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

SWOT analysis vs. PEST analysis

The PEST analysis is another tool that businesses can use to evaluate their external environment. It differs from the SWOT analysis in that it evaluates market trends and fluctuations as opposed to a company’s business units.

These trends are arranged into four categories:

  1. Political – such as future, domestic, and international legislation, government policies, elections, lobbying, pressure groups, wars, and conflicts.
  2. Economic – such as economic trends, taxation issues, natural disasters, market and commodity price cycles, and exchange rates.
  3. Social – this includes consumer attitudes, opinions, lifestyles, and the role of the media. Social factors also encompass brand image, fashion and role models, advertising, publicity, and ethical issues.
  4. Technological – an increasingly important category that includes competing innovations, research funding, patents, licensing, and intellectual property issues.

The PEST analysis is commonly used to evaluate a market and its players from the standpoint of a business or particular proposition. Conversely, decision-makers use the SWOT analysis to assess their own business or, in some cases, one or more competitors.

While strategic planning is far from an exact science, many organizations undertake a PEST analysis to identify factors that can be analyzed in a SWOT analysis. The PEST analysis is also arguably more versatile. It is most valuable for large corporations with complex market environments but is still useful for smaller businesses as a means of identifying potentially significant issues.

Summarizing the key differences between PEST analysis and SWOT analysis

  • The PEST analysis is another tool that businesses can use to evaluate their external environment. It differs from the SWOT analysis in that it evaluates market trends and fluctuations as opposed to a company’s business units.
  • PEST analyses are used by businesses to evaluate a market and the players within that market. The SWOT analysis is more of an introspective tool that is used to evaluate the business itself or, in some cases, its competitors.

PESTEL analysis examples

The PESTEL analysis is a tool used by marketers to evaluate the macro-environmental factors that impact the business or its particular industry. PESTEL is an acronym of six such factors: political, economic, social, technological, environmental, and legal. 

The PESTEL analysis is one of the most popular situational analysis methods and is best suited to extremely dynamic markets and business environments. With that said, let us take a look at some PESTEL analysis examples of two well-known companies.

Tesla PESTLE analysis

Political 

As a manufacturer of electric vehicles, Tesla must source battery minerals from countries where there are political risks. One example is the Democratic Republic of Congo (DRC), where more than 70% of the world’s cobalt is sourced. The country is characterized by political instability, child labor, conflict, and corruption. More beneficial political factors unique to Tesla’s business include a government focus on clean energy.

Economic

Tesla has benefitted from the decreasing costs of battery technology thanks in no small part to its own culture of innovation and forward-thinking. However, the cost of some raw materials remains a concern, as does rising inflation. States such as California and Nevada have also provided substantial tax subsidies to the company.

Social

Most citizens now appreciate or accept that electric vehicles are an important part of a sustainable future. This is particularly true of the next generation of young professionals who not only possess environmental values but can also afford a Tesla vehicle in the first instance.

Technological

As hinted at earlier, Tesla is a constant innovator on a never-ending quest to optimize and refine its batteries. The company has also endeavored to address the number one criticism of electric vehicles: range. It has removed many of the luxurious features consumers expect in a normal car in favor of better aerodynamics. The Tesla Model S Long Range Plus, for example, has a range of 402 miles which is industry-leading.

Environmental

Tesla is well-positioned to profit from climate change initiatives and rising standards of battery waste disposal and raw material recycling. However, the sourcing of these raw materials does not come without an environmental cost. Tesla is also creating battery packs that can be charged with solar panels instead of coal power plants, with the latter situation contradicting the green credentials of electric vehicles.

Legal

Tesla is not immune from the various legal factors that are inherent to global expansion, such as labor laws, environmental laws, and patents and copyrights. In the United States, there are also laws against direct selling that force car manufacturers to sell to the consumer via third-party dealerships.

Nike Pestel Analysis Example

Political

Nike, like many global companies, is no stranger to political factors with 533 factories across 41 countries. Nike has to account for import duties and various other costs that can be destabilized by world events. Tensions between the United States and China in 2019 saw President Trump threaten to increase tariffs on all footwear by 10%.

Economic

Nike was able to survive the 2008 GFC because of a massive restructure and widespread terminations. The company also suffered a 38% loss in sales because of COVID-19 closing retail stores. In response, it redirected its efforts to grow its online presence.

Social

Nike was one of the pioneers of sneaker culture in America. Thanks to visionary CEO Phil Knight, the company sold running shoes before running as a sport was socially acceptable. It then partnered with sports stars like Michael Jordan which created a resale market worth billions and keeps the Nike brand top-of-mind for fanatics.

Technological

The mission of the Nike brand is to expand human potential with innovation. The company runs the Nike Sport Research Lab in Beaverton, Oregon, where advanced research and development occurs in biomechanics, engineering, industrial design, and exercise physiology. One recent innovation is foot-scanning technology Nike Fit which helps consumers find shoes that fit the unique shape of their feet.

Environmental

Nike is also committed to sustainable innovations that reduce environmental impact. For one, 75% of all shoes contain recycled material. The company has also pledged to use less freshwater to dye and finish textiles, with 99% of all dye water recycled and not released into water catchments. Most impressively, 99.9% of all the waste leftover from the footwear manufacturing process is diverted away from landfills or incineration.

Legal

In the 1980s, Nike was sued for failing to disclose poor working conditions in “sweatshop” factories in Asia. The company has also been involved in lawsuits with Adidas and Skechers over various copyright infringements.

Uber Pestel Analysis Example

Political

Uber seems to attract political discourse as soon as it enters a new market. Discussion tends to be centered around culpability in the event of an accident and whether or not Uber drivers need to obtain taxi licenses or comply with minimum wage standards. The company spent around $2.63 million in 2020 lobbying governments around the world for favorable outcomes in the aforementioned areas.

Economic

As transportation starts to return to normal levels in 2022, the price of fuel has risen accordingly. This may force Uber to raise its fares and cause consumers to look elsewhere for a ride. Nevertheless, Uber’s place in the sharing economy – which many believe it pioneered – has the company well placed to grow over the long term.

Social

Uber is active on social media and has broad appeal to consumers across various demographics. With 20% of Americans expected to be 65 years or older by 2030, the company also has the potential to take advantage of less tech-savvy generations that are perhaps not in its target audience. In the short term, the shift toward remote work may impact Uber’s bottom line to some extent.

Technological

The introduction of alternative forms of transport such as bikes and scooters has allowed Uber to capitalize on shorter distance trips. The features of the Uber app itself are also well documented, allowing consumers to estimate ride costs and track their drivers in real-time. Technology and high-speed cell networks are vital to the efficient functioning of the company, which makes Uber vulnerable to app issues and network outages.

Environmental

The most obvious environmental factor for Uber is the air pollution vehicles emit and consumer preferences toward greener energy sources. As part of its Green Future program, the company will help hundreds of thousands of drivers transition to electric vehicles by 2025. Uber has also made a bold commitment to offering 100% zero-emission rides by 2040 – whether that be traditional rides, micro-mobility, or public transport.

Legal

Uber must work within the bounds of various state and federal laws which has been made more difficult by confusion over the company’s core business model. It has been subject to minimum wage lawsuits and fines resulting from privacy breaches. In countries such as France, Uber was fined heavily for operating without the required permits. It was also banned from Germany in 2019 for a similar reason.

Key takeaways:

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.

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.

Other case studies

mcdonalds-pestel-analysis

Nike PESTEL analysis

tesco-pestel-analysis

coca-cola-pestel-analysis

apple-pestel-analysis

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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