A PESTEL analysis looks at the six most common macro-environmental factors to understand their interactions. The acronym stands for political, economic, social, technological changes, ecology, and legislation. A PESTEL analysis is a useful strategic tool for understanding market growth or decline, business position, potential, and direction for operations. The basic premise behind this framework, from a strategy perspective, is to identify opportunities and threats in the market.
- Political factors include how, and to what degree, a government intervenes in the economy. Specifically, political factors include areas such as tariffs, political instability, and other policy-based obstacles that businesses encounter in a given region.
- Economic factors include economic growth, interest rates, exchange rates, and the rate of inflation. Economic factors are by far the easiest to quantify, and they provide a basic framework for capital exchange and consumer purchasing ability.
- Social factors include the cultural aspects of the environment, such as health consciousness, population growth rate, age distribution, career attitudes, and emphasis on safety. Often referred to socio-demographic factors, they largely consist of preferences and attitudes displayed by different groups of individuals within a given market. Social factors can be very difficult to measure with certainty.
- Technological factors include research and development (R&D), automation, technology incentives, and the rate of technological change. Disruptive innovations can dramatically alter an industry and change who is best poised for competition. Carefully monitoring these factors on a daily basis is crucial to a company's success and has grown in importance over the years.
- Environmental factors include ecological and environmental aspects such as weather, climate, and climate change. Industries like tourism, farming, and insurance are especially affected by these factors. Growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer, both creating new markets and diminishing or destroying existing ones.
- Legal factors include discrimination laws, consumer laws, antitrust laws, employment laws, and health and safety laws. These factors can affect how a company operates, its costs, and the demand for its products.
According to the structure-conduct-performance (SCP) approach, an industry's performance (or the success of an industry in producing benefits for the consumer) depends on the conduct of its firm. The conduct of the firm, in turn, is dependent on its structure (or factors that determine the competitiveness of the market).
The structure of the industry depends on basic conditions such as technology and demand for a product. This creates a linear relationship of sorts, where the structural inputs can impact the conduct and strategy of the firm, leading to better (or worse) performance.
Taken into account alongside the PESTEL framework, management should carefully consider and define the structure of a given industry. This structure will provide critical inputs for the broader industry, which in turn will impact the conduct of the organization through strategic integration. If this process is accomplished effectively—and management has integrated the external structure with the internal conduct strategically—higher performance can then be derived.