Market analysis can serve as a flashlight to help you get a glimpse of what might be ahead for you and your business. As a part of this, PESTEL Analysis is used to examine macro-environmental factors that are sources of opportunities and threats, and therefore positively or negatively impact the organization, its customers and suppliers.
There are six factors to PESTEL analysis: Political, Economic, Social, Technological, Environmental and Legal.
Political Factors—These factors describe how the government and the political system may influence the company’s Corporate Strategy.
Examples of Political Factors:
- Government incentives for industrial development in certain regions may impact decisions related to location of factories.
- The annual financial budget of the government may significantly impact a company financially. For example, a parts supplier in the rapid transit industry setting revenue projections for a particular geographic region must consider the current political position and the expected government financial support for transportation and infrastructure improvements.
Economic Factors—These factors are related to the economic structure and policies of an economy and its interaction with other economies. They influence how businesses operate and grow.
Examples of Economic Factors:
- Interest rates for borrowing may impact funding and investment decisions of a company.
- Inflation rates impact input costs (that is, salaries, cost of raw materials, property costs) and should be considered when planning the Marketing Strategy.
Social Factors—These factors reflect the social and cultural state, attitudes and behaviors prevalent in a market. Changes in these factors may impact the demand for a particular product or product category.
Examples of Social Factors:
- An aging population creates a growing market for products targeting senior citizens.
- A growing trend toward nuclear families necessitates services such as day-care facilities for children.
Technological Factors—These factors describe the technologies and R&D efforts that are relevant to a company and the ecosystem within which such technologies function. They may help the company gain sustainable advantage in its market through product or process innovation.
Examples of Technological Factors:
- A faster mobile network enables real-time video conferencing with the company’s field sales force.
- An increase in Internet availability and the growth and efficiency of e-commerce and its distribution channels enable more people to shop online.
Environmental Factors—These factors are related to the ecological environment and include aspects such as climate change, deforestation and pollution, among others, which may affect how some companies function.
Examples of Environmental Factors:
- The appliance industry manufactures CFC-free refrigerators to prevent further damage to the ozone.
- Automobile manufacturers reduce vehicle emissions in order to decrease air pollution.
Legal Factors—These factors are related to the legal and regulatory framework of the market in which a company operates or is planning to enter. Companies need to adhere to the laws and regulations that exist in their markets, irrespective of how restrictive they may be. At the same time, the legal framework may also give rise to additional opportunities.
Examples of Legal Factors:
- Laws that mandate the use of bike helmets provide a boost to helmet manufacturers.
- In several countries, anti-monopoly laws make it difficult for large companies to acquire competitors.
On the pathway to success, you will find these factors may be a benefit or an obstacle, but without a detailed and comprehensive PESTEL analysis you end up stumbling in the dark.