What is PESTEL Analysis?

The term PESTEL means analysis for political, economic, social, technological, environmental, and legal. It is a marketing term PESTEL analysis is a strategy or plan which helps conduct a situational analysis. PESTEL analysis helps to identify the changes in the macro-environment. It helps an organization to monitor and react to the changes in the macro-environment and perform well as compared to the competitor. It helps a corporate to identify the advantages and disadvantages involved in the business strategy.

PESTEL Analysis is explained as follows

Political

 Political factors mean the government policies and their intervention in the economy of the country. The marketing strategies need to be as per the government laws and policies of any country. Government policies determine the risk and rewards involves in the business. Following are some of the political factors which affect the firm’s strategy:

• Tax policies and restrictions: This refers to what is the tax rate decided by the government in the macro economy.
• Tariff rates: Tariff rates on different goods and services are decided at a certain rate.
• Labor laws: Labor laws are imposed to protect the rights of labor.
• Trade agreements and regulations: This differs from country to country. Every government sets restricted trade agreements and regulations.
• Environmental law: Some definite laws are defined by the government to protect the environment from the factors which can adversely affect the environment.
• Bureaucracy: Government stability is very a important factor. Changes in bureaucracy may change various norms and reforms.
• Competition Regulation: Government fix regulations to promote competition and restrict monopoly.

For example: if the cost of imports and exports of goods and services affect due to trade deals between the government, it may affect the firm’s budget.

Economic factor

Economic factors in an economy include growth rates, trade, supply and demand, market trends, competition, and currency fluctuations. This involves both micro-economy as well as macro economy the economic factors include the following.

• Economic growth rates: the growth rate which is expected in the economy of the country.
• Inflation: Inflation in the economy affect the growth of the business
• Exchange rates: this expresses currency fluctuation and the exchange rate
• Interest rates: the interest rates fixed in the economy affect the growth of the capital.
• Customer preferences: a change in consumer needs and demands affect the sales of the product or services.
• Stock market and investment trends: increase or decrease in the stock trends affects the investment decisions.

For example: if the interest rate in an economy decreases, the company may decide to refinance its debts.

Social factors

PESTEL analysis also takes into consideration, the social factors. Social factors are cultural and demographic trends in society. This largely affects the growth of the organization. The social and cultural factors affect the sales of products or services in an economy. The following factors affect the social influences:

• Cultural aspects and perceptions
• Population growth rate
• Age distribution
• Career attributes
• Health consciousness

For example, the percentage of the population in the world has decreased and the health conditions are also diseased due to the current pandemic of covid 19. This has also affected the firms’ strategies.

Technological factors

 The technological advancement and innovation in the firm as well as in the economy affect the firm’s strategy and planning.  The technological advancement present in the organization to manufacture a product, the automated technologies in the service industry affect the growth of the firm’s business. Technological factors include the following:

• Research and development: bring up-to-date research and development
• Automation: Automation helps to decrease the process involved in the production or service.
• Technological advancement: timely advancement in technology helps to improve efficiency
• The rate of change in technology

For example: If a company decides to automate its data to minimize the time involved in the process. The manufacturing industry for example in the automotive industry has a lower production as automation in manufacturing automotive parts is not possible.

Environmental factors

 The ecological impact on the business is called an environmental factor. The environmental changes affect the business in the organization. Following are the environmental factors:

• Weather conditions
• Pollution
• Climate change
• Temperature
• Natural disaster

Moreover, to attain corporate social responsibility, every organization is leading towards an environment-friendly approach to business. For example, many organizations are becoming more and more plastic-friendly to make the environment plastic-free. Climate change is a very serious issue these days. Global warming is affecting business operations as well.

Legal factors

The legal forces define what a business can do and what a business cannot do because of the legal limitations of the country. The organization also has internal policies and regulations which are to be followed strictly. Following are the legal factors:

• Industry regulations: every economy has specific industry regulation which needs to be followed
• Licensing and permits: business requires licensing and permits which differ from country to country
• Intellectual property rights: intellectual property rights include patent, rights, trademarks, industrial design rights.
• Labor laws: For example, a minimum wage rate is set to protect labor rights.

For example, A restaurant needs a food safety standard certificate set by the country to run its business.

PESTEL Analysis in business valuation: PESTEL Analysis in business valuation is very important because it helps to understand the impact on business due to PESTEL. It has the following models:

• DCF valuation model: Discounted cash flow valuation model is the valuation of companies’ unlevered free cash flow discounted back in the books.
• The business valuation model helps a firm to understand the firm's value using various methods. For example, Equity multiples.

Points to be taken into consideration while framing PESTEL Analysis

While framing PESTEL Analysis, the analyst should limit the research and analyzed the strategies at the broader level as it may differ from firm to firm and country to country. 1 thing which should be kept into account is that it is meant to provide an immediate solution. It helps the company to identify the factors which are not in control.

Context and Applications  

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for  

• B.B.A. 
• M.B.A. 
• B.Com