pestel-analysis

What Is A PESTEL Analysis And Why It Matters

The PESTEL analysis is a framework that can help marketers assess whether macro-economic factors are affecting an organization. This is a critical step that helps organizations identify potential threats and weaknesses that can be used in other frameworks such as SWOT or to gain a broader and better understanding of the overall marketing environment.

Why does a PESTEL analysis matter?

A PESTEL analysis is one of the tools and frameworks that marketers can use to assess the impact of external market forces on the organization’s growth and profitability over time.

Indeed, the PESTEL analysis becomes a companion framework to other tools, and frameworks, like the SWOT analysis as it allows to gain a broader perspective on the overall market and industry where the organization operates.

In too many cases marketers fall into the trap of analyzing an organization as it operated in a vacuum. Understanding macro trends, and how those are and will affect the organization is a crucial skill for marketers to gain perspective on the company’s overall marketing strategy.

And to perform a better analysis of the current and future scenario. This also allows an organization to formulate a better business strategy. This also helps organizations adapt their business models based on the changing macroeconomic landscape.

Related: Business Strategy: Definition, Examples, And Case Studies

What are the critical components of a PESTEL analysis?

The PESTEL analysis comprises six macro-environmental factors that span from political to legal:

  • Political: how much is the government involved in the economy or in that particular market? And how much a government policy can influence that?
  • Economic: how many economic factors, such as interest rates, employment, foreign exchanged, unemployment and other factors will affect the company’s profitability?
  • Social: how much emerging trends or demographics, such as population growth, age distribution, and so on affect the organization? 
  • Technological:  how much technological innovation, development, and disruption might affect a market or the industry in which the organization operates? 
  • Environmental: how much the surrounding environment and the impact of a business on ecological aspects are influencing the organization’s policies as well?
  • Legal: how will change in legislation affect the organization’s profitability, sustainability, and growth?
  • Read next: SWOT Analysis

Case Study: Amazon PESTEL Analysis

amazon-pestel-analysis

Amazon PESTEL Analysis Introduction

Let’s now evaluate the global retail giant Amazon in the context of a PESTEL Analysis by looking at the following external factors:

  • P – Political.
  • E – Economic.
  • S – Social.
  • T – Technological.
  • E – Environmental.
  • L – Legal.

Amazon PESTEL Analysis

Let’s now perform a PESTEL Analysis on Amazon, addressing each factor in more detail.

Political

Political factors encompass the level of governmental intervention in an economy. This may include policy decisions relating to foreign trade and tax or laws relating to labor or the environment. 

As a global retailer, Amazon is not immune to political factors. Politically stable western countries with similar laws to the USA offer Amazon expansion opportunities. However, the company has faced stiff competition in China where the government tends to back Chinese e-commerce companies.

Economic

Economic factors are those that directly impact on the performance of the economy. In turn, these factors influence the profitability of an organization. Economic factors may include unemployment rates, raw material costs, and foreign exchange rates.

In the wake of the coronavirus pandemic, Amazon has benefitted tremendously from economic stimulus measures that have increased consumer discretionary income. However, this income has also allowed competitors to enter the market.

Social

Social factors describe the general beliefs and attitudes of a population, most often related to cultural and demographical trends. These factors ultimately determine and then drive consumer behavior. 

With the shift toward convenient, fast, and contactless delivery, Amazon has again taken advantage. Savvy and computer literate millennial consumers are also driving huge growth in mobile shopping as the availability of 5G networks increases.

Technological

This describes the rate of technological innovation and development and how it might influence a given market. Digital technology is often the focus, but non-tech companies also look for advances in distribution, manufacturing, and logistics.

Amazon is highly innovative within the retail sector. The company has invested heavily in drones to deliver parcels. It has also created an unattended locker system called Amazon Hub so that consumers can receive parcels when it is convenient for them to do so.

Environmental

In the 21st century, environmental factors are becoming increasingly prevalent. They encompass such things as carbon footprint, waste disposal, and sustainable access to raw materials. Climate change has also meant that businesses must be more adaptable to frequent natural disasters.

As Amazon’s distribution network grows, the company must sustainably address its greenhouse gas emissions. In the United States, Amazon Prime is particularly polluting because of the promise of 1 or 2-day delivery.

Legal

Large organizations that operate in many countries must have a detailed understanding of the laws applicable to each. This is especially true in countries where employment, consumer, tax, and trade law directly impacts on business operations.

Amazon has had to deal with legal challenges regarding its tendency to subvert tax law and move profits into tax havens such as Luxembourg. The company was also recently investigated by the US Federal Trade Commission for misleading discount claims on over 1000 of its products.

Key takeaways:

  • The PESTEL analysis is a tool that businesses use to analyze macro-environmental factors that have the potential to impact on performance.
  • PESTEL is an acronym for six factors: political, economic, social, technological, environmental, and legal.
  • As a large, global retail company, Amazon has been able to take advantage of the shift toward convenient and contactless consumer goods delivery. However, it’s global reach also leaves it vulnerable to sustainability trends and investigation for tax evasion.

PESTEL Analysis vs. Porter’s Five Forces

PESTEL analysis and Porter’s Five Forces can be both used to have both a micro and macro strategic assessment for the company. In addition, to that, together with the PESTEL Analysis also the Porter’s Diamond Model can be further used to refine the strategic assessment, for the overall firm’s strategy within the marketplace. 

porters-diamond-model
Porter’s Diamond Model is a diamond-shaped framework that explains why specific industries in a nation become internationally competitive while those in other nations do not. The model was first published in Michael Porter’s 1990 book The Competitive Advantage of Nations. This framework looks at the firm strategy, structure/rivalry, factor conditions, demand conditions, related and supporting industries.

Other connected frameworks

Porter’s Five Forces

porter-five-forces
Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces.

SWOT Analysis

swot-analysis
A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.

BCG Matrix

bcg-matrix
In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.

Balanced Scorecard

balanced-scorecard
First proposed by accounting academic Robert Kaplan, the balanced scorecard is a management system that allows an organization to focus on big-picture strategic goals. The four perspectives of the balanced scorecard include financial, customer, business process, and organizational capacity. From there, according to the balanced scorecard, it’s possible to have a holistic view of the business.

Blue Ocean Strategy 

blue-ocean-strategy
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

Scenario Planning

scenario-planning
Businesses use scenario planning to make assumptions on future events and how their respective business environments may change in response to those future events. Therefore, scenario planning identifies specific uncertainties – or different realities and how they might affect future business operations. Scenario planning attempts at better strategic decision making by avoiding two pitfalls: underprediction, and overprediction.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here

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