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How to do a PESTEL analysis

Contents

What is a PESTEL analysis?

PESTEL analysis is a business strategy framework which is used to identify, categorise and analyse the key external threats and opportunities a firm faces now and into the future. 

The six letters in PESTEL represent the 6 most common categories used: P for Political, E for Economic, S for Social (or Socio-Economic), T for Technological, E for Environmental and L for Legal.

It is often termed a macro-scanning tool. This is because it involves looking a the big-picture long-term changes in the external environment. (The external environment is also sometimes called the macro-environment.)

A PESTEL analysis is a key input to most strategy development and execution processes.

Why should you do a PESTEL analysis?

The PESTEL analysis is an essential strategy analysis tool for any strategist's toolkit.

Together with other tools such as Porter's 5 Forces analysis it encourages firms to consider the external environment in which they operate. This is particularly important for more established, mature firms, which have a tendency toward bureaucracy and become inward-looking.

PESTEL analysis can also provide a more forward-looking perspective by flushing out trends. This can provide advance warning of potential threats and opportunities, giving the firm more time to react. The different possible outcomes from these trends can then also be combined and developed into scenarios.

PESTEL analysis is particularly powerful when used:

  • to identify the threats and opportunities a firm faces as part of a SWOT analysis,
  • in conjunction with a Porter's 5 Forces analysis, and
  • as input to Scenario Planning.
  • What goes in each of the 6 categories on a PESTEL analysis?

    Different factors will be more or less important to different businesses or industries. The descriptions below attempt to be as broad and comprehensive as possible so that you can choose what you think is relevant to your situation.

    Political

    The Political sector includes any government, parastatal and special interest group actions or lobbying in the form of policy, legislation, taxes and duties. It also considers the stability or instability of governments. It is important to understand the political agenda and how it might move for or against certain industries or practices.

    This might include:

    • 'positive' moves such as the subsidies offered for alternative green energy production, or
    • 'negative' moves such as increasing taxes on alcohol or tobacco.

    Depending on your firm, it may be important to consider both domestic policy as well as international policy, trade policy and pressure groups.

    Quick checklist

    • Government policy
    • Legislation
    • Political harmony/conflict and stability/instability
    • Elections and coalitions
    • Foreign trade policy, restrictions and agreements
    • Tax policy
    • Labour policy
    • Forthcoming elections and election cycles
    • Government stability
    • Lobbying activity and protests
    • Defence policy and spending
    • Terrorism, war and other military considerations
    • Environmental policy
    • Funding grants and initiatives
    • Subsidies and tariffs
    • Fiscal policy
    • Freedom of speech and the press
    • Government bureaucracy

    (See, for example, Three different regulatory responses and their impact on industry.)

    Questions to ask:

    • Is the political environment stable? If not, how might it change?
    • What government policies or political groups could be beneficial or detrimental to the firm's success?

    Economic

    The Economic sector includes the general economic environment and the effects that this might have on the business and its customers, distributors and suppliers.

    In conducting your analysis, it is important to distinguish between

    • long-term trends and structural issues, and
    • seasonal or cyclical issues.

    Quick checklist

    • Economic growth (e.g. GDP)
    • Interest rates
    • Exchange rates
    • Inflation
    • Disposable income of consumers and businesses
    • Savings and investment rates/propensity to spend
    • Taxation
    • Wages (both absolute levels and growth rates)
    • Employment/unemployment rates
    • Financial markets
    • Property prices
    • Commodity and raw materials prices
    • Availability of finance/credit
    • Supply and demand factors
    • Cycles and bubbles

    These might operate in aggregate or on a sector-specific basis.

    Internationally, you might also consider:

    • import/export conditions,
    • foreign exchange conditions, and
    • trade deficits/surpluses.

    Questions to ask:

    • How, specifically, do each of the different economic factors impact the firm's business?
    • What factors could cause an improvement or deterioration in each of the different economic factors?

    Social

    The Social sector considers changes in social preferences and norms. This is sometimes also called the Socio-Economic or Socio-Cultural sector.

    Quick checklist

    • Demographics, including
      • Population growth
      • Population age distribution
      • Birth and death rates
    • Family size and dynamics
      • Marriage, divorce and cohabitation
    • Living standards
    • Wealth distribution
    • Ethnic and religious view and norms
    • Health and health consciousness
    • Education standards
    • Career choices and attitudes
    • Work patterns and preferences, including attitudes towards
      • retirement
      • flexibility
    • Customer preferences and buying trends
    • Leisure activities and lifestyles
    • Cultural trends
    • Fashion trends and fads
    • Industrial reviews and consumer confidence
    • Organisational image
    • Attitudes towards the government, business and equality/diversity (race, gender, ability, foreigners/immigrants, minorities, etc.)
    • Crime

    Questions to ask:

    • How do our customers' circumstances and attitudes affect their buying habits?
    • How are our customers' and other stakeholders' circumstances and attitudes changing?

    Technological

    The Technological sector considers the impact of all forms of technological development and innovation.

    This could include

    • new ways of producing goods and services
    • new ways of distributing goods and services, and
    • new ways of communicating with and engaging customers, suppliers and distributors.

    The development of information technologies, including the internet and associated technologies such as mobile access is obviously a major factor here. This includes both the consumer and business-to-business applications of this. But it also includes improvements in manufacturing processes, materials, energy and transportation.

    Quick checklist

    • Research and development capability and pipelines,
    • Producing goods and services
    • Distributing goods and services
    • Communications infrastructure
    • Digital and mobile technologies
    • Automation
    • The Internet of Things (IoT)
    • Emerging technologies
    • Technological lifecycle: including maturity and obsolescence
    • Target market communication
    • Copyright or patent protection for intellectual property ("IP"), and their efficacy
    • Increased training required to use new technologies
    • Potential return on investment from new technologies
    • Technological awareness and proficiency

    Questions to ask:

    • What innovations and technological innovations are available or on the horizon?
    • How might they affect the firm?

    Environmental

    The Environmental sector has become increasingly important in recent years as stakeholders have become more conscious of humankind's impact on the natural environment.

    Consider:

    • changes and opportunities throughout the value chain which could impact the environment, including,
    • opportunities to communicate what the organisation is doing about them more effectively, and
    • Corporate Social Responsibility (CSR) where businesses contribute to societal goals either through how they operate and/or through philanthropic activities such as volunteering or charitable donations/activities.

    Quick checklist

    • The availability of raw materials
    • Pollution and greenhouse gas emissions
    • Positive business ethics and sustainability
    • Carbon footprint
    • Climate and weather
    • Natural disasters
    • Renewable energy, waste management and recycling
    • Environmental legislation
    • Geographic location and accessibility

    Questions to ask:

    • How is the physical environment changing and how will this impact the business?
    • How are attitudes towards the business's impact on the physical environment changing>

    Legal

    Finally, the Legal sector looks at changes in laws, lawsuits and regulations which affect the business. These can be general changes in the industry, or specific lawsuits or regulatory interventions or sanctions which the business is facing.

    Quick checklist

    • Health and safety regulations
    • Equal opportunities laws
    • Advertising standards rules
    • Consumer rights and protections
    • Privacy and data protection laws
    • Product labelling requirements
    • Product safety requirements
    • Safety standards
    • Employment/labour laws
    • Anti-trust and competition laws
    • Copyright, patent, intellectual laws
    • Licenses and permits

    Note that there is often a high cross-over between political and legal factors. However, while political policies may create certain advantages and disadvantages, legal factors must be complied with.

    Questions to ask:

    • What laws and regulations apply to the business across all of the markets in which it operates and how do they help or hinder the business?
    • How might these laws and regulations change?

    What are some variations of PESTEL analysis?

    There are several variations of the traditional PESTEL analysis. These include:

    • PESTLE analysis: a simple re-ordering of the last two letters/categories.
    • PESTLIED analysis: includes additional letters/categories for International and Demographic.
    • STEEPLE analysis: includes a third E for Ethical.
    • SLEPT analysis: a simple re-ordering of the letters/categories, with the Environmental category removed.
    • STEPE analysis: a simple re-ordering of the letters/categories, with the Legal category removed.
    • PEST analysis: a simplification without the last two letters/categories for Environmetal and Legal.
    • STEP analysis: PEST in a different order.
    • LONGPEST / LONGPESTEL: LOcal, National and Global factors plus PEST or PESTEL.

    In addition, the L is sometimes taken to mean Labour, rather than Legal.

    The existence of all of these variations drives home the fact that it does not really matter which words and letters you use as long as you have a systematic review of the competitive environment.

    How to do a PESTEL analysis

    There are a number of steps you can take:

    1. Brainstorm: get a cross-section of people together from different areas and functions with the business to brainstorm some initial ideas.
      • Use the suggestions and questions outlined above for each section as input to your brainstorm.
      • Brainstorm not just what is happening or could happen, but also what the positive and/or negative impact on the business could be.
    2. Consult: seek the opinions of experts from outside your business.
      • These could be customers, distributors, suppliers, consultants, academics or any other experts.
    3. Research: gather evidence for each insight in your PESTEL analysis.
      • It is important to not only look for evidence which supports the insight, but also to gather any evidence which might contradict it. Few things in a PESTEL analysis are guaranteed cut and dried.
    4. Evaluate: score each of the items on your PESTEL analysis for:
      • likelihood: if it is not already happening, how likely is it to happen.
      • impact: how big an impact could it have on the business.
      • You can let all members of a team score each insight individually, and then debate until the scores start to converge.
    5. Refine: repeat the process until you have narrowed it down to a manageable number of clearly articulated and insightful points in each of the 6 categories.

    How to do PESTEL analysis well

    PESTEL analysis, like SWOT analysis is frequently criticised. Usually, this is usually on the basis of an analysis that has been done poorly. For example, PESTEL analysis often degenerates into long lists of 'things' without context, relevance or evidence. Don't fall into that trap. If you do, most of the time you spend doing PESTEL analysis will be wasted.

    As you work through each quadrant, it is important to identify and document:

    • What is happening or could happen?
    • What is or could be the impact on your firm/division/department? (That is, be sure to answer the proverbial "So what?" question.)
    • What evidence you have to support this assessment?

    A good way to express something on a PESTEL would be along the lines of:

    X could/will/is caus(e/ing)/lead(ing) to Y (which leads to Z)
    with evidence provided in supporting paragraphs and charts. 

    Depending on how thorough you are being, you could also try to quantify the likelihood and impact of various levels of change happening, and the time frames over which they might happen.

    Finally, you should consider the environmental signals you intend to monitor to stay abreast of any changes, or the actions you might take to influence the outcomes (such as joining an industry or policy group and or lobbying for changes).

    Avoid the temptation to make decisions based on individual insights from your PESTEL analysis. Instead, base decisions on the balance of evidence across the whole of the PESTEL analysis and within the context of all of your other strategic analysis and priorities.

    Where can I get a PESTEL analysis template?

    You can easily create a simple PESTEL analysis template in common programmes like Microsoft Word, Powerpoint or Excel using a simple table structure.

    Alternative, you can build a PESTEL analysis, alone or with a team, using a tool like StratNavApp.com. StratNavApp.com is the online collaborative tool for business strategy development and execution.

    Using a purpose-built tool like StratNavApp.com has a number of advantages. For example, StratNavApp.com will:

    • Keep track of which users made which changes to your PESTEL analysis, and when.
    • Help you collect and link evidence in support of each insight on your PESTEL analysis.
    • Link insights from your PESTEL analysis to other appropriate areas of your business strategy.
    • Free accounts are available, it works on all devices and no other software (other than a browser) is required.

    Examples of PESTEL Analysis

    You can see some examples of PESTEL Analyses here.

    How often should you do a PESTEL Analysis?

    It depends on how quickly your industry and competitive environment changes. These days, the pace of change for most businesses is quick rapid. So you should probably review your PESTEL analysis at least every 6 months.

    A better approach, however, is to monitor the environment on a continual basis. Nominate specific people in your business to keep an eye on different sectors in your PESTEL analysis. Choose people who have natural if not professional interest in that subject. Ensure those people are reading the relevant journals, and talking to your suppliers, distributors, customers and other stakeholders about their allocated sector on an ongoing basis. Charge them to keep the analysis up to date and alert the rest of your team if there are any material changes in their sector.

    A tool like StratNavApp.com will make this easier to do.

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