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.