PESTEL analysis is probably one of the most well-known, top-level, battle-hardened and frequently deployed business planning tools – a great tool!
PESTEL being an acronym for Political, Economic, Socio-cultural, Technological, Environmental and Legislation. 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 to you and me is that it should be used as part of your strategic, business planning and objective and target setting processes.
What it achieves
PESTEL provides a framework for looking at factors completely outside of your company’s control. These are things you can do absolutely nothing to influence, you’ve just got to react to them once they occur. These are the external factors that frequently have an impact on what the company does and how it behaves. Just think of the recent budget. The point is, you’ve gotta live with the results, there is absolutely no chance of you changing anything. Used properly, PESTEL helps you and your people peer into, and prepare for, the future.
It’s really about using the tool as a framework to take a cold hard look at the outside world, to see what might come and bite you in the backside, or more positively, create an opportunity that you might be able to exploit.
The results from your analysis should highlight external opportunities and threats. These then feed into the ‘OT’ of a SWOT analysis.
Taking each part of the PESTEL framework in turn:
- Political factors might include political stability (Just think Liz Truss & Boris Johnson… need I say more?!) tax policy, trade restrictions and tariffs. Additionally, governments, and the political decisions they make, can have a massive impact on a variety of sectors, not least defence, health, education and infrastructure, all of which can affect the plans made by companies operating in those arenas.
- Economic factors include economic growth rates, interest rates, 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 rates, age distribution and career attitudes – just think of the difference between the focus and outlook of the different generations; Boomers, Generation X, Millennials and Generation Z. These social trends can affect the demand for a company’s products and how that company conducts itself. 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; the rise of AI, R&D, automation, 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 also presents critical difficulties with online security. Our IT security company are forever mouthing the mantra “it’s not if, it’s when (you get hacked – very comforting)”. Many technological effects may also change the barriers to entry for new start-up companies. Shifts in technology often dictate costs, quality and lead to innovation. I love music, but even in my lifetime we’ve had 45s, LP’s, CD’s, MP3’s and now streaming (contrary to popular opinion, I’m not quite old enough to remember 78s – Lord knows the amount of times I’ve purchased Band on the Run, Rumours and Bat out of Hell on different formats).
- Legal factors include health and safety and environmental laws, HR laws, consumer and anti-trust laws. You might even include the rules that you have to live by with regard to your affiliations with trade associations and/or other regulatory bodies. All of which can affect how a company operates, its costs, and often the demand for products.
- Environmental factors (which often crossover with the legal issues above) but might also include; the rise of Net Zero, climate change, ecological issues like weather, flora and fauna. These can have immediate effects on sectors like tourism, farming, insurance as well as influence the demand for certain products and services. Additionally, the growing awareness of climate change and its impact is changing how companies operate and the products they offer. This is creating new markets and simultaneously diminishing or destroying others. (check out our recent blog on Net Zero for more info, if required).
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, based 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 – 10% or more) they used to make a significant sum from the cash pile that was 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. (And preferably not scolding your friendly Statius consultant in front of the top team!)
The relative importance of the factors will vary in priority for each company, its 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, companies that produce a wide range of products may find it more useful to apply the PESTEL framework to each product or division within the company. One client that imports a range of products from a variety of, sometimes less than stable, African and South American countries, has undertaken a PESTEL analysis for each of the countries it conducts business with.
Related tools and ideas
Tools that PESTEL can be used in conjunction with include:
- Porter analysis – The Five Forces model
- SWOT analysis – Strengths, weaknesses, opportunities and threats
Recommended references
- None that we can think of – we ought to develop something!
