PESTEL Analysis: What It Is and Example Applications
A guide to understanding what a PESTEL analysis is, example applications, and tips on how to use it.
What is a PESTEL analysis?
PESTEL analysis (formerly known as PEST analysis) is a framework that captures the critical factors used to assess a business operating environment.
The PESTEL acronym stands for Political, Economic, Social, Technological, Environmental, and Legal factors.
The PESTEL analysis framework is commonly used by managers in finance, consulting, operations leadership, and other strategic business teams. At the analytical level, many of these factors can be translated into quantitative inputs that can affect business forecasts and financial performance.
Political Factors
Political factors are key considerations led by government actions and policies. These government-linked factors can have a significant impact on a business, organization, or specific industry. This includes foreign trade policies, tax policies, antitrust views, and more.
A country’s political outlook and tendencies can present significant risks and opportunities for organizations looking to predict impactful decisions and voting outcomes.
Political Factors Example: A large corporation is denied its merger and acquisition proposal due to government views and interpretations on consumer protection and antitrust laws. This outcome could force the corporation's leadership to change acquisition targets or to re-evaluate developing new products organically within the company.
Political Factor Considerations:
- Corruption levels & government protests
- Tax policies & special tariffs
- Country-to-country relationships
- Trade control & import/export regulations
- Government budgets & spending priorities
Economic Factors
Economic factors evaluate the financial environment of an organization and are often quantified or modeled to calculate the risk or opportunity impacts on the business. The quantifiable nature of economic factors should be combined with other equally important qualitative factors to create a balanced view of a business environment.
These factors are typically made up of standardized and generally accepted financial metrics that measure inflation, work output, general wealth, and more.
Economic Factors Example: A company’s financial analyst uses a country’s median household family income to calculate affordable product prices that appropriately fit the market and its customers.
Economic Factor Considerations:
- Unemployment rate
- Inflation rate
- GDP activity & growth rate
- Government & municipal bond rates
- Household family income
Social Factors
Social factors refer to the impact of social norms, customs, personal demographics, and other living and leisure qualities that are relevant to the commercial activity of the organization.
Social factors often focus on large cultural shifts that can influence the purchasing decisions of a local population. This includes changes in lifestyle trends, consumer beliefs, income distribution, attitudes toward working conditions, and more.
Social Factors Example: A hotel management company has decided to spend a significant amount of its development budget to renovate and expand many of its property fitness facilities after discovering that a larger proportion of its returning guests have developed active lifestyle routines.
Social Factor Considerations:
- Spending habits & trends
- Death & life expectancy rates
- Divorce and marriage rates
- Immigration and emigration rates
- Population size & growth
Technological Factors
Technology has always played a key role in the development and productivity of businesses. In considering the fast-changing nature of modern technology, competitive businesses will often reflect on technological factors just as frequently as other factors - think of Airbnb and its impact on the leisure travel business.
Technological Factors Example: A restaurant group must consider the practical feasibility, financial costs, and learning resources that must be invested to switch onto a new electronic ordering management system that will organize both in-restaurant and online delivery orders.
Technological Factor Considerations:
- Communication infrastructure
- Automation & innovation
- Technological awareness & adaption
- Research and development activity
- Technology incentives
Environmental Factors
The growing influence of environmental awareness has translated to an increased focus on a business’ physical surroundings and how it can capitalize on new opportunities while mitigating apparent risks.
These considerations include environmental offsets, climate change impacts, carbon footprint tracking, increased incidences of weather events, and much more. Many of these factors overlap with ESG (Environmental, Social, and Governance) factors and are used in a similar analysis of CSR (Corporate Social Responsibility).
Environmental Factors Example: A multinational company is operating in a country that has just announced a mandatory requirement for all registered businesses to reach net zero emissions by 2030. This announcement will force the company to reconsider the tracking and reporting of its carbon footprint and any changes that will need to be made to its operations and supply chain.
Environmental Factor Considerations:
- General climate & weather conditions
- Air and water pollution
- Recycling standards
- Environmental policies
- Renewable energy infrastructure
Legal Factors
To operate within regulations, businesses must understand the legal premises under which they operate. Although often confused with political factors, legal factors focus on changes emerging from the regulatory environment and specific laws.
Changes in law and regulations can carry a broad scope and create significant positive and negative consequences for an organization. Some law changes may force a company to spend additional resources to adjust to new requirements while other changes may help a company enter new markets that were previously unobtainable.
Legal Factors Example: A multinational quick-service restaurant chain is evaluating a restaurant launch in a new country. The company must check the country's ingredient approval list and nutritional transparency regulations to further evaluate any needed menu adjustments.
Legal Factor Considerations:
- Health & safety laws
- Copyright & patent laws
- Consumer protection laws
- Antitrust laws
- Employment laws
When to Use PESTEL Analysis?
A PESTEL analysis is helpful when you need to organize and structure your evaluation of a business environment.
You can use the PESTEL analysis in the following scenarios.
#1 Identify Unique Market Opportunities & Risks
Business analysts and strategic managers can use the PESTEL analysis to locate underserved market opportunities and develop business strategies to mitigate and minimize apparent risks.
Example: A company is considering a new market opportunity in a developing country, but they need to look at the existing travel and utility infrastructure that is critical to the business operation. If the infrastructure is not up to par, the company will have to determine how much it is willing to invest in the local infrastructure and how that might affect the project's return on investment.
#2 Launch a New Business
Comprehensive market research and analysis are vital to evaluating the potential success of a start-up and its planned business model. The six PESTEL factors would certainly influence product fit, product demand, supply sourcing, and other important considerations needed to validate a new business operation.
Example: A beverage company may have to further analyze the social norms and legal regulation around alcoholic beverages in certain markets. Some areas may be very open to alcohol consumption, other markets may have a strong preference for a specific type of alcohol, while other markets may not be receptive to alcohol in general.
#3 Evaluate & Solve Business Problems
Businesses are almost guaranteed to run into difficult obstacles. With this in mind, businesses use the PESTEL analysis to break down pressing issues to find creative, long-term solutions. The structured approach of PESTEL will make it easier for management to pinpoint specific issues that make up a larger layer of complex problems.
Example: A food delivery company is struggling to find delivery drivers as the cost of fuel and overall car ownership continues to rapidly increase. This company may consider using the social and environmental factors of PESTEL to identify key money-saving markets with larger pools of bicycle delivery drivers.
Why is a PESTEL Analysis Useful?
PESTEL analysis helps businesses identify foreseeable threats that they can mitigate with a planned response. By analyzing threats early on, businesses can avoid costly errors that may arise from poor planning.
Tips for Doing a PESTEL Analysis
- Don’t worry about topics that fit into multiple PESTEL categories. It is very common to have overlapping coverage of linked topics (Ex. Political + Legal, Social + Environmental, etc.)
- Don’t be afraid to dive deep into one or two PESTEL factors. Certain industries will prioritize specific critical factors more than others (Ex. A solar energy company will prioritize environmental factors more than an e-commerce business).
- Don’t get stuck on identifying every single possible business influence. Use reasonable judgment to determine which factors will have the most impact on the business.
Case Example PESTEL Application
Suppose a Dutch renewable energy consultancy firm is debating if it should expand its business into Chile. To determine if this business expansion is viable, this firm can conduct a PESTEL analysis to gain better insight on the Chilean renewable energy market.
Political:
- Does the Chilean government stimulate and welcome foreign investors?
- Does Chile have a stable political climate?
- Can foreign businesses rely on orderly governmental conduct?
Answer:
The Chilean government generally welcomes foreign investment and has implemented policies to attract and support foreign businesses. This is evident in its bilateral investment and double-taxation treaties with other countries. Additionally, Chile’s constitution is written to be market-oriented and favors Foreign Direct Investment (FDI) policies.
The country’s stable political climate and well-established rule of law provide a predictable and secure environment for foreign investors. Overall, the Chilean government has a track record of orderly conduct favorable to foreign businesses.
Political factors are somewhat favorable to the foreign firm with no obvious political risks.
Economic:
- How strong is Chile's economy?
- What are the key drivers of its economy?
- Is Chile’s economy favorable for a Dutch consultancy firm?
Answer:
As of 2021, Chile ranked as the 59th largest economy in the world by nominal GDP. The key drivers of the Chilean economy are:
- Copper mining – Chile is the world’s largest producer of copper, contributing about a third of the world’s current supply.
- Agricultural exports – Chile is a leading exporter of fresh fruit and other agricultural products.
- Services sector – Includes finance, insurance, and real estate.
- Natural resources – Chile has many natural resources (metals, minerals, etc.) that contribute to its economic growth.
There has been a steady growth in the import of services in the last five years, which is a positive sign for foreign investors in the service industry. Forecasts for the next five years present a continuing trend.
General economic conditions present a positive environment for the renewable energy consulting firm.
Social:
- What is the population size of Chile?
- What does Chile's aging demographics look like?
- How much does the government invest in education?
- What would be the biggest social challenge for the Dutch consultancy firm?
Answer:
As of 2021, the population of Chile sits at approximately 19.5 million people. Chile has an aging demographic with a growing proportion of elderly people.
The Chilean government invests heavily in education, with 6% of the country’s GDP being spent on education annually.
Business culture favors activity driven by personal relationships and many tend to frown upon hard-sell and generally aggressive behavior. Foreign firms will benefit from having Spanish-speaking staff and partners who can communicate with local middle managers who typically conduct their business operations in Spanish.
Social factors suggest that the Dutch firm will have to consider possible friction in communication and culture between its current staff and the local workforce.
Technological:
- Does Chile have the base level of technology needed to support renewable energy?
- Is Chile’s technological landscape favorable for renewable energy consultancy firms?
Answer:
Chile has a growing renewable energy sector. In recent years, the Chilean government have invested in wind, solar, hydropower, and other renewable energy sources.
Additionally, Chile has experienced significant technology-linked growth with the entry of large multinational tech companies who have set up large data centers in the country. These data centers require a lot of operating electricity which in turn is growing the country’s demand for sustainable energy providers.
The technological factors in Chile present a generally favorable environment for renewable energy consultancy firms.
Environmental:
- What renewable energy initiatives does Chile have?
- Are Chile’s ecological factors favorable for the renewable energy consultancy industry?
Answer: Chile has several renewable energy initiatives, including
- Solar energy – Due to high levels of solar radiation, Chile invests in large-scale solar energy power plants.
- Wind energy – Chile is developing onshore and offshore wind farms.
- Hydro energy – Chile is investing in hydroelectric power plants.
- Geothermal energy – Chile is exploring the development of geothermal power plants.
- Bioenergy – Chile is exploring the potential of bioenergy, including biomass and biofuels.
The combination of Chile's sun, wind, elevation, temperature, and coastline makes Chile one of the best countries in the world for solar and wind energy. These environmental conditions are optimal for the renewable energy industry.
Legal:
- What international treaties is Chile a part of?
- Is Chile legally favorable for foreign businesses?
Answer:
Chile has ratified many free trade agreements (FTAs), bilateral investment treaties (BIT), and double tax treaties with other states (including a double tax treaty with the Netherlands). Furthermore, Chilean law offers many legal business forms and setups that don’t propose any significant surface level challenges to a Dutch company.
The stable and established legal framework presents low levels of risk for a Dutch renewable energy consultancy firm.
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