Video Transcript: PESTEL Analysis Explained

So you want to map out the external environment of an organization, but you  don't know where to start. PESTEL is your answer. Today I'm going to tell you  everything you need to know about the PESTEL analysis. My name is Lars, and  welcome to a new episode of business to you. PESTEL. Pest, steeple, destep or the spelit analysis. They're all different versions of basically the same thing with  the exact same goal, which is to help you analyze the external environment of  an organization. This is especially useful when starting a new business or when  entering a foreign market or a different industry with an existing company.  Before I go into the actual framework, I want to clearly define the external  environment that is being examined, because PESTEL analysis does not just  look at any external factor out there, but more specifically to macro  environmental factors in order to explain it better. Let's imagine a fictional  company. First of all, you have the company itself. Everything that exists and  happens within that company can be considered internal. Think about the  organizational structure of the company, the culture, the employees, the  management, shareholders, reward systems, etc, closely surrounding the  company, which are therefore external, are competitors, suppliers, distributors,  customers or strategic partners. These external elements, so to speak, are in a  direct contact with the focal company. They interact with one another. It's a two  way relationship. Sometimes this part of the external environment is called the  task environment. Now it's very important to realize that even though PESTEL is looking at external factors, it is not looking at these factors, like mentioned  before, PESTEL looks at the more general environment, the macro  environmental factors, which can have a massive impact on the company, but  not the other way around. They therefore have a one way effect, rather than an  interaction like with the task environment. If you want to look more into the task  environment, I advise you to use Porter five forces, which I will make a video on  very soon. So now we have that cleared up. Let's go into the PESTEL analysis.  PESTEL is an acronym that stands for political, economic, social, technological,  environmental and legal factors. Together, they make up quite an exhaustive list  of the general environment. In other words, if you look at all of these six factors  combined, when scanning the organization's environment, you are less likely to  miss out on any important macro environmental factors. Let's go through all of  them, one by one. Political these factors are all about how and to what degree a  government intervenes in the economy or a certain industry. Basically all the  influences that a government has on your business could be classified here.  This can include government policy, political stability or instability, corruption,  foreign trade policies, tax policies, etc. Furthermore, the government may have  a profound impact on how a nation's education system works, how infrastructure looks like and how the health sector is regulated. These are all factors that need  to be taken into account when assessing the attractiveness of a potential  market. Economic Factors are determinants of a certain economy's 

performance. Factors include the economic growth, exchange rates, inflation  rates, interest rates, disposable income of consumers and unemployment rates.  These factors may have a direct or an indirect, long term impact on a company,  since it affects the purchasing power of consumers and could possibly change  the demand and supply in the economy. Therefore it also affects the way  companies price their products and services. You can imagine that in a country  where purchasing power is relatively low, prices are also lower the social  dimension. This dimension of the general environment represents the  demographic characteristics, norms, customs and values of the population  within which the organization operates. This includes trends such as the  population growth rate, age distribution, income levels, but also attitudes  towards careers, health, lifestyle and possible cultural barriers. These factors  are especially important for marketeers when targeting certain customers. In  addition, it also says something about the local workforce and its willingness to  work under certain conditions. Some people like to distinguish these factors by  separating social factors into demographics and cultural or intercultural factors  that explains these different versions of the PESTEL analysis. Personally, I'm  fine with the social category, since it combines all factors related to the people,  but feel free to adapt it in a way that suits you. Of course, technological factors,  these factors. Pertain to innovations in technology and the regulations  surrounding technology that may affect the operation of the industry in the  market, favorably or unfavorably. Think about technology incentives, the level of  innovation, automation, R & D, activity, technological change and the amount of  technological awareness that the market possesses. These factors may  influence decisions to enter or not enter certain industries, to launch or not  launch certain products, or to outsource production activities abroad. By  knowing what is going on technology wise, you may be able to prevent your  company from spending a lot of money on developing a technology that would  become obsolete very soon due to disruptive technological changes elsewhere,  environmental factors have come to the forefront only relatively recently. They  have become important due to the increasing scarcity of raw materials, pollution  targets and carbon footprint targets set by governments and pressure from  NGOs, like, for example, Greenpeace. It is important to mention that you  shouldn't be confused about the term environmental here, since we also use  that to indicate all external factors combined, environmental simply has a double meaning here, and in this context, we use it to address ecological aspects, such  as weather, climate environmental offsets and climate change, basically the well  being of our planet. Growing awareness of the potential impacts of climate  change is affecting how companies operate and what kind of products they offer. This has led to many companies getting more and more involved in practices  such as corporate social responsibility and sustainability. So finally, the legal  factors, although these factors may have some overlap with political factors, 

they include more specific laws such as discrimination laws, antitrust laws,  employment laws, consumer protection laws, copyright and patent laws and  health and safety laws. It is clear that companies need to know what is and what is not legal in order to operate successfully and rightfully. If an organization  trades globally, this becomes especially tricky, since each country has its own  set of rules and regulations. In addition, you want to be aware of potential  changes in legislation and impact it may have on your business in the future. So  I recommend it is to have a legal advisor or an attorney to help you with these  kind of things. So all of these factors combined give a good overview of the  general environment out there. Which factors are most important for your  business might vary based on the country and industry you are in as you might  be able to imagine, environmental and ecological factors are more important to  the oil and automotive industry than, for example, the software industry. So if  you want to bring PESTEL into practice and actually use it properly, I  recommend you to calculate weighted averages of the available options you  have. Imagine you are a European company, and you're thinking of entering the  South American market, but you don't know which country to enter first, what  you could do is select a number of PESTEL factors that are most important to  your business. Let's say we want to look at the economic growth, corruption and how intellectual property is protected, give them a weighting of their importance  relative to the other factors, and assign grades for each factor per country. In the end, you are able to give each option a weighted average grade and compare  them to each other. So you might be wondering where to get that data from. You will actually be surprised how many of the factors that I have just mentioned in  this video are already measured and given a score, even something as  corruption, for example, is measured by the Corruption Perception Index. There  are many helpful websites where these factors are quantified per country, and of course, I'm here to help you out, so I included some useful links in the  description down below. If you like business related stuff, feel free to subscribe  to not miss out on any of our future videos, and if you have any question on the  subject, please ask them below in the comment section, because I will try to  answer as many as I can. And of course, I highly encourage all of you to help  each other out as well and get the discussion going. Thanks for watching. And  don't forget, alone we are smart together. We are brilliant. See you next time