PESTEL analysis is a framework that helps companies review internal and external environmental factors, including political, economic, social, technological, environmental, and legislative areas. Each section of the analysis requires answering basic questions to determine how these factors impact the business positively or negatively. Political, economic, social, technological, environmental, and legislative factors are all external to the company’s operations, and companies need to be aware of them to ensure they operate within a set of boundaries consistent with current economic factors.
A PESTEL analysis is an acronym for internal and external environmental factors which include issues related to (P)olitic, (E)economic, (S)social, (T)technical, (E)environmental, and (L)legislative areas. Companies typically create a framework for their organizational structure that allows them to review the factors of each group and how they impact the business, both positively and negatively. In each section of the PESTEL analysis, owners and managers can answer some basic questions or follow some guidelines that help them complete the entire analysis.
The political factors in a PESTEL analysis are typically external to the company’s operations, such as government regulations or individual politicians who may control the functioning of a company. A review of policy factors can help a company determine how revenue increases will affect its tax liability, barriers to entering new markets based on local or national laws, and penalties for violations of laws and regulations politicians.
Economic trends are also an external factor in the PESTEL analysis. Consumer income and spending rates, available credit, current levels of the money supply, inflation, and interest rates paid or borrowed are economic factors that a business usually cannot influence. Companies need to be aware of these factors, however, to ensure they operate within a set of boundaries consistent with current economic factors. For example, taking on too much debt when interest rates may adjust in the future can negatively impact a business.
The social aspects of this analysis concern demographics and cultural changes in a local economy. As a nation’s population ages, the demand for goods and services will change. Consumers may need fewer electronics but more health care-related items. Furthermore, an increase in population from immigration or higher birth rates will also signal a change in preferences for economic goods.
Technological changes in PESTEL analysis are an increasingly important factor in this analysis. As enterprise technology changes frequently, companies need to be aware of these changes in order to take advantage of them. Failing to keep up with competitors who are using technology to create a competitive advantage can put a company behind the economy in terms of production or cost-cutting activities.
Environmental factors concern the natural environment that surrounds a company. This includes natural resources such as wildlife, timber, minerals, waterways and similar items. In addition to the company’s direct impact on the environment, companies will likely need to consider public opinion. The public may have a negative opinion of a company’s business practices, which in turn will dissuade consumers from patronizing the company.
Legislative factors in the PESTEL analysis typically refer to future changes in laws and regulations. Most governments tend to add laws or regulations to various businesses. Unfavorable legislation can result in fewer profitable transactions or a more difficult operating environment. Companies working in multiple international markets will need to focus on the legislative factors of each country.
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