Are you looking to conduct a pestel analysis for your business? Through this article, you can learn what is pestel analysis, the seven steps on how to do pestel analysis, the importance of pestel analysis in the marketing sphere, and understand each of the pestel factors, and learn from the example in the case study. Pestel analysis is a marketing concept that is used as a tool or framework to identify and analyze the macro-environmental factors (external marketing environment) that might impact the organization’s performance.
It is usually conducted when a business starts or launches a new product, plan, service, etc. in the market. Before any strategy or tactical plan is prepared for the business, it is necessary to conduct such a situational analysis. Thus, it is important to include pestel analysis in strategic management. Generally, a swot and pestel analysis is conducted to ensure that the business situation and all the interacting factors are well understood.
In this article let us look at:
- What is Pestel?
- How to do Pestel Analysis?
- Importance of Pestel Analysis
- Difference between SWOT and Pestel Analysis
1. What is Pestel?
The word pestel is an acronym that stands for political, economic, social, technological, environmental, and legal factors. However, over time, the framework has been expanded to add more ethical, demographics, intercultural, and ecological factors.
The following questions that any business asks, set as good pestel analysis examples:
- How important is a culture in the market for this business, and what are its factors?
- What is the political situation governing this sector, and how will it change in the future?
- What are the technological innovations that can come up, and how can they affect us?
2. How to do Pestel Analysis?
To conduct a pestel analysis, one should first understand all the factors of pestel to be able to apply it to a business plan. With the help of a pestel analysis diagram shown here, one can keep track of all the factors.
The factors are as follows:
- Political factors: These factors establish how and to what degree the Government influences the economy or a particular business sector. This includes any Government policy, corruption, political stability or instability, fiscal policy, taxation policy, foreign trade policy, trade restrictions, environmental law, etc. Additionally, the Government has a major impact on infrastructure, education, health, and other regulations, which can affect the business environment.
- Economic factors: Economic factors in pestel analysis are the elements of an economy’s performance, which impact the business directly and indirectly and can have a lasting influence on the business, which can continue to affect the business even in the future. These factors include inflation rates, economic growth, exchange rates, demand and supply models, interest rates, disposable incomes of the consumers, foreign direct investment, and unemployment rates. This can directly influence how the business determines the prices of their products or services.
- Social factors: The social factors are determined by the general environment in which the organization wants to work. This includes demographics, culture, norms, customs, and values of the population. Other trends of population statistics are age distribution, income distribution, lifestyle, health and fitness attitudes, and other cultural barriers. This is important when the business wants to target certain customers. It also helps in understanding the local workforce and work culture.
- Technological factors: Any technological innovations that can affect business operations and the market in a favorable or unfavorable way are the technological factors in pestel analysis. This includes automation, technological incentives, research and development, and the amount of technological awareness the market possesses. These factors can determine whether the business should enter the sector or not, invest in a certain technology, and if should launch a certain product or service.
- Environmental factors: The environmental factors in pestel analysis have only been recently introduced. This is because of the increasing environmental issues like climate change, global warming, pollution, scarcity of natural resources, and carbon footprint targets introduced by the Government. Thus, all the elements that affect the ecological and environmental aspects such as weather, climate, and biodiversity are included in this. It majorly harms industries working in the tourism, farming, agriculture, and insurance sectors. More awareness is also leading to many companies changing the way they operate and the type of products they create. Many firms are also getting involved in Corporate Social Responsibility (CSR) practices in this field.
- Legal factors: Some aspects of legal factors are similar to the political factors in pestel analysis, but there are some who are concerned with laws centered around businesses such as discrimination laws, employment laws, consumer protection laws, antitrust laws, copyright and patent laws, and health and safety laws. If the business operates at a global level, then these factors are determined by each country where they operate. The organization also needs to be aware of potential changes in law and how it will affect their business.
- Ethical factors: These factors were also recently added to pestel analysis, and these can help organizations determine how to act right and in a fair manner. Ethical factors establish the organization’s responsibilities in terms of corporate and social actions. This includes the company and its employees’ behavior inside and outside, with customers, etc. It involves morality, duties, integrity, behavior, and being aware of what is good and bad for the company, customers, and employees.
3. Importance of Pestel Analysis
To ensure success in any business plan or in launching a new product or service, it is important to conduct a pestel analysis. This is because it helps businesses understand the potential failures in any of the factors that govern their sector and to avoid them to ensure profits in the future.
Case Study on Pestel Analysis
Coca-Cola is the largest selling beverage in the world, and to be able to operate in various countries while making profits. A pestel analysis with an example of this company is usually conducted every few years to understand the concept better.
- Political: Coca-Cola is highly involved in political lobbying in various countries, so political contributions, trade associations, and advocacy are taken on by the company.
- Economic: Although the company brings in large profits, they have to refine their supply chain according to the needs of a specific country. Prices are determined according to the country of operation, labor, consumers’ incomes, etc. Even during the recession, fast food companies are known to make profits because of increasing unemployment, but certain changes need to be made.
- Social: Based on weight gaining issues in many developed countries due to dependence on fast food and beverages, Coca-Cola introduced Coke Zero, which is sugar-free and healthier.
- Technological: The company is known to adopt the latest technology, and they have employed a new program called ‘Bridge’, which is aimed at adopting new technology ahead of its competitors.
- Environmental: In many countries, Coca-Cola uses recycled material for packaging and engages in sustainable practices. They have a plan to increase the recycled plastic use for their bottles.
- Legal: Like many other beverage producers, Coca-Cola also deals with legal battles about the use of harmful ingredients and deceiving consumers about the health risks associated with their products.
Through this case study, one can learn how an extremely successful company has made profits for decades, even with competition and varying factors. By conducting pestle analysis, Coca Cola was able to make profits during the recession in various countries. It provides the best example of why such a strategic plan is needed beforehand.
4. Difference between SWOT and Pestel Analysis
A SWOT analysis stands for Strengths, Weaknesses, Opportunities, and Threats. Conducting this analysis helps the business determine its strengths and weaknesses in comparison to its competitors. At the same time, the other two parts of the acronym help determine the factors outside the organization that can influence their success. This type of analysis is required when the business is new and might be facing problems in meeting performance standards without knowing why. Thus, a SWOT analysis should be conducted when determining both internal and external factors that can influence the organization’s performance.
On the other hand, pestel analysis should be conducted when there is a need to determine real-world factors outside of the organization that can affect the business. It helps in identifying threats before the business plan is launched and avoid steps that will lead to failures. Thus, an objective decision can be taken, especially when starting a business or launching a new product or service in a new region or country.
However, before starting any business or launching a new product, it is advised to conduct both SWOT and pestel analysis for the strategic plan to ensure success.
There are many factors under pestel analysis that can help determine if the business will succeed. The analysis varies according to the sector in which the business operates. It also depends on the region.
Through this article, the pestel analysis definition was explained along with all the factors under each part of the framework. Along with this, why pestel analysis is important was also explained with the case study of Coca-Cola as an example. A brief description of SWOT analysis helped explain the difference between SWOT and pestel analysis. To know more about Pestel Analysis and Product Management, check out our 6-month online Product Management Course, in collaboration with IIM Indore. The is a unique program that offers Bring Your Own Product for a hands-on learning experience!
What is Pestel Analysis: An Overview