PESTEL analysis: Identify external forces affecting your organization
When thinking about the pressures affecting your business, it can be challenging to come up with an exhaustive list, but an oversight could cost you. This is why it’s important to use a tool like the PESTEL analysis framework.
A PESTEL analysis helps identify external forces facing your company. The method does not offer up specific strategies, but it does offer a great starting point for your company’s strategic plan.
What is the PESTEL model?
The PESTEL model, sometimes written as PESTLE, is a tool used to identify and monitor the large external forces facing an organization. It’s an acronym for the six factors accounted for in the model—political, economic, social, technological, environmental and legal—and was developed in the late 1960s by Harvard professor Francis Aguilar.
PESTEL analysis has been used for over 50 years. Companies keep using this model after all this time because it is a valuable tool.
Russell Fralich
Associate Professor, HEC Montréal
PESTEL analysis template
Our free supply and demand analysis tool includes a PESTEL analysis template.
What are the six factors of PESTEL?
The PESTEL framework consists of six factors:
- political
- economic
- social
- technological
- environmental
- legal
Russell Fralich, Associate Professor at HEC Montréal, says that when looking at the external pressures on your business, you need to make sure you have not overlooked anything. “This is where the PESTEL model comes in. It offers a systematic method for thinking about all possible factors.”
Each of the six factors in the framework can comprise a wide array of specific pressures on your business. Here are some examples:
1. Political
- government stability
- trade bodies
- labour laws
- foreign trade policies
- international conflicts and war
2. Economic
- inflation
- interest rates
- exchange rates
- consumers’ disposable income
- national debt
3. Social
- lifestyle trends
- population aging
- health consciousness
- views on ethical issues
- ethnic and religious composition of consumer base
4. Technological
- automation
- artificial intelligence
- advances in material sciences and engineering
- new software and applications
- robotics
5. Environmental
- climate change and global warming
- recycling
- deforestation
- pollution and waste management
- sustainability
6. Legal
- copyright and patent laws
- health and safety laws
- trade policies
- regulatory bodies
- consumer protection laws
What is PESTEL analysis used for?
PESTEL analysis focuses on the external environment of an organization. More widely, it can be applied to strategic planning, but it can also be used in the context of smaller projects. For instance, an entrepreneur may use a PESTEL analysis when launching a new product line.
A thorough PESTEL analysis brings up a list of factors that offer potential opportunities and pose certain threats. It’s important to note that the PESTEL framework does not prescribe solutions or strategic responses. It is only a starting point, with other tools better able to suggest solutions.
How do you analyze your company’s external environment using PESTEL?
To conduct a PESTEL analysis, list all the external pressures that can exert a force on your company or project. Start with a wide view and then narrow it down to the more specific. Classify those pressures using the six factors of the model. Once you have an exhaustive list, prune it down to the core pressures on which you could have an influence or to which you could react.
“If you make a comprehensive analysis, you may end up with 100 elements. With your management team, bring this list down to a handful of forces that you can do something about,” advises Fralich.
If you are a smaller, one-person operation, this type of analysis need not be very involved: it can be done in a few minutes with pen and paper.
However, once a company gets to a certain size, doing a PESTEL analysis becomes essential.
“The management team will realize they need a formal, systematic way to analyze their business environment,” says Fralich.
How often should a company conduct a PESTEL analysis?
If the framework is used for a smaller project, it can be used whenever a new project is launched. And if it is used as part of the company’s strategic planning, it should be conducted regularly, although the frequency will depend on the industry.
“If you are operating in a quickly changing sector, like artificial intelligence, you might need to do a strategic review every couple of months. And if you are in the mining industry, maybe you’ll only need to do it every few years,” Fralich says.
PESTEL analysis example
Below is an example of a PESTEL analysis for a car manufacturer. It looks at one external force for each factor and offers a short explanation on its potential impact on the company.
Example of a PESTEL analysis for a car manufacturer
| Political | Electric car subsidies: Riding the wave of consumer enthusiasm for more sustainable vehicles, politicians are debating the creation of a new subsidy for electric cars. This may be an opportunity. |
| Economic | Rising interest rates: This may constitute a threat since consumers will spend more on their mortgage and have less disposable income to spend on big-ticket purchases, like a new vehicle. |
| Social | Population aging: The average age of a consumer is rising and their car preferences are changing. They want more comfortable vehicles with more seats to accommodate a growing family. |
| Technical | Supply chain disruptions: Modern cars are computers on wheels. They require a high number of microprocessors, but the recurrent supply chain disruptions have made it necessary to find new suppliers, or to increase stocks in anticipation of a shortage. |
| Environmental | Carbon emissions: Consumers are expecting and demanding cleaner vehicles. As a result, they may ask for emission standards to be tightened. This may be a threat if your vehicles test poorly for emissions. |
| Legal | Stricter safety standards: Responding to a rise in the number of highway deaths, a new legislation that imposes higher safety standards is passed. This may be an opportunity to position your company as a manufacturer of safer cars. |
What is the difference between SWOT and PESTEL analysis?
PESTEL is a tool used to analyze your company’s external environment. SWOT analysis is a framework for identifying and analyzing both internal factors affecting you company—its strengths and weaknesses—as well as external—the opportunities and threats it faces.
While both SWOT and PESTEL help you to survey the external factors affecting your company, Fralich considers SWOT a more rudimentary tool, since it lacks a systematic approach to analyzing your external environment.
Next step
Download the free BDC guide The Foundations of Strategic Planning and discover how to set measurable targets for your business, create an action plan and ensure you have the capabilities to succeed.