Successful businesses don’t operate in a vacuum. They understand the context of the market environment, and how those external factors can impact their strategic plans. Without this foundational context, you’re essentially leading in the dark—and leaving your business open to risk and costly surprises.
So how do you get this valuable context? Enter the PESTEL analysis.
PESTEL is an acronym that stands for
- Political factors
- Economic factors
- Social factors
- Technological factors
- Environmental factors
- Legal factors
A PESTEL analysis (or PESTLE analysis), is a way for businesses to understand the external factors that could affect the business. By assessing the different external forces that can impact your business, you can better plan your business strategies, mitigate risks, and prepare for the future.
In this introduction to PESTEL analysis, we’ll break down what a PESTEL analysis is, how and when to use it, and how it compares to another common business analysis tool—the SWOT analysis.
What is a PESTEL analysis?
A PESTEL analysis (an expanded version of the PEST analysis) is a strategic planning tool used to audit an organization’s environment and the external forces that can influence the business.
The purpose of a PESTEL analysis is to help business leaders understand what factors may impact the business and what opportunities and risks those influences might create—helping leaders make better decisions and plan effectively for the future. In other words, a PESTEL analysis gives you insight into your business environment so you can make strategic decisions based on data rather than guesswork.
The analysis evaluates six categories of influence: political, economic, social, technological, environmental, and legal factors. These factors are generally considered outside of an organization’s control (compared to internal influences that a business can change). However, by understanding these influences, businesses can more effectively position themselves to respond to change.
6 factors of the PESTEL model
To conduct a PESTEL analysis, you’ll review six main factors of influence:
Political factors
Political factors assess how legal and governmental policies, as well as the overall political climate, can impact your business operations and profitability. This includes political influences at the local, state, and national levels.
These factors might include:
- Upcoming elections and changing leadership
- Government regulation of your business industry
- Tax and labor laws
- Trade restrictions
- The stability of the government and the balance of power
- Global alliances, diplomatic affairs, and wars
- International regulations and industry standards
Questions to ask:
- What government policies help or hurt our business?
- Are there any tax rebates or funding grants we are eligible for?
- How do industry regulations compare across our regions of operations?
Economic factors
This step assesses how economic trends and factors impact your business. Since the economy affects both consumers and businesses, be sure to thoroughly examine these factors in order to gather a complete picture of the economic environment.
These factors might include:
- Inflation rates
- Interest rates
- Economic growth
- Current economic stability and forecasts
- Unemployment rate
- Fiscal policies
- Stock market trends
- Consumer behavior and confidence
Questions to ask:
- Are interest rates expected to change significantly? How will that affect business investments and financial commitments?
- Does our target market have disposable income? Can they afford our product or services?
- How might changing tax rates or minimum wage standards impact profit and ability to make payroll?
Social factors
Social factors assess the socio-cultural influences of consumers and your target demographics. Understanding the general makeup of the population and your target market, as well as the trends impacting them will give you the insight you need to position your business strategically.
These factors might include:
- Population growth
- Demographics like age, race, family size and structure
- Consumer habits and lifestyles
- Cultural trends
- Labor market trends
- Immigration rates
Questions to ask:
- What is our target demographic?
- Is there consumer confidence in our industry?
- How does the market view our competitors and similar organizations?
Technological factors
Technology and innovation can have far-reaching impacts on business, including how organizations produce and distribute goods and services, how they communicate with employees and consumers, and how they operate day-to-day.
For instance, the increase in remote work in recent years is largely tied to and enabled by technological innovation—from virtual collaboration tools to improved internet speed and access. This not only impacts the labor market and employment practices but also introduces new opportunities for work and productivity.
As you evaluate these influences, consider the following factors:
- Rate of technological change and development
- Innovation in digital and mobile technologies
- The organization’s access to technology
- The market’s access to technology
- Cybercrime trends and cybersecurity tools
- Trends in automation
- Evolution of infrastructure
- Cutting edge research and development
Questions to ask:
- Is our IT set up to handle new security threats?
- How will new technology like AI impact our business ability?
- How well is our technology protected? How easy would it be to copy our technology?
- Do we have the internet access and connectivity needed to support business and employee performance?
Environmental factors
The environment (both on a global scale and a local scale) has an intrinsic impact on everything we do—including business. From climate change and pollution to the growing focus on corporate sustainability responsibility (CSR), environmental factors play a big role in how businesses operate today.
Consider the following environmental factors:
- Climate change
- Sustainability, including recycling processes and operational efficiency
- Waste disposal
- Carbon footprint targets
- Weather and natural disasters
Questions to ask:
- How efficient are our processes and operations?
- How will climate change impact our business?
- What opportunities are there to reduce or offset carbon emissions?
- Will resource scarcity impact our business?
Legal factors
Legal factors can be closely tied to political factors and include any proposed legislation that could impact the business directly or indirectly.
These factors might include:
- Privacy laws
- Trade and commerce policies
- Labor law
- Industry regulation (or de-regulation)
- Infrastructure and public health legislation
Questions to ask:
- How might new legislation impact our business processes or ability to operate in a certain region or location?
- What changes would we need to make to our policies or operations to ensure compliance with regulations?
- What consumer protections do we need to put in place?
PESTEL analysis benefits and use cases
A PESTEL analysis provides the foundation you need to make informed, strategic decisions about your business.
Use a PESTEL analysis to:
- Evaluate your business decisions and how they may affect your organization.
- Identify threats posed by external influences before they impact your business.
- Uncover new opportunities to move your business forward.
- Make objective, informed decisions about new initiatives—especially those involved with new markets.
- Get the big picture of your business environment so you aren’t making decisions based on assumptions.
PESTEL analysis vs. SWOT analysis
A SWOT analysis evaluates your business to uncover its strengths, weaknesses, opportunities, and threats. Where a PESTEL analysis focuses on external factors that influence an organization, the SWOT analysis looks inward at the business itself.
By taking inventory of your business’s strengths and weaknesses, a SWOT analysis helps you understand what is working well, what needs improvement, and how you might overcome potential challenges.
A SWOT analysis also looks at potential opportunities and threats to the business—which can be impacted by both internal and external factors. That’s where a PESTEL analysis goes hand in hand with a SWOT analysis to take a deep dive into the external factors that can provide opportunities or increase risks for your business.
If you’re planning a new initiative or outlining your business strategy, start with a PESTEL analysis first, followed by a SWOT analysis.
The PESTEL analysis will give you the big-picture context you need to understand the environment in which your business exists and how those factors can impact it. This will lay the groundwork for your opportunities and threats assessment during the SWOT analysis.
By bringing both tools together, business leaders can get a comprehensive view of their business for better decision making and a competitive edge.
