What is PESTEL Analysis And Why it is Used

PESTEL analysis is used to evaluate the impact of external factors on a business. You can use PESTEL to identify opportunities and threats in your external environment.

Pestel analysis is suitable for any business type, as it is a strategic tool used to assess the macro-environmental factors that have an impact on the industry and on the particular business.

But in general, medium sized businesses can derive benefits from a PESTEL analysis.

Factors in PESTEL Analysis

PESTEL stands for political, economic, social, technological, environmental, and legal.

Political: Governments can impact businesses in various ways, including through legislation and taxation.

You need to be aware of current political trends, for example, in terms of trade agreements, as well as changes in government policies.

Economic: Understanding economic factors is important as it can influence your profits, costs and investments.

This includes examining economic indicators such as GDP, inflation, unemployment, and exchange rates.

Social: The social factors, such as changing values and beliefs, population demographics, and cultural trends are important.

These can influence customer and employee behaviour and impact how you market products and services.

Technological: Understanding technological advancements is important as they can drive innovation, productivity, and cost savings.

You can use technology to improve products and services and gain a competitive advantage.

Environmental: Environmental factors can have an impact on your business in terms of costs, regulations and public perceptions.

You need to consider the potential consequences of their activities on the environment and take measures to reduce their impact.

Legal: Laws and regulations can affect businesses in various ways.

Ensure compliance with laws and regulations to remain compliant and protect your reputation.

Example of PESTEL Analysis

Let us take the case study of Hong Kong –

Political
Hong Kong has a low-tax regime and low levels of government interference, which have created favorable conditions for business operations.

Additionally, it is seen as politically stable, with a high degree of freedom that enables businesses to operate without facing major impediments from the government.

Economic
Hong Kong has a strong economy and is one of the most economically prosperous regions in the world.

It has a highly developed labor market and a well-developed financial system. Furthermore, its currency is linked to the US dollar and a pegged exchange rate system, making it an attractive option for international investors.

Social
The city is known for its highly educated and competitive workforce and a strong tradition of entrepreneurship.

Additionally, the region has a developed infrastructure, high urban density and a dense transportation network, making it an ideal place to do business.

Technological
It is a hub of leading information and communication technologies and has advanced IT infrastructure and a highly sophisticated telecommunications network.

Additionally, the region has invested heavily in broadband internet access, making it a great location for digital businesses.

Environmental
The city has a long history of environmental stewardship and has recently implemented policies to promote sustainable development and reduce carbon emissions.

Furthermore, the region’s close proximity to mainland China presents potential opportunities for the development of green technologies.

Legal
Hong Kong has an independent legal system based on the rule of law, making it a safe and secure place to do business.

Additionally, the region is well-respected for its robust intellectual property laws, ensuring that businesses are protected from intellectual property theft.

Benefits of PESTEL Analysis

Doing a PESTEL analysis can be valuable for a business, as it exposes the macro economic trends that affect the business.

Comprehensive Analysis: PESTEL analysis provides a comprehensive analysis of the macroenvironment in which an organization operates.

Enables Anticipation: The analysis enables you to anticipate and better plan for changes and take advantage of opportunities.

Changes in government policy, economic events, and technological innovations are known through a PESTEL analysis.

Improved Planning: Using PESTEL analysis can help you plan better and set more effective strategies, by understanding the external environment in which they operate.

Wide Range of Impacts Considered: It helps to identify a wide range of impacts and influences on your business, which may not otherwise be considered.

By taking into account a wide range of future scenarios, you can be better prepared for the future and better equipped to manage any changes or events which may occur.

Drawbacks of PESTEL Analysis

PESTEL analysis suffers from a few concerns –

Not Useful for Short Term Planning: This analysis is most useful when dealing with long-term strategic planning.

It can be difficult to make reliable predictions about the effects of external factors in the short term, which limits the ability to help inform decision-making with regard to upcoming campaigns or strategies.

Time Consuming: It is a comprehensive process which requires you to study the external environment thoroughly.

This examination can take up quite a bit of the your time, especially if you are unaware of certain external factors or do not have access to relevant data.

Finally

PESTEL is a valuable tool to help you assess the external environment, identify potential risks and opportunities, and understand how external factors can impact operations.

By using PESTEL analysis, you can develop strategies to achieve long-term success.