Tool’s to make you THINK differently about your business.
PESTEL analysis is probably one of the most well-known top-level battle-hardened business planning tools where PESTEL is an acronym for Political, Economic, Socio-cultural, Technological, Environmental and Legislative. When we first came across the tool, some 30 years ago, it was simply PEST analysis: the EL has been added along the way to make it more all-encompassing.
When to use it
PESTEL is usually used as part of what economists would call a “macroeconomic analysis”; what that really means is when you’re thinking about future plans - business planning and strategy to you and me. It is one of the most well-known top-level battle-hardened business planning tools.
What it achieves
It provides a framework for looking at factors outside of the company’s control. These external factors frequently have an impact on what the company does and how it behaves. Used properly, PESTEL helps your people prepare for the future.
Like the Porter Analysis (blog to follow), the results of the PESTEL analysis highlight external opportunities and threats. These then become the ‘OT’ of a SWOT analysis.
Taking each part of the PESTEL framework in turn:
- Political factors might include tax policy, trade restrictions, tariffs and political stability. Additionally, Governments can have a high impact on the health, education and infrastructure all of which can affect companies operating in those sectors.
- Economic factors include economic growth rates, interest, exchange and inflation rates. These factors have considerable influence on how businesses operate and make decisions. For example, interest rates can affect a business’s growth rate as well as its ability to service debt. Exchange rates can affect the costs of exporting goods as well as the supply and cost of imported goods and materials.
- Socio-cultural factors include the cultural aspects and health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors can affect the demand for a company's products and how that company operates. For example, an ageing population may imply a smaller and less-willing workforce. This will impact labour availability and costs. As a result, companies may react by adopting different strategies, for instance, by actively engaging and making positions more attractive to older people.
- Technological factors include R&D, automation, ‘the rise of the robots”, internet connectivity, IT security and so on. Technological advances like electric and driverless cars will no doubt have a massive effect on society and while the rise in internet connectivity provides many businesses with a global market it can also present difficulties with online security. Many technological effects may change the barriers to entry for new start-up companies. Shifts in technology are likely to dictate costs, quality and lead to innovation.
- Legal factors include health and safety and environmental laws, HR laws, consumer and anti-trust laws can all affect how a company operates, its costs, and often the demand for products.
- Environmental factors include ecological issues such as weather, climate and climate change. These can have immediate effects on sectors like tourism, farming, insurance as well as influence the demand for certain products and services. Additionally, growing awareness of climate change and its impact is affecting how companies operate and the products they offer. This is creating new markets and simultaneously diminishing or destroying others.
A Word of Warning
Using these tools is not about slavish adherence to the genesis of the tool, nor about ticking the right box, both of which can be seen from a number of different variants of the original PEST framework, for instance:
- SLEPT, which adds just legal factors.
- STEPE, which encompasses ecological factors
- STEEPLE and STEEPLED, both include ethics and demographic factors.
- SPELIT, includes intercultural factors.
- STEER considers sociocultural, technological, economic, ecological and regulatory factors but omits political factors.
So, we’d definitely be of the opinion that the tool can be used and abused in any way you like. In fact, one long-standing client company created the moniker PESTEL-G, with G for geography. This company, in Battle, East Sussex noted that two thirds of is immediate 100 miles radius was in fact the sea! There are very few clients for steel fabrication …or much else, to be found in the middle of the English Channel!
How to use the tool
Brainstorm with the top team (and any significant others) all of the political, economic, socio-cultural, technological environmental and legislative issues that affect your business and then assess what the impact is or could be.
It’s not about putting the right thing in the right box. It’s about using the tool to drive your thinking. I remember one occasion working with the top team of a £50m turnover, cash rich company, asking where they thought interest rates were going and knowing that any changes were unlikely to have a big effect. One of the more combative directors pounced on me, putting me right by exclaiming that in the past (when interest rates were high) they used to make a significant sum from the cash pile that used to feed into the company bonus pool…and without “decent interest rates” this fill-up was sorely missed…he blamed the politicians … so it went in the political column…but it could have easily gone in the economic box. The point is, it’s not about the right boxes it’s about triggering thinking.
The relative importance of the factors will vary in priority for each company, it’s niche, its customers and the goods and services delivered. Retail organisations are often more affected by the social factors, while a defence contractor may be more affected by political factors. Factors that are more likely to change in the future or are more relevant to a given company will carry greater importance. For example, a company that has large borrowings will need to focus on the economic factors - especially interest rates.
Finally, conglomerate companies that produce a wide range of products may find it more useful to apply the PESTEL framework to each division within the company. One client that imported a range of similar products from a variety of African and South American countries did a PESTEL analysis for each country it did business with.
Tools that PESTEL can be used in conjunction with include:
- Porter Analysis – The Five forces model
- SWOT analysis - Strengths, Weaknesses, Opportunities and Threats
- Critical Success Factors