PESTEL Analysis And How It Can Be Used

The Use of PESTEL Analysis Strategic Decision Making.

PESTEL Analysis is another vital planning tool that can be used to identity and analyse those factors in the macro-environment that can influence our strategic decision making. The acronym stands for Political, Economic, Social, Technological, Environmental and Legal factors. This tool can be used in conjunction with SWOT Analysis and Porter’s Five Forces which have been discussed in the previous articles. For better understanding of PESTEL Analysis, let’s look at its elements one by one.

Political Factors

If you want to start a business or you have already started and you are about taking specific actions relating to the business, you need to consider the impact the political factors may have on the business. If you are very observant, you will notice that some companies don’t embark on major projects or take strategic decisions until government has read its budgets for the year. Why? The reason is that government policies have direct or indirect impacts on businesses. Political factors that can affect businesses includes taxation policy and trade regulations. As a businessman or woman, before you take any strategy step, it is important to access the impact any changes in regulation may have on your business. Also, you will like to know the taxes and other incentives the government is coming up with so that you can comply and make most of the opportunities available. If you are planning to set up a new business or expand your existing business, other political factors you may need to consider are political stability or political unrest in that region. Also, terrorism is becoming a global phenomenon. A prudent entrepreneur will like to consider the safety of his investment. A place where there are frequent terrorist attacks cannot be considered safe for business. Still under political factors in our PESTEL analysis, you need to consider the impact the change in government may have on your business. In our country, this is a major consideration as there is always cases of projects abandonments any time power changes hands.

Economic Factors

Before you start any business at all, it is important you consider the buying powers of your target markets. Such things that may likely affect or determine the buying power of consumers include their levels of disposable income, unemployment level, inflation rate, general and product specific taxation. Other factors you need to consider in your PESTEL Analysis under economic factors include foreign exchange rates, trade tariffs, oil prices and the state of the economy. During economic boom, businesses usually thrive but the opposite is the case during economic depression. Starting a new business or opening a new branch during economic recession will be a wrong decision except your business is recession proof.

Read Also: Best Business Ideas in a Recession

Social Factors

As part of the factors to consider in PESTEL Analysis are the changes in tastes and lifestyles of consumers. What was in vogue last year may not be relevant today again. Of course, you need to consider cultural, ethnic and religion factors as well. Other factors under the social factors in your PESTEL Analysis include population size/demographics, income distribution, levels of education, brand preferences, consumer buying pattern and their attitudes to work and leisure, and any law that affects social factors.

Technological Factors

The level of government spending in research and development is a major factor to consider under this heading in your PESTEL Analysis. Also, in this Information age, the rates of obsolescence seem to be very high. Before you invest heavily in any IT equipment, you need to think about its future usability. Will it still be compatible with new development?  For instance, you discover that the use of diskettes to store information is no longer relevant today. Therefore, you need to be aware of Information technological trends. You need to be aware of the new discoveries and developments can impact your business.

Environmental Factor

In PESTEL Analysis, this can also be called ecological factors. You need to take into considering how the use of raw materials, components and energy sources impact your environment. You need to forestall noise and water pollutions your business might cause the environment and the level of resistance from people where you operate. You may consider the use of more environmentally friendly substitutes. Compliance with environmental legislations is very important.

Read Also: How To Choose The Right Small Business Idea

Legal Factors

Every business is expected to operate within specific legal frameworks. You need to keep yourself abreast of legislations that affect your business. Apart from the general legislations such as employment law, health and safety laws, consumer protection law; there will be some regulations that are specific to your industry.

Evaluation of PESTEL Analysis

From all the above factors discussed, you must have realised the usefulness of PESTEL Analysis in strategic decision making process. However, it is not sufficient to rely on PESTEL Analysis alone. You can use it conjunction with other business analysis tools before you can arrive at good conclusion of which strategic decision to make.

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