The Easiest Explanation of PESTEL Analysis You’ll Ever See
What is a PESTEL analysis?
Well, there are hundreds of articles on the internet on this topic, but a lot of them are written in a language that is hard to understand. In simple terms, a PESTEL analysis helps companies analyze the external factors that could affect their business.
As the great physicist Albert Einstein said: "You don't really understand something unless you can explain it to your grandmother.” So, we have made things very easy to understand for you.
In this article, we will discuss the PESTEL analysis with examples and also include a PESTEL analysis template at the end for your reference.
Let’s begin.
When exactly should you use PESTEL analysis?
So, now we understand that PESTEL analysis helps us analyze external factors that could affect our business, but when exactly would we need to do this? Let us look at a few examples of when it would benefit our business to analyze the external factors affecting us:
- As a consultant you support a global retail company. The company has stores in 15 different countries and has over 4000 locations. Sales have been falling, and you are tasked with understanding why this is happening and how to rectify the problem. To do this, you must understand the rapidly changing global retail market in order to pinpoint what is causing the fall in sales. To structure your analysis on the external environment, you can use the PESTEL framework, which will help you identify areas for internal improvement.
- As a consultant you support a company to launch new innovative business, and you therefore assess the overall opportunity and understand the relevant market drivers. The PESTEL analysis will help you to go through the key elements of the external environment that influence the business.
- You have been brought as a consultant to make a decision, to which country a company should expand. PESTEL analysis will help you understand the external factors within each location which would influence how successful this new launch will be, as it will help you to identify where the company could expect the highest ROI for expansion. It will also prevent unconscious assumptions made about each market, as it will allow you to create an objective view of each location.
Now, as you have a better idea, when the PESTEL analysis may help you let’s dive into the framework itself.
A Brief Introduction to All the Factors of the PESTEL Analysis
Let us start with a quick description of each of the factors of this framework.
- P stands for Political: This factor is about how the government affects about how you do business. This refers to political stability, tax regulations imposed by the government, trade restrictions, etc.
- E stands for Economic: This includes the stability of the economy, recession/economic boom, the purchasing power of customers, employment rate, etc. In short, if the economy is booming, it’s good for business, and if it’s not, well, then businesses may face challenges.
- S stands for Sociological: This is about population size, demographics, lifestyle, the culture of a target market, etc. This factor helps us dig deeper into the customer psyche and understand their needs, desires, pain points, and attitudes.
- T stands for Technological: This refers to the technological changes that may affect businesses. These changes include innovation, automation, technological awareness among customers, etc.
- The second E stands for Environmental: This factor has everything to do with mother nature. How the business affects the environment and how environmental changes affect the business are included within this factor.
- L stands for Legal: This includes all the laws that apply to businesses, such as minimum wage, work health and safety, employment rights, consumer rights laws, legislation regarding gender and racial equality in the workplace, etc.
An Example for All the Factors of the PESTEL Analysis
Great, now that you have the basic understanding of every factor of the PESTEL analysis, it’s time to discuss some examples to ensure that you grasp this concept really well.
Let’s start with an example for the first factor.
Political
Remember Brexit? It’s the term that is used to define the United Kingdom's separation from the European Union. This was purely political event from every aspect. But, it has changed how UK does business with the rest of the EU. Businesses are facing manpower issues and there have been massive disruptions in the flow of goods between the markets. They were previously united but are now separated due to the decisions of politicians.
Economic
Let’s discuss the recession that occurred in 2008 in the United States and western Europe. Basically, borrowers with poor credit received loans and failed to pay them. This resulted in a recession, and a substantial decrease in the net worth of many American households. A lot of people were scared to spend money and this affected businesses throughout the regions where this recession hit.
Sociological
We’re going to take Starbucks as an example here, and out of the many elements that are included in the sociological factor, such as population size, wealth distribution, religious beliefs, etc., we’ll focus on the cultural norms and values in this example.
So, what happened with Starbucks? Well, it didn't get much success in Australia. In 2008, Starbucks had to close down nearly 70% of its stores in this country, leaving only 23 open. Why? Because they failed to understand the Australian coffee culture. Australians love to sit in a cafe and have a social time and Starbucks’s buy-and-go attitude didn’t appeal to them. Also, Starbucks assumed that Australians would like the same sugary drinks that sell in America, but they were wrong here, too.
Technological
Back in the day, one had to order food through telephone calls and actually wait at the takeaway outlet. Nowadays, you can order food using an app and have it delivered to your doorstep. This technology was a game-changer during the pandemic. The businesses that didn’t enable customers to order and pay online suffered due to lockdowns. However, if they had adopted this new technology, their business could have remained relatively unaffected despite all the chaos in the market.
Environmental
Climate is a great example of an environmental factor that can impact businesses. For instance, a drought may affect the production of crops which could decrease the supply and increase the demand. Another example could be the climate of Scandinavian countries. Because the weather in these countries gets really cold and the sunlight is scarce during the winter months, the demand for products like heaters, winter clothes, and Vitamin D supplements is high during certain periods.
Legal
Not following the law can prove to be costly in business. For example, in certain industries, such as construction, a company has the legal obligation to ensure the safety of all its workers. This could include providing quality helmets and new protective gear. Even though it can increase the costs to run the business, it may save someone’s life and the business itself.
And that’s the end of the examples. Now, as promised, here is the PESTEL analysis template, which is available to download for free when you are enrolled in our External Analysis Frameworks on Consultport Academy, our learning platform dedicated to everything related to consulting
Introducing the Consultport Academy
We hope that you have understood the PESTEL analysis well, know when to apply it, and are ready to explain it to anyone —even to a kid or a grandma.
And if you liked this article, then you will love the Consultport Academy, which is the collection of free video courses on various consulting-related topics.
The course also contains a series of animated videos that help you analyze external factors that impact businesses, and it also includes PESTEL analysis.
The stuff you’ll see there is way more interactive and detailed than the information in this article.
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