PESTEL or PESTEL is an acronym for Political, Economic, Social, Technological, Environmental and Legal. It is actually analysis of macro environment situation. It provides knowledge regarding the factors that are not directly affecting the business but indirectly influencing decisions. Sometimes the business plan is flawless but due to unfavorable macro-economic variables the product fails. People who are starting their own business or marketers who want to launch their products in the market, analyze the environment in which their products will be interacting with different factors.
Therefore it is important to consider these factors apart from business specific issues.
As the full form suggests it calls for analyzing the political factors like policy of government regarding import/export, trade liberalization and restrictions, tax regimes and tax holidays according to government’s interest in sectors, foreign policy and investment plans, openness in accepting FDIs, laws regarding minimum wages and working hours, trade and unionization support, environmental laws and regulations, rent seeking and corruption, efficiency in setting up or selling off business. All these factors described actually effect the cost of doing business in a country. Businessmen or marketers will want political stability so that there idea is well received and does not go down the drain due to political frictions.
Economic factors pertains to interest rate or inflation fluctuations that might favor or hurt the purchasing power of the customers or Increase Company’s borrowing cost, any factor that intervenes with the demand and supply of the product comes in this domain. It includes exchange rate fluctuations in case of raw material import or major contribution being made through export, employment opportunities created by the state as it increases the purchasing power of customers. Credit terms are very critical in all financial matters. Financial crisis of 2008 was originated by banks that went too easy on credit terms when giving housing loans to customers, customers started defaulting because of acquiring loan which was more than their paying back ability. People started selling their loans to other individuals and hence the whole system collapsed. Too stringent policies are also not favorable to growth economies because then entrepreneurs do not get encouraged to implement their ideas fearing the financial liabilities.
Social factors includes issues like child labor, equal employment opportunity which that particular sector has to face and the product will be facing too if it chooses to operate in that particular sector. It assesses the mental approach of individuals in a given society given their demographic and psychographic. Education, age, income, life style and trends, for example in Japan majority of the population is old age therefore the social issues that they have are regarding pension funds, old homes and the products and services that they need would be related to their age. These social issues arise from the living standards and cultural norms of the region, like in some parts of the world women are not given equal opportunity as men to participate in economic activities and hence gender inequality is born. Few countries condemn child labor and state it as being illegal whereas other countries are so poor that they cannot survive unless each and every member of the family is working.
Technological involves the technological advancements and developments that are happening and might happen in the future and how the product and business can take advantage of these developments. This includes the modernization of processes and procedures through invention of new technology which would increase the efficiency and productivity. These technological improvements also open doors to new venues of investments and close doors for some. For example the latest developments have put Netflix, Walkman, VCRs, CD players, greeting cards, landlines out of business. It is very important to know the pace with which world is shifting as it puts many things to obsolesce. In this era if a business is not being innovative and evolving in terms of its product offerings or its procedures then it is setting up itself for liquidation. Customers tend to view innovative and creative companies as favorable and become loyal to them as they think they have the answer to their needs and problems.
Environment analysis includes the environmental hazards that company has to be cautious about as government and public in general are sensitive to these issues. In some countries there are heavy fines and penalties for not obeying the environmental laws and behaving in reckless manner. Usually companies are penalized for dumping waste in clean water source which becomes health hazard for beneficiaries of that source or not utilizing the resources efficiently, hence wasting resources which are already scarce and costing a lot. Companies need to analyze the kind of pollution they will create and kind of restrictions government has against this kind of pollution.
Laws it have to follow if it wishes to operate in that particular region comprises Legal factor. When a business is set up in a country or a region after bearing all the costs and expenses then it becomes important to know if it will be safeguarded against copycats and other frauds. Patent, trademark and other trade secrets law should be strong and implemented as only in this manner a business can function in a healthy environment. Otherwise infringements will take away the competitive advantage of the company over others that it has acquired after substantial investment in technology, research and development and hiring best resource. Other than this it is necessary to know the local laws that are subject to change according to local preferences but are enforced nevertheless like minimum wage laws. Violation of any such law could earn company a bad name and expense in the form of fine that will eat away the revenues.