Business Environment

PESTEL Analysis

We know that a business firm in an economy is affected by both micro and macro factors in its external environment. In addition, these factors are not in control of the firm themselves. However, PESTEL analysis is a tool that helps in analysing these factors. Furthermore, this is what firms use to understand and monitor the macro-environmental factors. So let us see how this is done.

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PESTEL Analysis Definition

PESTLE or PESTEL Analysis is a tool which helps companies have a ten thousand foot view of the macro environment it is operating in. PESTEL is an acronym and the letters stand for Political, Economic, Social, Technological, Environmental and Legal. Also, this framework helps to keep track of all the changes happening in the environment.

Moreover, this framework has undergone many changes and also has many variations. Previously it was only PEST analysis. Then the legal environment was included later. At the present time, a debate is going on about including Ethics in the framework.

Furthermore, PESTLE is a more comprehensive and inclusive framework than its previous counterparts. As it is relatively easy to understand and implement. Also, it aids management in the decision-making process and urges proactive actions. Thus, the firm is not only reacting to the changes in the environment but also is converting opportunities into results.

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(Source: Business-to-you)

Factors of PESTEL Analysis

1] Political

These include factors that affect the extent and the impact of the government on the economy of a country. For example, the laws, taxation policies, monetary policies, etc are all a part of the political environment. Additionally, some political factors to consider are as follows:

  • The political stability of the country
  • Political ideologies of the government
  • Taxation policies
  • Regulatory practices and governing bodies
  • Term of the government and any expected changes in the future
  • Influential political leaders and their ideas

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2] Economic

Economic factors have a huge effect on the firm and its success. Some of the factors to consider when monitoring the economic environment are as follows:

  • Economic growth
  • The current phase of the Trade Cycle (Expansion, Depression, etc)
  • Inflation rates
  • Unemployment Rates
  • Current Interest Rates prevailing in the economy
  • Important factors of the specific industry
  • Consumer Spending potential

3] Social

Everything that goes on in a society greatly affects the organisation. Therefore, it is important to analyse social factors while studying the social environment. For example,

  • Demographics of the market
  • Consumer Buying Patterns
  • Religious and Cultural factors
  • State and influence of the media
  • Lifestyle trends in place at the time

4] Technological

The changes in the technological environment can be either an opportunity or a threat to the firm. Hence, some technological factors to look for are:

  • New production technology
  • Manufacturing technology (increase in output, lowering of production cost, etc.)
  • New innovations
  • Intellectual Property, Patents, etc.
  • Maturity of technology

5] Legal

This refers to the laws made by the government that the company has to follow in order to continue its operations. For example,

  • Business Laws
  • Environment Laws and guides
  • Health and safety guidelines
  • International Trade Agreements and Treaties
  • Regional/Local Laws and Circulars

6] Environmental

These factors affect industries and their ability to function smoothly. For example, such factors are:

  • Environmental Issues
  • Energy/Power Consumption
  • Insurance Policies
  • Safe Waste Disposal
  • Dealing with hazardous material

Solved Question on PESTEL Analysis

Q: Does the culture of a country have an effect on the PESTEL analysis?

Ans: Yes, a culture of the market is an important factor of the macro environment. Thus, when scrutinizing the social environment of an economy during PESTEL analysis, it is important to look into the religious sentiments and the prevailing culture of a market.

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