An organization is affected by a multitude of factors and macro-environments forms the major part of it. One of the tools to understand those factors is PESTEL. It is basically an insight into how a business is affected by its surroundings in enormous ways.
PESTEL stands for Political, Economic, Social, Technological, Environmental and Legal factors. Although, over time people have diversified the structure with other elements namely ecological, ethical, demographics, etc. But the gist of the factors affecting a general business will be encompassed in PESTEL analysis.
Word by word analysis of the PESTEL analytical tool is done here for a better understanding. Any business can make effective use of it while examining the business plan’s suitability in a particularly given environment.
P = Political Factors
A country’s government plays a crucial role in any business that operates in its province. One has to take into account the impact of political stability/ instability, tax policy, trade restrictions, foreign trade policies, environmental and labour laws. All the above-mentioned factors decide your business’s long term success. Additionally, the time and resources deployed by the government to enhance the education system, health regulations and infrastructure will go a long way in helping you decide the feasibility of the Political factors for your business.
E = Economic Factors
Economies are highly affected by the extent of government intervention. So, it can be said that the economic factors are by and large the result of the market reaction to the political scenario in a country. Aspects such as exchange rate, interest rate, inflation rate, unemployment rate, disposable consumer income, etc all become a deciding factor.
How is this linked to your business in the long term? The demand and supply function operates in a certain manner and the consumer’s capacity to infuse cash is the primal stage which will decide how the pricing policy should be decided for any set of goods or services in the market.
S = Social Factors
The customers are the lifeblood of the businesses and understanding the psychology of the targeted customer group is very important while doing the feasibility analysis of the business. Aspects such as personal values, demographic characteristics and norms of the population play a decisive role. Also, the health consciousness, taste, lifestyle, cultural preferences, safety will affect the customer’s interest in your business.
The study of the local social drivers, where the business is going to operate will have a major business impact. So the business must prepare itself to meet the social call attached to it. Any additional measures required at the end of the organization should be incorporated into the business plan.
T = Technological Factors
While deciding if to enter a particular market or not, technological factors consideration is a must. How so? Well, this is one thing that keeps evolving with time. The capacity of the market to perceive the latest innovations and automation will impact your business. Your idea may or may not be linked directly to technology but the impact is inevitable. It will influence your decision to enter the market at a certain point or not.
Studying technological factors will help you keep pace with the upcoming advancements in the market and will save you time and money. It will equip you to invest your resources in the right direction.
E = Environmental Factors
With the increasing dearth of resources, environmental factors have become another deciding factor for studying business viability. Steps are taken by the government to minimize pollution and to ensure that the resources are used in the best possible way. For the same, the government takes initiative such as providing a tax benefit to the businesses following the set guidelines. Corporate social responsibility (CSR) is one such measure by the government to ensure that the businesses meet their environmental obligations and contribute back to the welfare of society.
All in all, every environment and ecology-related aspect such as climate change, tourism, agriculture have a strong influence on business practicability.
L = Legal Factors
Ethics forms the foundation of a business. No business can operate in a surrounding where it is not conscious of its moral responsibility. It includes knowledge of all the laws that apply to the business and adherence of the same is expected from the business. Laws that generally apply to a business include antitrust laws, consumer protection laws, discrimination laws, safety laws, copyright and patent laws, etc. Any prospective change in the laws should be anticipated by the business in advance, especially when it wants to operate on a global scale. One can anytime seek expertise in the matter from a legal advisor as the laws may be too technical to be understood for a person with a business mindset.
Takeaway
To sum it up, PESTEL analysis highlights all the necessary conditions that a business needs to scan before actually starting its operation. However, the severity of each factor is to consider based on the industry and location of the business. Each business may have different drivers when it comes to the ground reality and as a result, some factors might be more important than others. So the actual implementation of the PESTEL analysis should be done in light of the rest of the relative factors.
Sometimes this tool is used with other business analysis tools such as SWOT (strength, weakness, opportunities and threats) analysis to get a holistic view of how the internal and external factors affect the business. The market favorability for the business is dependent on these factors only. The business may choose a panel of experts to do the job or as it deems fit. But these parameters are universal and no compromise shall be done in this regard while evaluating the attractiveness of the prospective market.
