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A PESTEL analysis is an acronym for internal and external environmental factors that include issues from the (P)olitical, (E)conomic, (S)ocial, (T)echnical, (E)nvironment and (L)egislative areas of business. Companies typically create a framework for their organizational structure that allows them to review factors from each group and how they impact the business, whether positively or negatively. Under each section of the PESTEL analysis, owners and managers can answer a few basic questions or follow some guidelines that help them complete the entire analysis.
Political factors in a PESTEL analysis are typically external to the company’s operations, such as government regulations or individual politicians who can control how a company operates. A review of political factors can help a company determine how revenue increases will affect its tax liability, the barriers to entry in new markets based on local or national laws and the penalties for acting in violation of political laws and regulations.
Economic trends are also an external factor in the PESTEL analysis. Consumer income and spending rates, available credit, current money supply levels, inflation and interest rates paid or borrowed funds are economic factors a company cannot usually influence. Companies must 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 higher in the future can negatively impact a company.
Social aspects of this analysis relate to the demographics and cultural changes in a local economy. As a nation’s population ages, the demand for goods and services will shift. Consumers may need fewer electronics but more health care-related items. Additionally, an increase in population from immigration or higher birth rates will also signal a change in preferences for economic goods.
Technological changes in the PESTEL analysis is a more increasingly important factor in this analysis. As business technology changes frequently, companies must remain aware of these changes in order to take advantage of them. Failing to stay on pace with competitors who use technology to create a competitive advantage can put a company behind in the economy in terms of production output or cost reduction activities.
Environmental factors relate to the natural environment surrounding a company. This includes natural resources like wildlife, timber, minerals, waterways and similar items. In addition to the company’s direct impact on the environment, companies will most likely have to consider public opinion. The public can have a negative opinion on a company’s business practices, which in turn will dissuade consumers from patronizing the business.
Legislative factors in PESTEL analysis typically relate to future changes in laws and regulations. Most governments tend to add laws or regulations to various business activities. Unfavorable legislation can result in fewer profitable transactions or a more difficult operating environment. Companies working in multiple international markets will have to focus on the legislative factors from each country.