How PESTEL Analysis Guides Your Important Business Decisions

How PESTEL Analysis Guides Your Important Business Decisions

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Syed Aquib Ur
Syed Aquib Ur Rahman
Assistant Manager
Updated on Dec 27, 2023 13:35 IST

Discover PESTEL Analysis: Learn its significance, factors, and applications. Explore real-world examples for business strategy, addressing environmental, legal, and cultural influences, and see how this analysis can help various businesses when they conduct it and adapt to technological shifts and economic dynamics.

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One of the most important frameworks apart from Porter’s Five Forces and SWOT Analysis that guides a business strategy is PESTEL Analysis. It is used by management experts and marketing teams worldwide and helps a business respond to the changing dynamics quickly to gain a competitive advantage. 

Table of Content

  1. PESTEL analysis explained with examples
  2. Variations of PESTEL analysis
  3. Importance of PESTEL analysis
  4. How to conduct PESTEL analysis

PESTEL Analysis Explained with Examples

PESTEL stands for Political, Economic, Social, Technological, Environmental, and Legal. 

It is a framework that is used for analysing the macro environment of the organisation. 

It is a type of situational analysis that is conducted after every few months or a year, as the macro environment remains largely dynamic. 

Also, one crucial aspect that differentiates PESTEL Analysis from SWOT analysis is that it only looks at the uncontrollable external factors/situations. SWOT looks into internal factors such as weakness and threats. 

Let’s explore all the external factors one by one. 

Political Factors

These factors determine the government’s policies and regulations that allow the organisation to operate in the city, state, or nation. 

In India’s context, GST, foreign trade policies, labour laws, etc, are political factors that businesses need to consider existing in the market. 

Economic Factors

These include all aspects of the nation’s or state’s economy – macroeconomic and microeconomic. Macroeconomic factors are inflation, GDP, employment and unemployment, costs of labour, etc. On the other hand, microeconomic factors include disposable income, spending potential of customers, etc. 

B2C organisations affected by microeconomic factors more than B2B companies. For example, the higher the spending potential of the customers, the more products the B2C companies can develop to meet more requirements. Learn more about the difference between B2B and B2C as well. 

Social Factors

These are aspects that are largely seen in the current society where the organisation is based. Factors such as demographics, religious beliefs, buying patterns of a specific target audience, etc., are social in nature. 

For example, exploring social factors such as demographics can help in customer segmentation. Based on segmenting customers, marketing departments can strategise a plan and leverage the marketing mix

Technological Factors

Technology drives innovation, and it is constantly changing. More than any of the factors mentioned above, technology evolves much faster. 

How do you think it affects marketing and production?

Technology leads to new ways of developing products, distributing them and creating newer means of communication. 

One of the key examples of this is digital marketing and its growing importance for businesses of all sizes today. So much so, with artificial intelligence becoming a recent trend, marketers are starting to leverage AI marketing in their marketing strategies. 

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Environmental Factors

These factors include climate change, pollution, etc. Today, they are changing consumers’ perceptions of brands that do not give importance to such challenges. Even the sourcing of raw materials, whether ethical or unethical, play a big role in the consumer’s decision-making process. 

Related: Green marketing

Legal Factors

These factors equate to consumer rights, protection of intellectual property, licences, etc. 

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Variations of PESTLE Analysis

Some of the common variations of PESTEL analysis are mentioned below. 

Acronym  Abbreviation
PESTLIED Political, Economic, Socio-Cultural, Technological, Legal, International, Environmental, Demographic.
STEEPLE Social/Demographic, Technological, Economic, Environmental, Political, Legal, and Ethical
SLEPT Socio-Cultural, Legal, Economic, Political, Technological

Also read about Business Ethics

Importance of PESTEL Analysis

A key benefit of PESTEL analysis is that it offers the bigger picture of some of the most influential factors in developing a product. It ensures that the organisation is not overlooking the laws of the nation or forgetting about the environment. 

Another advantage is that it helps you understand the risks that may arise because of the changing factors in the business environment. 

PESTEL analysis can be used for a variety of purposes. Marketing, product development, change management, business strategy planning, etc. are some of them. 

Ford's PESTEL Analysis as an Example

This example is sourced from Ford's investor website that covers its commitment to sustainability, societal impact, and governance practices. Along with that, this study refers to sources, including Panmore, Crowjack, and some quasi-academic sources from Scribd. 

Ford's PESTEL analysis can be broken down in the following way. 

Political (Trade, government regulations, and stability)

  • Trade policies: Fluctuations in trade agreements and tariffs can affect the cost of materials and finished vehicles, impacting Ford's competitiveness.
  • Government regulations: Stringent fuel emission standards and safety regulations can increase production costs and require technological innovation.
  • Political stability: Instability in key markets can disrupt supply chains and consumer confidence.

Economic (Growth, fuel prices, and interest rates)

  • Global economic growth: A strong global economy leads to increased consumer spending and demand for vehicles, and that benefits Ford.
  • Interest rates: Fluctuations in interest rates can affect the affordability of car loans and impact consumer demand.
  • Fuel prices: Rising fuel prices can make consumers less willing to purchase fuel-inefficient vehicles. This heavily impacts Ford's sales of trucks and SUVs.

Social (Preferences, alternatives available, and sharing economy) 

  • Consumer preferences: Changing consumer preferences towards fuel efficiency, safety, and technology can influence Ford's product development and marketing strategies. Additionally, refer to product development process that ties a company's marketing efforts. 
  • Urbanisation: The increasing concentration of people in cities creates demand for smaller, fuel-efficient vehicles and alternative transportation options.
  • Sharing economy: The rise of car-sharing and ride-hailing services can challenge traditional car ownership models, which also can negatively impact Ford's sales.

Technological (EVs and connectivity)

  • Electric vehicles: The rapid development of electric vehicle (EV) technology is forcing traditional carmakers like Ford to invest heavily in EV development to remain competitive.
  • Autonomous driving: The potential for autonomous driving technology could disrupt the entire transportation industry, requiring Ford to adapt its business model. For further reference, head over to our page on types of business models
  • Connectivity and digitalisation: Advancements in connectivity and digitalisation are creating new opportunities for Ford to offer innovative features and services in its vehicles. This trend is also shaping the automotive digital marketing strategy, at a global level.  

Environmental (Climate change and scarcity of resources)

  • Climate change: Concerns about climate change and air pollution are driving demand for EVs and more fuel-efficient vehicles, putting pressure on Ford to reduce its carbon footprint.
  • Resource scarcity: The depletion of natural resources like lithium and cobalt, which are essential for EV batteries, could pose challenges for Ford's EV production.
  • Environmental regulations: Stricter environmental regulations can increase production costs and require Ford to invest in cleaner technologies.

Legal (Liability and Labour laws)

  • Product liability laws: Product liability lawsuits can be costly for carmakers like Ford, requiring them to prioritize safety and quality control.
  • Labour laws: Changes in labour laws can impact Ford's production costs and employee relations.
  • Intellectual property laws: Protecting intellectual property in the automotive industry is crucial for Ford to maintain its competitive edge.

How to Conduct a PESTEL Analysis

Here is how you can do a PESTEL analysis with eight steps. 

  1. Determining the research scope with possible and future situations that can affect the business in the specific industry
  2. Finding out more than one individual to gather different perspectives on the external factors, preferably a group or team
  3. Determining the right sources of information about policies and changes
  4. Creating a template of sorts to highlight all the factors and how each affects the organisation in which ways
  5. Listing the challenges at the beginning after analysis of the information
  6. Focusing on the solutions for each challenge as a business
  7. Discussing the observations with top-level management
  8. Taking the final decisions after discussions

Parting Thoughts

So there you go! This is PESTEL analysis in a nutshell. Hopefully, you can conduct one yourself and make the right decisions that benefit your business and society at large.

FAQs

Why is it important to consider cultural factors within the Social aspect of PESTEL analysis?

Cultural factors play a significant role in shaping consumer behaviour and preferences. Understanding cultural nuances helps businesses tailor their products or services to specific demographics, enabling effective market segmentation and targeted marketing strategies. Moreover, cultural shifts can impact buying patterns, influencing demand and consumption trends, which are crucial for businesses to remain competitive and relevant within a diverse market landscape.

How does PESTEL analysis adapt to or incorporate rapid technological advancements?

PESTEL analysis continuously evolves to encompass the ever-changing technological landscape. The 'Technological' aspect within PESTEL analysis reflects the influence of technological innovations on industries and markets. To adapt, businesses need to regularly update their analysis frameworks to include emerging technologies, assess their impact on operations, production, marketing, and overall business strategies. This ensures businesses remain agile in leveraging technological advancements for their advantage.

Can you provide examples of how Legal factors influence various industries within a PESTEL analysis?

Legal factors encompass various aspects, including regulatory changes, consumer rights, intellectual property laws, and more. In the pharmaceutical industry, stringent regulations govern drug approvals and patents, affecting innovation and market access. Similarly, in the automotive sector, stringent emissions standards impact manufacturing processes and product development. Understanding and adapting to these legal factors are crucial for companies to navigate and comply with regulations while sustaining their competitiveness.

How does a PESTEL analysis address environmental sustainability concerns within businesses?

PESTEL analysis addresses environmental concerns through the 'Environmental' aspect, focusing on how environmental factors influence business operations. Businesses increasingly consider sustainability practices to mitigate environmental impacts, such as reducing carbon footprints, adopting eco-friendly production methods, and sourcing ethically. PESTEL analysis helps in identifying environmental trends, enabling companies to proactively adjust strategies to align with sustainability goals, meet consumer demands, and maintain a positive brand image.

What role does the economic aspect of PESTEL analysis play in international business expansions?

The economic aspect of PESTEL analysis evaluates macro and microeconomic factors impacting businesses. For international expansions, economic factors like currency exchange rates, inflation, GDP growth, and trade policies significantly influence market entry strategies, pricing decisions, and operational feasibility. Understanding these economic dynamics helps businesses assess the viability of entering new markets, forecast potential risks, and tailor strategies to capitalize on economic opportunities in different regions.

About the Author
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Syed Aquib Ur Rahman
Assistant Manager

Aquib is a seasoned wordsmith, having penned countless blogs for Indian and international brands. These days, he's all about digital marketing and core management subjects - not to mention his unwavering commitment ... Read Full Bio