PESTEL Analysis & Environment Analysis
The PESTEL analysis is a tool devised by Harvard professor Francis Aguilar to conduct a thorough external analysis of the business environment of any industry for which data is available. This is an important step for eventually devising a strategy that can effectively manoeuvre the competition to maximize a firm's chances of sustainability and profitability. PESTEL is an amalgam of initials of various factors that not only affect but the entire industry as a whole- these factors are namely Political, Economic, Social, Technological, Environmental and Legal.
PESTEL analysis provides valuable insight into the operating challenges that any company in the industry appears to face, and so the company in question may face as well. An understanding of the overall competitive landscape will prevent investors and entrepreneurs from partaking in any risky ventures if the risk arises out of, say, an unstable political regime or a sudden economic recession. This may be best exemplified by the recent exit of the United Kingdom from the European Union. The sudden fallout was political and caused many investors to pull out of new ventures and halt their expansions, as the future became uncertain in the wake of this decision.
Political Factors that Impact
The political factors that may impact the profitability or chances of survival of the company are quite diverse. The political risks vary from sudden changes in existing political regimes to civil unrest to major decisions taken by the government. In cases of possible multinationals, one may also include political factors that take place/ affect not only the host country but also all countries that contain business operations, or that may engage in trade with
To properly appraise the extent of the overall systematic political risk that may be exposed to, the following factors should be considered before taking part in any investments:
- The level of political stability that the country has in recent years.
- The integrity of the politicians and their likelihood to take part in acts of corruption, as the resulting repercussions may lead to possible impeachments or resignations of high level government employees.
- The laws that the country enforces, especially with regards to business, such as contract law, as they dictate what is and is not allowed to do. Some countries, for example, prohibit alcohol or have certain conditions that must be fulfilled, while some government systems have inefficient amounts of red tape that discourage business.
- Whether or not a company’s intellectual property (IP) is protected. For example, a country that has no policies for IP protection would mean that entrepreneurs may find it too risky to invest in
- The trade barriers that the host country has would protect ; however, trade barriers that countries with potential trade partners would harm companies by preventing potential exports.
- A high level of taxation would demotivate companies like from maximizing their profits.
- The risk of military invasion by hostile countries may cause divestment from ventures.
- A low minimum wage would mean higher profits and, thus, higher chances of survival for
Economic Factors that Impact
Economic factors are all those that pertain to the economy of the country that , such as changes in the inflation rate, the foreign exchange rate, the interest rate, the gross domestic product, and the current stage of the economic cycle. These factors, and their resulting impact on aggregate demand, aggregate investment and the business climate, in general, have the potential to make a company highly profitable, or extremely likely to incur a loss. The economic factors in the PESTEL analysis are macroeconomic.
The economic factors that may be sensitive to, and in turn should consider before investing may include the following:
- The economic system that is currently operational in the sector in question- whether it is a monopoly, an oligopoly, or something similar to a perfect competition economic system.
- The rate of GDP growth in the country will affect how fast is expected to grow in the near future.
- The interest rates in the country would affect how much individuals are willing to borrow and invest. Higher rates would result in greater investments that would mean more growth for
- However efficiently the financial markets operate also impact how well can raise capital at a fair price, keeping in mind the demand and supply.
- The exchange rate of the country operates in would impact the profitability of , particularly if engages in international trade. The stability of the currency is also important- an unstable currency discourages international investors.
- A high level of unemployment in the country would mean there is a greater supply of jobs than demand, meaning people would be willing to work for a lower wage, which would lower the costs of
Social Factors that Impact
The social factors that impact are a direct reflection of the society that operates in, and encompasses culture, belief, attitudes and values that the majority of the population may hold as a community. The impact of social factors is not only important for the operational aspect of , but also on the marketing aspect of the organization. A thorough understanding of the customers, their lifestyle, level of education and beliefs in a society, or segment of society, would help design both the products and marketing messages that would lead to a venture becoming a success.
The social factors that affect and should be included in the social aspect of the PESTEL analysis include the following:
- The demographics of the population, meaning their respective ages and genders, vastly impact whether or not a certain product may be marketed to them. Makeup is mostly catered to women, so targeting a majority male population would be less population than targeting a population that is mostly female.
- The class distribution among the population is of paramount importance: would be unable to promote a premium product to the general public if the majority of the population was a lower class; rather, they would have to rely on very niche marketing.
- To some extent, the differences in educational background between the marketers and the target market may make it difficult to relate to and draw in the target market effectively. should be very careful not to lose the connection to the target market's interests and priorities.
- needs to be fully aware of what level of health standards, reactions to harassment claims and importance of environmental protection prevail in the industry as a whole, and thus are expected from any company as they are seen as the norm.
Technological Factors that Impact
Technology can rapidly dismantle the price structure and competitive landscape of an industry in a very short amount of time. It thus becomes extremely important to constantly and consistently innovate, not only for the sake of maximizing possible profits and becoming a market leader, but also to prevent obsolescence in the near future. There are multiple instances of innovative products completely redesigning the norm for an entire industry: Uber and Lyft dominate the taxi cab industry; smartphones have left other phones an unviable option for most et cetera.
The technological factors that may influence may include the following:
- The recent technological developments and breakthroughs made by competitors, as mentioned above. If encounters a new technology that is gaining popularity in the industry in question, it is important to monitor the level of popularity and how quickly it is growing and disrupting its competitors’ revenues. This would translate to the level of urgency required to adequately respond to the innovation, either by matching the technology or finding an innovative alternative.
- How easy, and thus quickly, will the technology be diffused to other firms in the industry, leading to other firms copying the technological processes/ features of
- How much an improvement of technology would improve/ transform what the product initially offers. If this improvement is drastic, then other firms in the industry suffer more heavily.
- The impact of the technology on the costs that most companies in the industry are subject to have the potential to increase or reduce the resulting profits greatly. If these profits are great in number, they may be reinvested into the research and development department, where future technological innovations would further raise the level of profits, and so on, ensuring sustainable profits over a long period of time.
Environmental Factors that Impact
Different industries hold different standards of environmental protection in their head as the norm. This norm then dictates what every company should aim for, in the least, to prevent becoming the target of pressure groups and boycotts due to a lack of environmental conscientiousness. A company in the textile industry, for example, is not expected to incur the same level of pollution and environmental degradation as an oil company. The new consumer, armed with the interest and the knowledge it carries, prefers to give its business to companies it views as more ethical, particularly about the environment in the wake of global warming.
The environmental factors that may significantly impact include:
- The current weather conditions may significantly impact the ability of to manage the transportation of both the resources and the finished product. This, in turn, would affect the delivery dates of the final product in the case of, say, an unexpected monsoon.
- Climate change would also render some products useless. For example, in the case of textiles, in countries where the winter has become very mild due to Global Warming, warm winter clothes have much less of a market.
- Those companies that produce extremely large amounts of waste may be required by law to manage their environmental habits. This may include pollution fines and quotas, which may place a financial strain on
- If should (knowingly or unknowingly) contribute to the further endangerment of an already endangered species may face not only the consequences from the law but also face a backlash from the general public who may then boycott in retaliation.
- While relying, in any percentage, on renewable energy may be expensive, it often receives support not only from the government but also from its customer base, who may be willing to pay a premium price for the products that may produce.
Legal Factors that Impact
The government institutions and frameworks in a country, while technically also political and thus subject to whichever political party holds the majority in a government body, are also legal and thus should be considered in a PESTEL analysis. Often policies on their own are not enough to efficiently protect and its workers, making appear an undesirable place of employment that may repel skilled, talented workers.
The legal factors that deserve consideration include the following:
- Intellectual property laws and other data protection laws are, as mentioned earlier, in place to protect the ideas and patents of companies who are only profiting because of that information. If there is a likelihood that the data is stolen, then will lose its competitive edge and have a high chance of failure.
- Discrimination laws are placed by the government to protect the employees and ensure that everyone in is treated fairly and given the same opportunities, regardless of gender, age, disability, ethnicity, religion or sexual orientation.
- Health and safety laws were created after witnessing the horrible conditions that employees were forced to work in during and directly after the industrial revolution. Implementing the proper regulations may be expensive, but has to engage in it, not only due to the law but also out of 's personal feeling of ethical and social responsibility to other human beings.
- Laws are also placed to ensure a certain level of quality or reasonable price for certain products to keep the customer safe and prevent them for being provided. The industries this applies to find often their costs elevated.