PESTEL analysis

Introduction

A PESTEL analysis is study of the political, economic, socio-cultural, technological, environment and legal factors. It provides a useful starting point to any analysis of the general environment surrounding an organisation.

Political

The political environment consists of laws, government agencies, and pressure groups that influence and limit various organizations and individuals in a given society. For example is the corporate tax.

Economic

The economic environment consists of factors that affect consumer purchasing power and spending patterns. With the generation moving into its prime wage-earning and the number of small families headed by dual-career couples continue to increase, organisation must pay attention to consumer expenditure and disposable income as consumers continue to demand for quality products and better service. Nations also vary greatly in their levels and distribution of income e.g. GNP trend. Constant monitoring of inflation, currency fluctuations and exchange rates is necessary so that the organisation would not be caught short in a boom e.g. A country’s economic slowdown that leads to retrenchment hence unemployment. With adequate warning, organisations can take advantage of changes in the economic environment.

Cultural

The cultural environment is made up of institutions and other forces that affect a society’s basic values, perceptions, preferences and behaviour. People in a given society hold many beliefs and values. Although core values are fairly persistent, cultural swings do take place. Organisations predict cultural shifts in order to spot opportunities or threats. People also vary in their emphasis on serving themselves versus serving others. Some people seek personal pleasure while others seek self-realization hence organisations must take into concern people attitudes to work and leisure. Organisations must pay attention to income distribution as well as average income. With the more educated workforce, lifestyle changes for the demand for quality products etc.

Technological

The technological environment is the most dramatic force shaping our destiny. The technological environment changes rapidly and it creates new markets and opportunities. New technology replaces old technology hence organisations should watch the technological environment closely before their products turn obsolete. Today’s research is usually carried out by research teams heavily subsidise by government on their focus on technology. In some situations, developments in nominally unrelated industries may be applicable in the organisation.

Environment

The natural environment involves the natural resources that are needed as inputs that affect the strategies. Such environmental trends are the increasing pollution and carbon emissions. For example is the disposal of chemical and nuclear wastes. Government intervention in natural resources management is their concern and efforts to promote a clean environment. For example, For example, tyres manufacture in china and India, it includes an anti-dumping law. Concern for the natural environment has spawned the so-called green movement that organisations are responding to consumer demands with ecological safer products and more energy-efficient operations. For example is that 3M runs a pollution prevention pays program that has led to a substantial reduction in pollution and costs.

Legal

It refers to regulations and legislation enforced to such as developing public policy to guide commerce, well-conceived regulation can encourage competition and ensure fair markets for goods and services. New laws and their enforcement will continue or increase and organisations must watch these developments when planning their strategy.

Importance of PESTEL analysis

It is important to study the environment surrounding the organisation for three main reasons.

1)    Most organisations compete against each other, so a study of the environment will provide information on the nature of competition as a step to developing sustainable competitive advantage.

2)    Most organisations will perceive opportunities that might be explored and threats that need to be continued. Opportunities and threats may come from government decisions, changes in technology and social developments and many other factors, hence not just from competitors.

3)    There are opportunities for networks and other linkages, which lead to sustainable co-operation. Such linkages with others may strengthen an organisation in its environment by providing mutual support.

Considerations

Before exploring specific aspects of the environmental analysis, it is important to consider the basic conditions surrounding the organisation. Special attention needs to be directed to the nature and strength of the forces driving strategic change such as the dynamics of the environment. Secondly in consideration of the factors surrounding the organisation, PESTEL analysis can be used to explore the general environment. It is useful to draw a distinction between the proactive outcomes and reactive outcomes when analysing the environment.

Limitations

There are three difficulties in determining the connection between the organisation corporate strategy and its environment.

Firstly is the prescriptive versus emergent debate. Interpretations in the corporate strategy process imply a different status for the same basic topic hence the difficulty to which the analysis is put to use.

Secondly is the uncertainty. Corporate strategists regard the environment as uncertain.

Thirdly is the range of influences as every element of an organisation’s environment influence corporate strategy hence the ability of an organisation to cope with the existing situation.

Conclusion

To the prescriptive strategists, although the items in a PESTEL analysis rely on past events and experience, the analysis can be used as a forecast of the future. The past is history and corporate strategy is concerned with future action, but the best evidence about the future may derive from the past. Prescriptive strategists would suggest that it is worth attempting the task because major new investments make this hidden assumption anyway.

The emergent corporate strategists may well comment that the future is so uncertain that prediction is useless. If this view is held, a PESTEL analysis will fulfil a different role in interpreting past events and their interrelationships. In practice, some emergent strategists may give words of caution but still be tempted to predict the future. Overall, when used wisely, the PESTEL analysis has a role in corporate strategy.