If this title scares you or you have no wonder what it is, then hang in there. You need to know it more than you think, even if you are a one-person shop.
The PESTEL analysis is an analysis of the environment that affects industries and ultimately companies. Basically, you need to know what’s going on in the world before you start a business and also after you get going. If not, you could be operating a business and ultimately fail because you are not paying attention to the rest of the world.
Let’s use an example here. Let’s say you are a digital camera manufacturer about 10 years ago. You were one of the top 3 companies in the market. You had 25% market share, you had great sales, high margins, great distribution in stores like Target, Walmart and Best Buy. You sold a lot of cameras. You read up on the competitors and knew what lines of businesses they were branching into. You devised a great marketing strategy to bring customers to your product instead of the other digital cameras on the market. You were making money.
Then this little computer company, ie Apple, comes along and makes a touchscreen phone. Consumers like the new technology. Apple releases new versions for the first few years with new functions and even a “camera” feature. The first pictures are such low digital quality that consumers can’t even print them out. Within three years of the Apple iphone releases, the resolution quality of the iphone is the same as the digital cameras you are selling. Let’s skip to the end of the example and consumers are no longer buying digital cameras because they already have it on the smartphones. What did your company do to minimize risk, create new products, or basically just stay i nbusiness?
There are 6 factors in the pESTEL: political, economic, sociocultural, technological, environmental, and legal/regulatory.
Political factors are the political process and policies, including tax policy, fiscal policy, tariffs, political climate, and the strength of institutions like the federal banking systems. You don’t have to claim your political status here but know what’s being discussed, laws that are proposed on the table, even those affecting small businesses.
Economic factors include the overall economic climate, either global, federal, state, or local. Specific factors include interest rate, exchange rates, inflation rate, unemployment rate, economic growth, trade deficits or surpluses, savings rates, consumer discretionary income, and per capita domestic product. THIS SECTION IS HUGE for most businesses.
Sociocultural factors are the values, cultural beliefs, attitudes, and lifestyles of the people. This also includes population size, growth rate, and age distribution. These may change over time and can vary by location. Consider: Are more consumers buying natural foods versus fast food? How does the aging Baby Boomer population affect your industry?
Technological factors include the pace of technological change and developments. These include creating knowledge and controlling the use of technology, including patent and copyright laws, nanotechnology, and gene editing.
Environmental factors include ecological and environmental forces, including weather, natural resources, climate, climate change, and associated issues. Environmental factors can directly impact insurance, farming, tourism, and energy production. Consider: These issues can include recycling, reusing, and overall reduction in consumption.
Legal factors are the laws and regulations that govern companies must follow. These laws include consumer, labor, antitrust, and OSHA laws. Some laws may be industry- specific, such as banks. In case you haven’t heard, the JOBS ACT of 2012 created law and regulations to make crowdfunding legal. If you need to raise money for your business, check out my blog about how small businesses can use crowdfunding to raise money!
I know this is a lot of boring business stuff but outside factors can heavily influence your business. If consumers don’t have jobs, they are not buying a lot of extra stuff and possibly not buying your $5 ice cream scoop or $40 custom-made t-shirt.
If you need more information with instruction on how to write your own PESTEL analysis, check out my free teaching video here or email me at firstname.lastname@example.org.
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