planning to align strategies for your company, I suggest you should conduct a PESTEL analysis first. It is always good to have more information about the surrounding. The PESTEL framework really helps take better decisions.

Image: designer491/Shutterstock.com

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PESTLEanalysis Contributor

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