In an earlier post we looked at the benefits, challenges and common pitfalls of a SWOT analysis – the most commonly-used tool of strategy analysis. In this post we would like to explore how an organisation can ‘supercharge’ its SWOT analysis by using a PESTEL analysis.
PESTEL analysis, often PEST or STEEP analysis (and sometimes PESTLE, PESTLIED, SLEPT or STEEPLE) is a simple but important tool for understanding the environment within which an organisation operates. By considering the following factors, strategic analysts can use PESTEL analysis to identify opportunities for and threats to the organisation from its environment, and can use this strategic intelligence to enhance the quality, and value, of the SWOT analysis.
Political factors affecting an organisation are concerned with to what degree the government intervenes in the economy. Specifically, political factors can include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs, and political stability. Political factors may also include goods and services which the government wants to provide or be provided (merit goods) and those that the government does not want to be provided (demerit goods). Furthermore, governments have great influence on the health, education, and infrastructure of a nation.
Economic factors can include economic growth, interest rates, exchange rates and the inflation rate. These factors have major impacts on how businesses operate and make decisions. For example, interest rates affect a firm’s cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy.
Sociological factors can include cultural aspects, for example health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a company’s products and how that company operates. For example, an aging population may imply a smaller and less-willing workforce (thus increasing the cost of labour).
Technological factors can include technological aspects such as R&D activity, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation.
Environmental factors can include ecological and environmental aspects such as weather, climate, and climate change, which may especially affect industries such as tourism, farming, and insurance. Furthermore, growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer, both creating new markets and diminishing or destroying existing ones.
Legal factors can include discrimination law, consumer law, employment law, and health and safety law. These factors can affect how a company operates, its costs, and the demand for its products.
Organisations that use PESTEL analysis effectively can avoid committing resources to strategies that are bound to fail due to forces beyond the organisation’s control. They can strategise to reduce the impact of expected negative changes in the environment. And they can identify and take advantage of opportunities that may emerge due to such changes.
As mentioned earlier, there are a number of similar mnemonics, or variants, other than PESTEL analysis for environmental analysis, as follows. It doesn’t really matter which you choose to use.
- PESTEL / PESTLE: Political, Economic, Sociological, Technological, Legal, Environmental
- PESTLIED: Political, Economic, Social, Technological, Legal, International, Environmental, Demographic
- STEEPLE: Social/Demographic, Technological, Economic, Environmental, Political, Legal, Ethical
- SLEPT: Social, Legal, Economic, Political, Technological.