PESTEL, also known as PEST is a descriptive analysis of the company’s environment. When we talk about the company’s environment or context, we refer to all those external factors that are relevant to the organization, so its analysis is vital for the generation of strategies or campaigns in the short and long term.
Today in Ingenio Empresa we explain what PESTEL analysis is, how it is done and a practical example.
What is PESTEL analysis?
The PESTEL analysis consists of the description of the company’s context or environment through the consideration of factors:
The analysis can be limited to the first 4 factors, remaining as a PEST analysis, since environmental or legal issues are not always applicable.
Some analysts go further by considering factors such as Industrial (PESTELI), Ethics (PESTALE) and Demographics (PESTALD).
What is PEST analysis for?
That said, PEST, PESTEL or whatever you want to call it, allows you to perform a strategic analysis to determine the current context in which the organization moves, which gives you an input for the creation of strategies to either take advantage of the opportunities obtained in the analysis, or act against potential risks.
This is why it is such a widely used tool by organizations. In addition, ISO standards such as 9001 include among their requirements the understanding of the organization’s context. Tools such as PESTEL evidences the fulfillment of these requirements.
Thus, we can consider 3 essential benefits of PESTEL:
- It is a tool of simple application, because it is very easy to understand and staff can appropriate it, this greatly facilitates the teamwork.
- It can be integrated with other tools such as SWOT or Porter’s Forces, and besides, it can be easily replicated in organizational strategy.
- It can be used in any type of organization (large, medium, small) or in large projects.
How to perform a PESTEL analysis
The PESTEL analysis allows us to characterize the context, understanding how it affects the product or service.
Actually, performing this analysis is not complex. How to do it is limited to reflection about the aspects of the environment that concern to the company.
Therefore, the success of the tool lies in the composition of the team that performs the exercise. Consider a team with knowledge of the company, participative. Better if it is made up of personnel who work in the field. Multidisciplinary. With people who are curious and informed about the country’s situation. Workers from different processes who know what they are talking about is vital.
Once the team is defined, prepare the worksheet. Although for group exercises it is convenient to use sheets of paper and post-it notes, I believe that this is not the case. A computer, an Excel spreadsheet (at the end of the post I will give you one) and a group of people ready to define the business environment is more than enough.
A good practice is to define the type of impact (positive or negative) and whether it will be short, medium or long term.
Then, the analysis of each factor begins:
Evaluates how government intervention may affect the company.
- Changes in government and its electoral programs
- Fiscal policy
- Government subsidies
- Wars and conflicts
- Changes in legislation
- Changes in trade agreements
- International agreements
- Internal and external conflicts
- Political movements
An analysis of this type can show that the company must make “strategies” towards the politicians of a country so that the laws that are generated in the government bring benefits. Taxes placed on soft drinks or tobacco are examples of this, and companies can generate strategies to remove these measures.
Consider how the national and international macroeconomic environment may affect the organization.
- Employment rates
- Economic cycle
- Economic decisions of other governments
- Currency devaluation and revaluation
- Trends in distribution channels
- Government deficits
- Consumer confidence index
- Market protectionism
For example, the imposition of tariffs by Donald Trump’s decision on Toyota is part of an economic variable to be taken into account.
Evaluates culture, religion, beliefs, habits, preferences, etc.
- Education level
- Purchasing patterns
- Customer opinions
- Opinions or perception of the media
- Income level
- Age level
Here’s a far-fetched example: Think that you have a company producing vacuum-packed meat and you want to open a plant on the Asian continent. Considering that the cow is a sacred animal in India, would you think of this country to build the factory there?
Today more important than ever. Every day brings a technological advance and there is no sector that cannot benefit from it. In my experience, this is the most difficult and untapped aspect of all. The challenge is for the organization to be aware of what kind of technologies can benefit it.
- Machine Learning
- New programming codes
- New machinery or technological devices
- 3D printing
- Energy use
- Technology replacement
- Software in the cloud
- Incentives for technology use
Ecological or environmental factors
Evaluates how the environment affects the organization.
- Climate change
- Consumption of non-renewable resources
- Environmental policies
- Liquid gases
- Natural hazards
For example, health centers, which are required by law to separate hospital waste.
Companies must comply with the law and the law is constantly changing. Sometimes not only the law of the country where the organization is located applies, but also the law of the country where you want to be.
- Intellectual property
- Occupational health and safety
- Sector regulation
- Protection laws
- Minimum wage
Example of a PESTEL analysis of a company
Consider a company that manufactures water purifying filters. In their strategic planning exercise, they perform a PESTEL analysis to determine the risks and opportunities of the business.
In the political variables they consider:
- A recent change of president.
- Mayoral elections to be held in two years.
- Approaches to conclude a trade agreement with Central America.
In the economic variables they define:
- Currency changes.
- The effect of the increase in the interest rate.
- The increase in exports in the last year.
Within the social variables they define:
- Change in society’s thinking about self-care.
Then in the technological variables:
- 3D printing as an opportunity to optimize costs.
- Loss of magnetic information.
- In the environmental variables they define:
- The work to obtain environmental certifications.
- The work with production waste.
Finally, in the legal variables:
- The mandatory implementation of the occupational health and safety management system.
Having done this, the company defines how these factors impact the expected timeframe and the type of impact.
The result is as follows:
The PEST analysis and its relation to the SWOT analysis
The PEST analysis can serve as an input for the SWOT analysis. This is usually done as a way of addressing chapter 4 of the ISO 9001 standard for the implementation of a quality management system.
If we take into account that the PEST describes the organizational environment, many of the results of this analysis will imply a large part of the opportunities and threats of the SWOT Analysis. Hence, both tools can be integrated to determine the context of the organization.