PESTEL Analysis

There are six macro environmental factors that can affect your business. These six factors are called PESTEL.

Last week we talked about external factors affecting your business, and we focused on the Micro Environment factors. I.e. the immediate external factors affecting your business – the factors you have some control over.

In today’s article, we’ll talk about your business Macro Environment Factors I.e. factors you have almost no control over.

The PESTEL framework is useful not just for examining your company’s macro environment, but for identifying opportunities and threats open to your business.

What Does PESTEL Stand For?

P – Political factors affecting your business
E – Economic factors affecting your business
S – Social and Cultural factors affecting your business
T – Technological factors affecting your business
E – Environmental factors affecting your business
L – Legal factors affecting your business

What Does This Mean For Your Business?

Within each of these six factors are sub-factors that can affect the way your company operates and the way you market your products or services.

Each PESTEL factor is made up of individual sub-factors that can impact on the way your business operates, and the way you approach marketing.

A thorough PESTEL analysis should provide you with information that includes an extensive list of external factors your business is susceptible to, the potential impact it has on your company, its impact on marketing, and whether it poses an opportunity or a threat to you.

Related Post: External Factors Affecting Your Business: Micro Environment

In-depth Look at PESTEL Analysis

Political Factors Affecting Your Business

These factors are all to what degree a government and government policy may impact on a company, a specific industry or the economy in general.

Political factors to consider

  • Election and Post election activities including riots
  • Political and government stability
  • Instability in a foreign market
  • Political orientation
  • Taxation policies
  • Pressure groups
  • Trade Union strength (including Trade restrictions and foreign trade policy)
  • Labor law
  • Environmental law

Political factors more than often, impact companies and how they do business. For example, during the Kenya 2017 elections, there were several pre- and post-election riots, which affected not just the hospitality and tourism industry but also the construction industry.

For a foreign company hoping to expand their business to Kenya, 2017 was not the right time for such a move, because of the tense political climate, and the unstable market.

This applies not only to businesses planning on expanding to other countries but also to local businesses. Using Kenya once again as an example. They restrict professional services such as Architects. from running online or offline advertisements such as Facebook ads, Google ads, billboards, TV or radio advertisements.

It is important for local and foreign businesses planning on expanding to a new country to respond to current and expected future legislation and adjust their business strategies accordingly.

You should also keep in mind the impact these political factors have on a country’s education system, infrastructure, and health regulations. These are all factors that need to be taken into account when assessing the attractiveness of a potential market.

Economic Factors Affecting Your Business

These factors impact on the economy and its performance, which in turn directly impacts your business and its profitability.

Economic factors can be further broken down into macro-economical and micro-economical factors.

Macro-economical factors deal with the management of demand in any economy. Governments use interest rate control, taxation policy and government expenditure as the main mechanisms they use for this.

Micro-economic factors are all about the way people spend their incomes. This has a large impact on B2C companies in particular.

Economic factors to consider

  • Business cycles
  • Economic growth
  • Inflation rates
  • Employment or unemployment rates
  • Foreign Exchange rates
  • Unemployment levels
  • Raw materials cost
  • GNP trends
  • Patterns of ownership
  • Disposable income of consumers and businesses

For example, the disposable income of the middle class and lower class customers in Kenya has dropped as the survey shows that 50% of Kenyan households earn below Ksh 10,000($100 USD) Monthly. Local and foreign businesses must consider what this means for their business success.

Social And Cultural Factors Affecting Your Business

These are factors that involve the shared belief and attitudes of the population. The impact your company’s products and services brings to market have on society must be considered.

This area of your business macro environment represents the demographic characteristics, norms, customs and values of the population within which your business operates.

Any elements of the production process or any products/services that are harmful to society should be eliminated to show that your company is taking social responsibility.

Socio-Cultural factors to consider

  • Demographics
  • Cultural barriers
  • Lifestyles
  • Social issues        
  • Education levels
  • Attitudes
  • Consumerism

You cannot ignore the impact these factors have on your business as they have a direct effect on how marketers understand customers and what drives them. Understanding this PESTEL factor will help you or your marketing team to better understand your customer’s needs and wants.

In addition, it also says something about the local workforce and its willingness to work under certain conditions.

Technological Factors Affecting Your Business

These are factors relating to innovation in technology that can affect not just your business but the operations of your industry and the market. 

Technology is constantly changing and these changes can influence whether to enter certain industries, launch a product, or even the decision to outsource your production activities abroad.

Technological factors to consider

  • Developments in technology (These can be new ways of producing goods and services, new ways of distributing goods and services, or new ways of communicating with target markets)
  • Government investment in technology        
  • Product life cycles
  • Technology incentives

Other technological factors to consider is the level of innovation, automation, research and development (R&D) activity, technological change and the amount of technological awareness that a market possesses.

Knowing what is going on in your industry technology-wise, will help you prevent your company from spending a lot of money on developing a technology that would become obsolete soon because of disruptive technological changes elsewhere.

The skills and knowledge applied to the production, and the technology and materials needed for the production of products and services can also impact the smooth running of the business and must be considered.

Environmental Factors Affecting Your Business

Environmental factors relate to the influence of the surrounding environment and the impact of ecological aspects. Admittedly, these factors have only become important in the last two decades.

Nevertheless, Earth’s renewal of its natural resources such as forests, agricultural products, marine products, etc must be taken into account. There are also natural non-renewable resources such as oil, coal, minerals, etc that may also impact your business production.

Environmental factors to consider

  • Green issues
  • Climate change and Global warming
  • Sustainability        
  • Environmental protection
  • Environmental pressure groups

Environmental factors have become important because of the increasing scarcity of raw materials, pollution targets and carbon footprint targets set by governments.

These factors include ecological and environmental aspects such as weather, climate, environmental offsets and climate change which may especially affect industries such as tourism, farming, agriculture, and insurance. Growing awareness of the potential impacts of climate change is also affecting how companies operate and the products they offer.

With the rise in importance of CSR (Corporate Sustainability Responsibility), this element of PESTEL is becoming more important.

Legal Factors Affecting Your Business

Every business must understand what is legal and allowed within the territories they operate in. You also must know any change in legislation and the impact this may have on the way your business operates.

Legal factors to consider

  • Competition law
  • Employment law
  • Foreign trade regulation        
  • Environmental protection legislation
  • Consumer protection legislation

Several political factors overlap with legal factors but it is important to keep in mind that political factors are led by government policy, whereas legal factors must be complied with.

If your business operates across several countries or even several states within a country where each state has different legislation, then this becomes tricky.

In addition, you want to know of any potential changes in legislation and the impact it may have on your business in the future. I recommend having a legal adviser or attorney to help you with these factors.

What Next?

Related PostHow To Analyze Your Business Standing In the Market (SWOT)

Now that you know all the external factors affecting your business environment, both macro and micro, it’s time to consider the likelihood of them affecting your business, and how important these factors are in terms of marketing.

Do A PESTEL Analysis!

  1. For each of the PESTEL factors, select sub-factors that are relevant to your business. List the key factors from the macro environment under each of the PESTEL factors.
  2. Make notes about ways in which these key factors might impact on marketing. For example, have higher oil prices led to customers using their cars less for shopping and so an increase in shopping online?
  3. Consider the potential impact it has on your company. What is the potential severity of the impact of this factor? Assign a rating of high, medium or low as far as you can determine.
  4. Decide on the time frame, whether short, medium or long. Ask yourself “When is this factor likely to impact? Will it be within the next few months, or this year, or in the longer term?”
  5. Consider whether each factor provides an opportunity or a threat. Is the factor likely to result in a positive opportunity or a negative threat?
  6. Next, consider the implications it has on your business. Is this trend on the increase, or is it reducing in the impact it might have?
  7. Lastly, gauge its relative importance. How important is this factor to the business and to marketing?

Answering these questions, and completing the analysis will give you a better and clearer picture, not only of the impact environmental factors are having on your business but also of how this might change in the near future and which need priority attention.

After you have completed a PESTEL analysis, you should be able to use this to help you identify your company’s strengths and weaknesses for a SWOT Analysis, which will in turn help you develop business growth strategies.

In the next Article, we’ll discuss the internal factors affecting your business

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