What Is PESTEL Analysis? – Components, Purpose And Limitations


PESTEL Analysis is a framework or tool used to analyze Macro environmental factors (i.e. External forces from the Market Environment) that may create an impact on the organization’s performance.

It is a component of strategic management used as a Marketing Strategy for all kind of Business.

PESTEL Analysis also integrated to work with other frameworks such as SWOT Analysis, Porter’s Five Forces, etc…

PESTEL Stands for

Political

Economic

Social

Technological

Legal

Environmental

It is also known as PESTLE, PEST, SLEPT, STEEPLE, PESTLIED, STEPE.

The 6 Components Of PESTEL Analysis

Political Factor

From Law-making to Governance, Government takes the single authority to govern and control all types of business in a country through their policies. But what does it take for the Government to make such policies?

There are many factors to consider for government to make the draft and policies which in turn will have a serious impact on your Business.

Let us look at some of the major criteria that will impact your business performance

  • Election
  • Trade Policy / Restrictions
  • Tariffs
  • Labour Law
  • Foreign Direct Investment Policy
  • Environmental Law
  • Political Stability or Instability
  • Infrastructure

All these factors may be an advantage or disadvantage for your business, but knowing these factors in advance would help you to take necessary action for the future of your Business.

Economic Factor

Economic factors are more significant which directly impacts your business performance. These Economic factors are further categorized into Macro-Economic and Micro-Economic Level.

Macro-Economic Factors

These factors include economic growth, interest rates, foreign exchange rates, inflation. It also includes major decisions made by the government regarding fiscal policy, interim economic policy in uncertain conditions that prevails in an economy.

Micro-Economic Factors

Microeconomic factors that need to consider are income level and purchasing capability of customers, unemployment rate, and labor supply.

Knowing these factors would help you to decide on identifying the target customers for your Business.

Social Factor

The nature of the demand for your products or services that comes from the target audience is characterized by several factors, called social factors.

It can also be called as Socio-Cultural factors.

Some of the social factors are

  • Population growth of the location
  • Age group of the people
  • Health and hygiene
  • Safety

All these factors from different demographic sources and opinions should be considered to respond apparently.

Technological Factor

We all know that, in this modern world, how the technological growth changes our lifestyle. In the same way, several technological factors create a great impact on your Business and they are

  • Research and Development
  • Digital Technology
  • Automation
  • Technology Incentive
  • Innovation

Knowing about these factors which influence your decisions, would help you to adopt a better methodology for your business operations.

Environmental Factor

Environmental factors include various factors. It also includes ecological factors. They are

  • Weather
  • Regional Climate
  • Climate change
  • Carbon footprint
  • Energy
  • Power
  • Waste disposal
  • Sustainability

These are the important factors that should be considered for certain industries especially for farming, tourism, etc…

Businesspersons need to be aware of these environmental conditions to implement the business operations and prevent your activities from getting affected and ensure sustainability.

Legal Factor

Legal factors that have both internal and external aspects that impact business operations, costs are

  • Consumer law
  • Discrimination law
  • Employment law
  • Health and Safety law
  • Labour laws

Purpose Of PESTEL Analysis

PESTEL Analysis is important for both startup and well-established companies. As these factors are influencing, the founders must consider for their growth purpose.

Measure The Impact

Even though, if you won’t consider these factors, anyway it will impact your operations. Because these are external forces that already exist outside the company.

It is the management’s responsibility to know its purpose and analyze for its future endeavor.

To Identify The Threats

In a broad sense, threats come from anywhere outside the business. If it is left unidentified, it will cause a serious problem to solve. The company should adapt to the changes in the market.

A deep analysis of those six factors will downplay such threats from the market conditions.

Expanding The Business

When you expand your business to a new location, the legal conditions should be assessed.

Regulations and rules vary with the locations. To ensure the safety of your company these factors are essential to consider. It will be useful in acquiring the new market.

Cost-Effectiveness

Analyzing the PESTEL factors will help you to optimize the cost of your entire process to create the product.

Measuring and documenting those factors would be easy, the only requirement is time and hard work.

With Time and dedication, the company would be able to deliver a product at an effective cost.

Exploiting the Opportunities

Competing with the top players is little a difficult task.

For that, you need to devise the right marketing strategy for your company.

Analyzing the external factors help you to explore new opportunities. Further, it will help you to exploit the market and outperform the competitors. 

Limitations Of PESTEL Analysis

Experimenting with the PESTEL analysis essential for establishing a company. But, there are some drawbacks in performing at ground level.

Knowing the facts that limit you to conduct the PESTEL analysis, will help you to plan accordingly.

Constant Change

The information that you will collect changes constantly from time to time.

As it includes various environmental factors, it is not easy to collect bulk data. Much effort would be needed to collect the updated data and record the same.

Time Consumption

Addressing all the external issues are crucial. It cannot be collected at a single instance. It takes much time to analyze thoroughly from several market situations.

False Information

Beware of misinformation. There will be more differentiating factors available that may include false information also.

Or it could be a piece of outdated information, which misguides you in making decisions. Show your diligence while you collect those data and evaluate them.

Ensure the data that you collect is authentic.

Workforce And Cost Management

You need to employ more people for the data survey. Manipulating the factors would require a strong team with appropriate skills.

If you opt to outsource this project, it will create additional costs to hire and manage them.

Priority

After you collect the data, prioritizing those seems to be critical. Strong analytical skills are needed to interpret and understand the situations that prevail outside the company.

Which one should be given more importance and which one should be eliminated?

You have to choose the better one to consider, and make a good decision for the sake of company growth.

Checking all these factors without any limitations will give you success in along-term.

Reader’s Insight

Let us know if we missed out on anything in this article PESTEL Analysis – Components, Purpose and Limitations and share your thoughts in the comment section.


Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments