How PESTEL Analysis Helps You Find Business Opportunities & Threats
If you are interested in marketing, or if you have been working with marketers or business analysts over the years, you might have heard of the famous SWOT analysis, where the S stands for Strengths, W for weaknesses, O for Opportunities, and T for Threats.
While marketing professionals can often praise the SWOT method, an alternative one also has the potential to bring light to the components of a company or a product: the PESTEL analysis. Originally PEST, the acronym can be extended with the two additional letters E and L. These two letters are interchangeable, and you might find PESTLE as often as PESTEL.
The method, letter by letter
Unlike the SWOT, the PESTEL framework only focuses on the company or product itself, without being compared to what surrounds it on the market. Instead of analyzing internal and external elements and assessing what businesses could take advantage of (or, on the contrary, be more careful about), the PESTEL provides an insight into the macro-environmental context in which a company or a product was born, with each letter representing a factor of influence. Let’s make each of these letters more explicit:
P – stands for Political
This component clarifies the part governments (our own, but foreign ones as well) take in shaping a company from tax policies to social welfare, with a heavy focus on regulations in trade, immigration, or tariffs. Overall, this component shows how stable the governments are in the countries in which the company is based and those in which the company has relations (branches, partnerships, etc.). From this, you can already identify opportunities and threats related to the political context.
E – stands for Economic
Not totally unrelated to the political factors, the economic ones revolve around the “wealth” of the region the company grows in. From GDP (Gross Domestic Product), disposable income of buyers, and the unemployment rate to credit accessibility, interest rates, and inflation. Analyzing the economic conditions surrounding the affairs of a company will give you the opportunity to make a company aware of the elements it can play with, and which it should be wary of, especially when it comes to a pricing policy.
S – stands for Social
Again, you cannot really talk about the political context in which the company grows without mentioning some social factors. This component is composed of the most basic demographics, such as the size and age of the population, its level of education, the different ethnicities making its singularity, how well wealth is distributed… But you also have to take into account the population’s consumption behavior (trends, amount of money spent on average in a particular category of goods or services…). The analysis of social factors will help you identify more efficiently who is a good potential customer and how to target them.
T – stands for Technological
Centered on a scientific basis, technological factors are the improvements and innovations a company could potentially benefit from. These factors can be the development or arrival of a brand new technology, but also just the rapidness of technological progress, advances, or obsolescence. Technological factors can include the level of automation or the number of governmental funds received by the sector of research and development. And yes, you guessed it, analyzing these factors will also give you an idea of opportunities and threats one company might encounter around the technological elements that surround it.
E – stands for Environmental
This component is not always examined in the overall analysis. While you could consider taking into account the general attitude (from the government but primarily from the population, meaning the demand for “greener, more sustainable and responsible products”) towards the environment and the climate crisis, the original factors mainly involve natural conditions, such as weather patterns and natural disasters, to which you would add the human impact, the levels of pollution. While these factors will mainly present you with threats to your business, you may also consider opportunities to improve your reputation by showing the population how conscientious your business is.
L – stands for Legal
Sometimes overlooked as well, this final component of the PESTEL framework focuses on laws implemented towards the other five elements. As we were on the topic of environment, you could decide to think about the legal responses to the environmental emergency as well: what laws now regulate ecological protection, energy consumption, recycling, and waste in general… It is also worth mentioning statutes and regulations concerning employment, health and safety, competition between companies, marketing and advertising, intellectual property, etc. Of course, the laws discussed in the Political part can be found again in the legal one.
Using the PESTEL method for a broad analysis of external factors of influence
To see examples of PESTEL in use, we strongly recommend following some case studies. This would give you a better understanding of the value this method provides.
As you can see, the PESTEL analysis can prove quite valuable for a thorough understanding of the external factors impacting a company on a wider scale than the SWOT, which would only focus on the market, meaning the competition and other companies in the field. With PESTEL, you can draw a portrait of the overall environment, with each layer themselves composed of opportunities and threats for the business. You might need some tools to find the correct information to analyze this background properly. The overview you get is entirely objective since you do not mention factors that would be internal to the company. Keep in mind, though, that these factors might be unstable and change constantly.
The PESTEL method is not here to replace the SWOT. It is complementary. It will help you understand the market you and the other companies are in, but you will still need to figure out your strengths and weaknesses, along with your competitors’. You could decide to run a SWOT analysis on its own; however, a PESTEL analysis on its own will not be enough to make business decisions based on your assets. Therefore, we would advise you to use the results of your PESTEL analysis for your SWOT.