How to Improve Your Odds of Success by Conducting a PESTEL Analysis

The other day we talked about Porter’s Five Forces which looked at the micro-environmental forces that make up the contact area between your company and your customers or buyers, your suppliers, and your competitors to assess the business’s ability to succeed.

While the Porter’s Five Forces model looked at the micro-environmental forces, this post describes the PESTEL analysis which assesses the macro-environmental forces that can affect your business.

PESTEL is an acronym that stands for:

Political
Economic
Social
Technological
Environmental
Legal

Business owners can use a PESTEL analysis to assess which macro-environmental elements could potentially impact the success of their business. Each of the six elements of the PESTEL analysis can either impede a company’s growth potential, or serve as a strategic opportunity. A PESTEL analysis of your business can help you gauge the health and growth potential of your particular industry, and show you how your company could be primed for either growth or decline.

The elements that make up a PESTEL analysis represent forces that a business can only react to, but cannot really influence in any meaningful way. Business owners need to keep abreast of the PESTEL forces so as not to be caught by surprise. Unfortunately, many small business owners do not devote a sufficient amount of time to evaluating PESTEL elements to make sure their business remains aligned with the changing landscape of business.

Let’s explore each of the six elements that make up a PESTEL analysis.

Political

Political forces include overall government policies like minimum wage, foreign trade policies including tariffs, income and sales tax policies, as well as tax subsidies and tax credits.

For example, when the US imposed tariffs on goods from China, it started an economic trade war that made some businesses winners and others losers.

Economic

Economic forces include the nation’s economic growth, exchange rates if they sell overseas or use offshore resources, annual inflation levels, interest rates, the disposable income levels of their buyers, and the national and local unemployment rates.

For example, when interest rates go up it gets harder for a business to borrow money, which affects profits and can slow expansion.

Social

Social forces can be divided into Demographic and Cultural issues. Demographic forces include the population growth rate, age distribution such as the number of baby boomers vs millennials, and income level distribution. For example, as we described in How to Predict the Future with Demand Curves a person’s age and income level can clearly predict buying patterns. Cultural forces define the buying public attitudes toward careers, health, even lifestyle choices.

For example, when my mom was entering the workforce the only career options for a woman were a secretary, nurse, or teacher.

Technological

Technological forces include technological incentives such as research and development tax credits, a level of innovation such as the way the internet and mobile devices changed just about everything, automation such as autonomous vehicles and robots, as well as research and development activity to see the advent of disruptive technology coming out of various ecosystems such as medical in Boston and computers in Silicon Valley.

For example, as more and more people carry cell phones to tell time, wristwatch sales continue to decline.

Environmental

Environmental forces are ecological and ethical factors that relate to corporate responsibilities. Some environmental forces include carbon emissions or carbon footprints, global warming, climate change, as well as sustainability.

Environmental forces have become quite popular as I write this, and have spawned movements such as the green new deal.

Legal

Legal forces include discrimination such as by race, gender or sexual orientation, immigration such as enhanced border regulations, antitrust such as promoting fair competition, employment such as minimum wage laws, consumer protection that require businesses to disclose detailed information about products, as well as copyright and patents to protect a business’s intellectual property,

In researching this post, I discovered a YouTube video by Lars De Bruin that does a good job describing a PESTEL analysis.

How can you use a PESTEL analysis to accurately assess the macroeconomic forces that will affect your business?