Introduction 

In today’s competitive market, it’s important that your business makes informed decisions about which opportunities are worth pursuing. PESTEL analysis is a useful framework for analyzing and understanding the potential impact of external factors on your business. 

It stands for Political, Economic, Socio-Cultural, Technological, Environmental, and Legal analysis. If you’re unfamiliar with PESTEL analysis or would like more information on how to conduct and interpret one for your business, read on!

 

What is PESTEL Analysis?

PESTEL analysis is an approach to analyzing how various factors affect a company’s performance, and it’s a popular way to evaluate business strategies. PESTLE analysis looks at the company’s environment, its internal factors (the management and employees), the economic environment in which it operates, and its external factors (the competition).

It is also a tool used by analysts to evaluate the potential for a project or business strategy to succeed. The acronym stands for Political, Economic, Social, Technological, Environmental, and Legal factors. 

These are the six areas that are evaluated in the PESTEL analysis. And the PESTEL analysis is used to determine the relationships that exist between these various factors and how they affect a project.

 

Factors Involved In PESTEL Analysis

The first step in conducting a PESTEL analysis is to identify the factors involved in the project. These include: 

• Political Factors: These are those that relate to government policies and regulations. 
• Economic factors include supply and demand, as well as the cost of production.
• Social Factors include demographic trends and cultural practices. 
• Technological factors include research and development activities directed towards improving processes or products.
• Environmental Factors include regulations relating to pollution control and waste disposal management practices. 
• Legal issues may also be relevant to the project’s success or failure, such as patent laws or intellectual property rights protection requirements

 

How To Conduct a PESTEL Analysis

A PESTEL analysis is most effective when it’s conducted using a structured approach. The first step is to determine the factors to include in your analysis. 

A good rule of thumb is to select factors that are:

1) external to your business, and 

2) have the potential to influence its operations or have a bearing on its strategic direction. 

 

The next step is to select a scale/grid/matrix to rate each factor’s relative impact on your business. Once you’ve selected the factors to include in your analysis and determined how to rate each factor’s relative impact, you’re ready to construct a table or chart. 

Input factors are listed on the vertical axis and your ratings are on the horizontal axis. Once the table has been constructed, you can plot your ratings accordingly. The plot can then be used to draw conclusions, make predictions, and identify opportunities/threats.

 

PESTEL Analysis Best Practices

Once you’ve conducted a PESTEL analysis, it’s important to review the results to identify any potential areas of risk. You should also be on the lookout for opportunities that could benefit your business. 

You should conduct a PESTEL analysis on a regular basis (e.g. annually, bi-annually, quarterly). Doing so will give you an idea of how external factors influence your business, and how their influence might impact it in the future. 

If you don’t have the necessary in-house resources/ expertise to conduct an analysis, you can hire an external consultant. Alternatively, you can use an online tool to construct a PESTEL analysis template.

 

PESTEL vs SWOT Analysis?

PESTEL and SWOT are two similar frameworks that are often used to analyze external factors that could impact a business. While PESTEL is a more general framework, SWOT is specifically geared toward evaluating the company’s strengths, weaknesses, opportunities, and threats. 

As such, PESTEL and SWOT can be used in conjunction with one another. For instance, you can use a PESTEL analysis to select the most significant factors, and then use the SWOT framework to analyze those factors in greater detail.

 

Advantages of a PESTEL Analysis

• A PESTEL analysis can help you better understand the external environment. 
• It will allow you to identify and anticipate trends, track industry/government initiatives, and see how your industry/sector will evolve over time. 
• A PESTEL analysis can also help you identify potential threats, challenges, and risks that could impact your business. This information can then be used to develop a strategy for overcoming challenges, mitigating risks, and capitalizing on opportunities. 
• A PESTEL analysis can also help you identify potential opportunities for growth and expansion.

 

Applications and Uses of a PESTEL Analysis

A PESTEL analysis can be used to identify factors that could impact your business in any sector/industry. It can be applied to existing challenges, challenges that you anticipate, or opportunities that you want to explore further. 

The information you gather during a PESTEL analysis can be used to inform your decision-making process. It can help you identify potential solutions or strategies for overcoming challenges, mitigating risks, and capitalizing on opportunities. 

A PESTEL analysis can help you identify external factors that could impact your organization in any of the following ways: 

 

• Political: Political factors could include changes in government, elections, geopolitical events, and more. Such factors could impact your business through changes in legislation, policies, and economic conditions.
• Economic: Economic factors include macro-economic trends, such as GDP growth, inflation, and unemployment rates. They could also include changes in the supply/demand curve, interest rates, and exchange rates. 
• Socio-Cultural: Socio-cultural factors include demographic and behavioral trends, such as changes in household formation, immigration, and retirement patterns. Socio-cultural factors can also include social/cultural events that could impact your industry, such as sporting events or natural disasters.
• Technological: Technological factors include the development of new technologies and their potential impact on your industry. They could also include the adoption of existing technologies, such as the Internet of Things, or the adoption of alternative technologies. 
• Environmental: Environmental factors include changes in government regulations, natural disasters, and availability of resources. They could also include the adoption of new technologies that could impact your industry. 
• Legal: Legal factors include changes in regulation and/or law, such as changes in privacy laws, or new laws/regulations pertaining to your industry. They could also include changes in the legal structure of your company (e.g. mergers & acquisitions, changes in shareholders, etc.). – Other factors: Other factors could include changes in demography, socio-cultural trends, technological developments, environmental factors, and legal factors.

 

Limitations and Shortcomings of a PESTEL Analysis

A PESTEL analysis is not a silver bullet. External factors do not have any direct bearing on your business. Rather, they represent opportunities/threats that can be realized/actualized through your decision-making process. 

For your analysis to be effective, you must also take into account the strengths and weaknesses of your business. You must have a clear idea of where your business excels, and where it could be improved. 

A PESTEL analysis can be time-consuming, costly, and challenging for companies to conduct. It can be difficult for businesses to accurately assess the impact of external factors, especially those that are difficult to quantify (e.g. social/cultural trends).

 

Conclusion

PESTEL analysis helps you determine if there are any problems with your project. It also helps you understand why your project is failing, so you can fix it before it costs too much money or hurts people too much.