A PESTEL analysis is an acronym for a tool used to identify the macro (external) forces facing an organisation. The letters stand for Political, Economic, Social, Technological, Environmental and Legal. In this blog, we will look at what a PESTEL analysis is used for as well as the advantages and disadvantages of using it in a business setting.

In marketing, before any kind of strategy or tactical plan can be implemented, it is fundamental to conduct a full situational analysis. This analysis should be repeated every six months to identify any changes in the macro-environment. Organisations that successfully monitor and respond to changes in the macro-environment can differentiate from the competition and thus have a competitive advantage over others.

The framework is also used to identify potential threats and weaknesses which are used in a SWOT Analysis when identifying any strengths, weaknesses, opportunities and threats to a business.

Let’s look at each element of a PESTEL analysis.

Political Factors

These determine the extent to which government and government policy may impact on an organisation or a specific industry. This would include political policy and stability as well as trade, fiscal and taxation policies too.

Economic Factors

An economic factor has a direct impact on the economy and its performance, which in turn directly impacts on the organisation and its profitability. Factors include interest rates, employment or unemployment rates, raw material costs and foreign exchange rates.

Social Factors

The focus here is on the social environment and identifying emerging trends. This helps a marketer to further understand consumer needs and wants in a social setting. Factors include changing family demographics, education levels, cultural trends, attitude changes and changes in lifestyles.

Technological Factors

Technological factors consider the rate of technological innovation and development that could affect a market or industry. Factors could include changes in digital or mobile technology, automation, research and development. There is often a tendency to focus on developments only in digital technology, but consideration must also be given to new methods of distribution, manufacturing and logistics.

Environmental Factors

Environmental factors are those that are influenced of the surrounding environment and the impact of ecological aspects. With the rise in importance of CSR (Corporate Sustainability Responsibility) and sustainability, this element is becoming more central to how organisations need to conduct their business. Factors include climate, recycling procedures, carbon footprint, waste disposal and sustainability

Legal Factors

An organisation must understand what is legal and allowed within the territories they operate in. They also must be aware of any change in legislation and the impact this may have on business operations. Factors include employment legislation, consumer law, healthy and safety, international as well as trade regulation and restrictions.

Political factors do cross over with legal factors; however, the key difference is that political factors are led by government policy, whereas legal factors must be complied with.

How to do a PESTEL Analysis?

There are several steps involved when undertaking a PESTEL analysis. At first, it is important to get a group of people together from different areas of the business and brainstorm ideas.

Next, you will want to consult and seek the opinions of experts from outside your business. These could be your customers, distributors, suppliers or consultants who know your business well.

The third stage will involve you researching and gathering evidence for each insight in your Analysis. Then you will want to evaluate and score each of the items for ‘likelihood’; how likely it is to happen and ‘impact’; how big an impact it could have on your business.

The final stage involves refining your ideas and repeating the proves until you have a manageable number of points in each of the six categories.

Advantages and Disadvantages of a PESTEL Analysis

It is an essential analysis tool for any strategist’s toolkit but there are some benefits and challenges associated with it.

Advantages of a PESTEL Analysis:

  • It can provide an advance warning of potential threats and opportunities
  • It encourages businesses to consider the external environment in which they operate
  • The analysis can help organisations understand external trends

Disadvantages of a PESTEL Analysis:

  • Many researchers argued that simplicity of the model that it is a simple list which is not sufficient and comprehensive
  • The most significant disadvantage of the model is it is only based on an assessment of the external environment

Final Thoughts

A PESTEL analysis helps an organisation identify the external forces that could impact their market and analyse how they could directly impact their business. It’s important when undertaking such an analysis that the factors affecting the organisation are not just identified but are also assessed – for example, what impact might they have on the organisation? The outcomes can then be used to populate the opportunities and threats in a SWOT analysis.

If you are interested in how to successfully undertake a PESTEL analysis and how it can be used to undertake a strategic marketing audit, why not develop your marketing knowledge and skills further with the CIM Diploma in Professional Marketing. For more information about this qualification or the range of marketing courses from The Oxford College of Marketing, call one of our course advisors today on +44 (0)1865 515255 or email enquiries@oxfordpeg.com.