Pestel Analysis | Pestel Analysis Guide with Samples and Graphs

1. Introduction

In this article, we will learn how business organizations analyze their external environment by applying a strategic management framework- PESTEL. The article first explains the meaning and purpose of doing PESTEL analysis, and then explains how businesses conduct PESTEL analysis by taking real-world examples.

2. What is PESTEL analysis?

PESTEL analysis is the strategic management framework, used to scan the external environmental forces that shape the overall business environment. PESTEL stands for- political, economic, social, technological, environmental and legal.

Political

Taxation policies, political environment, trade agreements, tariffs etc.

Economic

Economic indicators like- inflation, GDP, interest rate, disposable income etc.

Social

Social trends like- consumer demographics, attitude and behavior changes, cultural value shifts etc.

Technological

Technological trends like emerging technologies, improving technological infrastructure, the pace of change etc.

Environmental

Weather, pollution, global warming, resource depletion, environmental regulations etc.

Legal

Legislations impacting different business areas, like- outsourcing, data privacy, employment, import/export etc.

3. What is PESTEL analysis in business?

In the business world, the PESTEL analysis is an environment scanning tool that identifies the key political, economic, social, technological, legal and environmental factors that have a profound influence on business.

These environmental factors have varying implications for the business organizations, depending on the intensity and duration of impact.

Some environmental trends could be temporary, and have little impact on business. While, some environmental trends may have long-term implications, and require immediate attention.

4. What is the purpose of PESTEL analysis?

The purpose of PESTEL analysis is to:

  • Keep the track of external factors that impact the organization, and;

  • Analyze the drivers of change in strategic business environment, so that;

  • Timely actions could be taken to leverage the available opportunities, and minimize the external threats.

5. What does a PESTEL analysis do?

  • PESTEL analysis provides a holistic view about the contextual factors that set the overall business direction.

  • It helps business organizations in determining the market attractiveness for existing/new products.

  • It also explains how external environmental factors possibly influence the brand positioning, growth and productivity.

6. What is the PESTEL analysis used for?

PESTEL analysis is used to take well-informed and timely business decisions by understanding the changing external environment.

Following examples explain where and how managers/policymakers use PESTEL analysis while taking important decisions:

  • Risk analysis- For example, Microsoft decided to scale down operations in Russia after assessing the growing political tensions between home and host country (political factor)

  • Financial analysis- For example, Costa Coffee adjusted its financial modelling (by revisiting the revenue and profitability growth forecast) based on the rising inflation trends (economic factor)

  • Strategic planning- For example, Apple decided to reposition itself as an environment-friendly brand after assessing the consumers’ growing environment consciousness (social factor)

  • Workforce planning- Walmart started investing on the automation after assessing the skilled labor shortage issue (economic and technological factors)

  • Product development – Apparel brands in colder regions have started adding more summer and spring clothing items after assessing the change in weather conditions (environmental factor)

7. How to do PESTEL analysis?

The business organizations can conduct the PESTEL analysis by:

  • Scanning the external environment to identify major environmental factors that reside in the company’s political, economic, social, technological and legal environment.

  • Analyzing implications of each environmental factor for business.

Here we explain each component of PESTEL framework in detail:

7.1. Political factors

1. What are political factors?

Political factors refer to the government decisions and actions that directly or indirectly influence the business. They may include:

  • Taxation policies

  • Foreign trade policy

  • Political conflicts etc.

2. How to do political, environmental analysis?

  • Assess the political environment stability at the local and international level

  • Evaluate the government’s policies towards taxation, tariffs, competition and anti-trust regulations etc.

  • Analyze the impact of government policies on business (both- short and long-term)

3. Political factors- recent real-world examples

  • The Ukraine-Russia war directly affected the Microsoft. In its support to Ukraine, Microsoft spent around $126 million in scaling down its operations in Russia.

  • Indian government’s decision to cut corporate tax from 30% to 22% attracted many new manufacturing firms, and made India an investment destination.

7.2. Economic factors

1. What are economic factors?

Economic factors refer to all economic indicators that can directly and/or indirectly influence the short-term and/or long-term business success. Examples include:

  • Rising production costs due to inflation and labor price increase

  • Reducing disposable income

  • Exchange rate volatility

  • Rising interest rate

2. How to do the economic environmental analysis?

  • See the economic indicators by visiting websites sharing economic data

  • Forecast economic growth, and analyze its short and long-term impact on customer behavior

  • Evaluate the impact of current and forecasted economic growth on overall business performance

3. Economic factors- recent real world examples

  • Rising inflation and labor costs in China are affecting the profitability of Xiaomi, as its production cost has increased over time.

  • In response to the rising inflation, Costa Coffee has increased its prices twice in a single year, from £2.95 to £3.30.

7.3. Social factors

1. What are social factors?

Social factors refer to the demographic factors, consumer attitude and opinions, their buying patterns, living standards, religious and ethnic trends, and socio-cultural changes that influence the business performance. Some examples of social factors are:

  • Growing health consciousness

  • Growing culture of sharing life events over social media

  • Changing age distribution

  • Growing preferences for work-life balance

2. How to conduct social environmental analysis?

  • Spend on customer, competitor and market research to capture changing social trends.

  • Look at the changing demographics, forecast population growth, and interact with consumers to analyze the possible change in their attitude.

3. Social factors- recent real life examples

  • Considering the growing ‘vegan’ trend in society, Costa Coffee is planning to expand plant-based options in its menu to capture this opportunity.

  • As the proportion of youth is growing, it is compelling Marriott to reinvent itself to match the preferences, interests and spirit of young travelers.

7.4. Technological factors

1. What are technological factors?

Technological factors refer the manufacturing techniques, and marketing, logistics and e-commerce technologies. These factors influence how businesses produce, sell products, and interact with the stakeholders.

Some examples of technological factors that are currently shaping the business environment are:

  • Artificial intelligence, automation and robotics

  • R&D on tech innovations

  • Collaborations for technology transfer

  • Technology infrastructure etc.

  • Laws regulating cybercrimes

2. How to conduct the technological environment analysis?

  • Keep an eye on emerging disruptive technologies

  • Evaluate what competitors are doing, where they are investing and why

  • Conduct a cost-benefit analysis of emerging technologies

  • Analyze the potential long-term consequences of adopting/not adopting a particular technology

  • Evaluate the laws governing the use of a particular technology

3. Technological factors- recent real life examples

  • In 2021, the US government spent $157 billion on R&D to accelerate innovation in the tech sector. The government aims to increase the budget by 9% in the coming years.

  • Marriot plans to deploy the robots to reduce the costs, and reimagine the guest experience.

7.5. Environmental factors

1. What are environmental factors?

The environmental factors refer to the physical conditions in which the business organizations operate. It may include:

  • Weather patterns

  • Air, land and water pollution level

  • Industrial waste

  • Emissions

  • Hazardous chemicals

2. How to conduct environmental analysis?

Business organizations need to evaluate:

  • Physical environment to identify the potential threats

  • Impact of weather changes on production, sales and logistics

  • Environmental regulations related to the use of natural resources, pollution, emissions and other factors that could harm the natural environment

3. Environmental factors- real life examples

  • Unilever has set world’s most ambitious sustainability goals. In order to protect the environment, Unilever aims to cut emissions to zero level, both from its own, and from its suppliers’ operations by 2039- Bloomberg reports.

  • In 2017, Volkswagen paid $2.8 billion fine for cheating on government emission tests- as reported by Wall Street Journal.

7.6. Legal factors

1. What are legal factors?

Legal factors refer to how legislations could influence certain business areas. Some common legal factors that directly influence the business organizations are:

  • Intellectual property law

  • Health and safety law

  • Consumer protection law

  • Legislations related to employee rights

  • Legislations related to imports/exports and taxation etc.

2. How to conduct legal, environmental analysis?

  • Carefully study and understand the laws and regulations governing the primary and secondary industries in which business organizations operate.

  • International businesses have to understand and comply with the different legislations around the world to comply with the law.

  • Inability to conduct ‘legal’ analysis can result into expensive and reputation-damaging lawsuits.

3. Legal factors-recent real life examples

  • Strict data privacy laws are making the business environment tough for smartphone manufacturers, like Xiaomi and Apple. Xiaomi faces intense criticism for violating privacy law. Apple is facing a third class action privacy lawsuit in a row.

  • Anti-trust laws inhibit the monopoly. In 2020, Google faced a civil lawsuit for monopolizing the search advertising.

  • Intellectual property law protects the businesses from patent infringements. Recently, Netflix faced a patent infringement lawsuit for using the Broadcom’s music.

After exploring ‘how to do PESTEL analysis’, now let’s discover how PESTEL analysis could be applied in a real business environment.

8. PESTEL analysis examples

Here are some real world PESTEL analysis examples:

8.1. PESTEL analysis of social media industry

Let’s choose the social media industry as an example of a PESTEL analysis:

1. Political factors

  • Political conflicts (like US-China, US-Russia, and US- North Korea) result into the ban on various social networking sites.

  • Social networking sites are criticized for not controlling fake news about political parties during election campaigns.

Overall, unstable political environment imposes a major threat to social media industry.

2. Economic factors

  • Social networking sites are free for users around the globe. Therefore, the economic downturn imposes little impact on social media use. Economic inactivity rather boosts the use of social media, as people have more time to spend on social networking sites.

Following graph shows the additional time that people spent on different social networking sites during the pandemic:

Source: Statista

  • But, the economic downturn during the pandemic forced the companies to cut their marketing budgets. It directly hurt the social media ad revenue.

Following graph shows the advertising cut by different countries during the pandemic:

Source: World Economic Forum

Overall, the economic downturn, and resultant reduced spending on marketing threatens the industry by reducing its ad revenue.

3. Social factors

  • Tech savvy consumers love spending time on social media. Considering this behavioral shift, companies are now increasing the proportion of digital marketing in the overall marketing budget.

Following graph shows the increase on digital marketing spending from 2021 to 2026:

Source: Oberlo

Shift to digital marketing increases the ad revenue of industry players.

  • Growing Gen Z has a global mindset. These tech-savvy, globally connected users use multiple information channels, and spend more time on social media.

  • But, rising anti-social media sentiments impose a threat to the industry. The problematic use of social media negatively affects the mental health. Growing awareness about the dark side of social media could hurt the global social media industry.

Despite the negative sentiments, the overall social environment presents growth opportunities to the social media industry.

4. Technological factors

  • Emergence of technologies like augmented reality, AI and virtual reality are revolutionizing the social media industry.

  • Growing popularity of gaming, videos and social messaging accelerates the industry growth.

The technological development presents an opportunity to bring innovation, and target tech-savvy customers by investing on new technologies.

5. Environmental factors

  • Stringent environment protection regulations affect the social media industry, as social media players are induced to comply with the environment regulations.

  • The manufacturing of internet routers and related technologies lacks the sustainability element.

  • The industry faces criticism for harming the environment.

Overall, the environmental factors impose a threat to the industry, and compel players to integrate sustainability in their business operations.

6. Legal factors

  • The social media users are increasingly concerned about the data privacy

  • Data protection regulations are compelling social networking sites to comply with the law

  • Inability to comply with the data protection regulations increase the risk of expensive, reputation-damaging lawsuits

Overall, the strict legal environment imposes threat to the social media industry.

PESTEL summary- social media industry

Political

  • Ban on social networking sites (Threat)

  • No control over fake news during elections (Threat)

Economic

  • Economic inactivity boosts social media use (Opportunity)

  • Hurts ad revenue due to marketing budget cut (Threat)

Social

  • Sharing culture (Opportunity)

  • Globally connected users (Opportunity)

  • Rising anti-social media sentiments impose (Threat)

Technological

  • Emerging technologies (opportunity)

  • Growing popularity of videos/games/apps

Environmental

  • Environment protection regulations (threat)

Legal

  • Data privacy laws (threat)

Table 1- PESTEL analysis of social media industry

Here is another PESTEL analysis example.

8.2. PESTEL analysis for amazon

1. Political factors

  • Growing political tensions affect the Amazon. Like recently, Amazon had to close its operations in China, and faced $200,000 fine in Russia for failing to delete an account that Russian government deemed illegal- reported by Reuters.

  • Government’s growing support for e-commerce facilitates the Amazon expansion

  • The strict actions taken by the government against cybercrimes support the Amazon by reviving the customers’ trust.

Despite political tensions, the overall, political environment present opportunities to Amazon.

2. Economic factors

  • Fast E-commerce growth in developing world regions present growth opportunity to Amazon:

Source: World Economic Forum

  • People’s disposable income is rising, which means they have more money to spend on online shopping.

  • Rising labor costs are affecting the Amazon’s profitability.

Overall, the economic environment presents both- threats and opportunities to Amazon.

3. Social factors

  • Consumers’ preferences for online shopping are growing, as depicted in the following graph:

Source: Pew Research Center

  • Changing lifestyles, rising consumerism and growing internet penetration in developing countries encourage people to spend more on online shopping

Overall, social environment presents growth opportunity to the Amazon.

4. Technological factors

  • Emergence of new technologies (like AI and virtual reality) is optimizing the online shopping experience of Amazon consumers

  • Quick technology development compels Amazon to increase R&D expenditure to stay ahead of the competition

  • Technological development, and the resultant emergence of online shopping platforms has intensified the competition for Amazon.

Overall, technological environment presents both- opportunity (optimize user experience) and threat (increase R&D, growing competition) to Amazon

5. Environmental factors

  • Growing environment consciousness encourages customers to shop online, which favors Amazon.

  • Despite being an e-commerce platform, Amazon is still under pressure to reduce traffic-related emissions, and responsibly handle its logistics operations.

Environmental factors raise sustainability pressure, but Amazon is taking it as an opportunity to build a responsible brand image.

6. Legal factors

Overall, a strict legal environment imposes threat to Amazon.

PESTEL summary- Amazon

Political

  • Political tensions (threat)

  • Support for e-commerce (opportunity)

  • Actions against cybercrimes (opportunity)

Economic

  • Fast E-commerce growth (opportunity)

  • Rising disposable income (opportunity)

  • Rising labor costs (threat)

Social

  • Preferences for online shopping (opportunity)

  • Changing lifestyles (opportunity)

  • Rising consumerism (opportunity)

  • Growing internet (opportunity) penetration

Technological

  • New technologies (opportunity)

  • R&D expenditure (threat)

  • Intense competition (threat)

Environmental

  • Consumers’ environment consciousness (opportunity)

  • Sustainability pressure (threat)

Legal

  • Health and safety regulations (threat)

  • Fines imposed due to sanctions (threat)

Table 2- PESTEL analysis for Amazon

Above two examples show how companies can apply the PESTEL framework to understand the macro business environment.

For further practice, you can choose any company and apply PESTEL framework on it. You can download the free PESTEL analysis template from here.

Here, it is important to note that the PESTEL framework is not without limitations. To know about PESTEL advantages and disadvantages, read the next section.

9. Advantages and disadvantages of PESTEL analysis

Advantages

Disadvantages

  • The framework is simple, and easily understandable

  • The framework highlights the opportunities and threats that reside in companies’ external business environment

  • Lays the foundation for conducting internal environmental analysis through SWOT framework

  • Encourages the management to think strategically

  • Provides a holistic view of the external business environment.

  • Enables the management to timely take actions before external threats jeopardize the company's performance.

  • The model is static, and fails to capture the environmental dynamism.

  • The provided information quickly obsoletes with changes in the external environment.

  • The analysis is mostly based on assumptions rather than objective and factual information.

  • Continuous need to revise and update the framework.

10. Conclusion

To sum up, PESTEL is a useful strategic management tool that businesses use to analyze their external environment. Despite some limitations, the framework provides a holistic view, and helps policy makers, senior management and marketers in making more well-informed decisions.

11. Works cited

https://www.cnn.com/2022/07/26/tech/microsoft-earnings/index.html

https://m.economictimes.com/news/economy/policy/corporate-tax-cut-makes-india-an-investment-destination-to-attract-foreign-firms-to-set-up-units-fm/articleshow/71246759.cms

https://www.plymouthherald.co.uk/whats-on/food-drink/costa-coffee-angry-customers-threaten-7170240#:~:text=Costa%20Coffee%20has%20increased%20its,cost%20of%20living%20crisis%20continues.

https://www.whitehouse.gov/wp-content/uploads/2021/05/ap_14_research_fy22.pdf

https://www.bloomberg.com/news/articles/2020-06-14/unilever-to-cut-emissions-to-zero-by-2039-adopt-carbon-labeling#:~:text=Unilever%20NV%20is%20releasing%20a,of%20its%20suppliers%20by%202039.

https://www.wsj.com/articles/judge-slaps-vw-with-2-8-billion-criminal-fine-in-emissions-fraud-1492789096

https://www.statista.com/statistics/1116148/more-time-spent-social-media-platforms-users-usa-coronavirus/

https://www.weforum.org/agenda/2020/06/coronavirus-advertising-marketing-covid19-pandemic-business/

https://www.oberlo.com/statistics/digital-ad-spend

https://www.reuters.com/technology/amazon-faces-fines-up-200000-russia-over-banned-content-agencies-2022-10-04/

https://www.weforum.org/agenda/2021/09/e-commerce-fast-growth-online-sales-china-europe-america/

https://www.pewresearch.org/internet/2016/12/19/online-shopping-and-purchasing-preferences/

https://www.reuters.com/legal/litigation/amazon-faces-new-round-penalties-worker-safety-violations-2023-02-01/

https://www.forbes.com/sites/siladityaray/2020/07/09/amazon-agrees-to-pay-135000-in-settlement-for-violating-us-sanctions/

https://app.conceptboard.com/board/6qmo-3ec3-e8bk-m983-eo0b

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