9.3 Understanding External Factors
PESTEL analysis is an important tool for organizing factors within the general environment and identifying how they influence industries and firms. PESTEL is an anagram, meaning it is a word that is created by using parts of other words. In particular, PESTEL reflects the names of the six segments of the general environment: (1) political, (2) economic, (3) social, (4) technological, (5) environmental, and (6) legal. Wise executives carefully examine each of these six segments to identify significant opportunities and threats and then adjust their firms’ strategies accordingly.
Political Factors
Political factors center on the role of governments in shaping business. This segment includes elements such as tax policies, changes in trade restrictions and tariffs, and the stability of governments. Immigration policy is an aspect of the political segment of the general environment that offers important implications for many different organizations.
Economic Factors
Economic factors center on the economic conditions within which organizations operate. It includes elements such as interest rates, inflation rates, gross domestic product, unemployment rates, levels of disposable income, and the general growth or decline of the economy.
Social Factors
Social factors include demographics such as population size, age, and ethnic mix, as well as societal norms, customs, and values prevalent in the population where an organization functions.
Technological Factors
Technological factors focus on improvements in products and services provided by science. Relevant factors include, for example, changes in the rate of new product development, increases in automation, and advancements in service industry delivery.
Environmental Factors
Environmental factors involve the physical conditions within which organizations operate. It includes natural disasters, pollution levels, and weather patterns. Heightened awareness of climate change impacts has compelled companies to modify their operations and product offerings, leading to increased engagement in corporate social responsibility (CSR) and sustainability practices.
Legal Factors
Legal factors consider how the courts influence business activity. Examples of important legal factors include employment laws, health and safety regulations, discrimination laws, and antitrust laws. A clear understanding of legal boundaries is crucial for companies to trade successfully and ethically. Global trade poses additional challenges as each country has its own set of rules and regulations.
|
Political
|
Economic
|
Social
|
Technological
|
Environmental
|
Legal
|
Recognizing that numerous additional factors could impact a particular enterprise is essential. Moreover, the significance of these factors tends to differ across industries and nations. For instance, the software industry may be less affected by environmental and ecological considerations compared to the oil or automotive sector. Golf is a global sport, and many top equipment manufacturers do business in several countries, subjecting themselves to different political landscapes, tax laws, and cultural trends. Golf, like other sectors, is reliant on global trade, supply chain logistics, raw material cultivation, and political stability.
Key Takeaway
The PESTEL model of analysis provides a framework for determining the ways in which external factors can affect the performance of an organization. These factors can overlap and combine, sometimes in unpredictable ways that a business will need to be aware of.
“15 Evaluating the General Environment” from Mastering Strategic Management- 1st Canadian Edition Copyright © 2014 by Janice Edwards is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted. Modification: rewritten for brevity.
