strategic.tools

What is PESTEL Analysis and Why it is Needed?

Any company is influenced by external factors. How can these factors be determined? How to assess their impact on the business? Answers to these and many other questions can be obtained using a tool such as PESTEL analysis.

In order to understand what PESTEL analysis is, below we present the main areas of analysis:

– P (Political)

– E (Economic)

– S (Social)

– T (Technological)

– E (Environmental)

– L (Legal)

Let’s take a look at each area of ​​analysis.

Political – this area includes such factors as the political environment and stability, trade policy, tax policy, foreign policy of the country, etc. Analysis of these factors makes it possible to determine how government policy affects the industry in which the company operates, and, accordingly, to assess the influence of these factors on the company.

Economic – this area includes factors such as interest rates, inflation, economic growth, exchange rates, unemployment rate, household disposable income, etc. These factors can have both direct and indirect impact on the business. The fact is that these factors can affect the purchasing power of the population, and, accordingly, are associated with changes in the models of supply and demand in the economy.

Social – a group of these factors is focused on the social environment and includes such elements as demographic indicators, cultural values, lifestyle of the population, etc. Analysis of these factors makes it possible to determine the current and future needs of the population, and to adapt products / services to the needs of specific customers.

Technological – this area includes such factors as the rate of technological growth, the emergence of new technologies and materials, services and products, i.e. all technological changes that may have an impact on business development. With technological awareness, a company can make proactive decisions, optimize processes and costs, produce competitive products, and more.

Environmental – this area consists of environmental factors that have recently become increasingly important due to the increasing importance of corporate social responsibility and focus on long-term sustainable growth. These factors include indicators of environmental pollution and emissions under established standards, recycling procedures, waste management, etc.

Legal – a group of these factors includes regulatory and legal factors such as various standards, legislation, regulatory requirements, etc., that regulate the company’s activities or affect the company’s activities, both domestically and internationally, if the company carries out an international activity.

Now we will describe how the analysis is carried out.

The first stage of the analysis is the identification of factors and the collection of information. Further, the factors are prioritized and ranked. The factors can be ranked by the method of weighted average assessments with the involvement of internal experts, and such parameters as relevance and impact can be used as assessment indicators. Such a parameter as relevance shows the ratio of a certain factor and the company’s business, i.e. shows how important a particular factor is for the company. Such a parameter as impact shows what impact a certain factor can have on the company’s business (positive or negative impact). The final weighted score for each factor is obtained by multiplying the relevance and impact parameters.

The results obtained are interpreted as follows:

– factors with high marks require special attention

– factors with a high negative value are business-relevant factors that can have a strong negative impact

– factors with a high positive value represent good business opportunities

So, the results of PESTEL analysis allow you to get a general picture of the external environment of the company and highlight the key factors that can have both positive and negative impact on the business. Thus, PESTEL analysis is an effective tool that creates the basis for making optimal management decisions.