What is PESTEL analysis

PESTEL Analysis - analyze the macro environment

Would you like to work all over the world later, as independently as possible and with one or more of your own companies? Then you need the PESTEL analysis, with which you can precisely explore all external influencing factors for the company's success in the foreign country / market in advance, which you cannot or can hardly change yourself.

Before doing this, you can already prove during your studies that with the PESTEL analysis you can analyze and evaluate the macroeconomic framework conditions in India, China, your favorite country far away so precisely that you could open a company there tomorrow. Here is the information you need to get started with the PESTEL analysis process:

frequently asked Questions

The PESTEL analysis analyzes the entire detectable macro environment of a new market on the basis of six external criteria. Porter's five forces is an industry structure analysis by the US economist and business professor that analyzes the strategic environment of a company based on five competitive forces that differ from industry to industry.

The PESTEL analysis developed from the PEST analysis: in 1967 Francis J. Aguilar, professor at Harvard Business School, published the critical book "Scanning the Business Environment", which founded the ETPS analysis of economic, technical, political and social influences . Arnold Brown from the American Institute of Life Insurance made it a STEP analysis, which also stands for "Strategic Trend Evaluation Process". Now a colorful game of acronyms began, in which many authors participated and attentive (British) observers added the E for ecologic and the L for legal; the competition between PESTEL and PESTLE has not yet been decided.

Certainly, just the breakdown of the history of origin can be thematically broadly based, the practical examples can be illustrated excellently, the presentation of the individual factors benefits from a broad and good general education.

PESTEL Analysis: The Definition

The PESTEL analysis analyzes all factors that, according to the current state of knowledge, can influence the success of a company in a foreign market / country. If companies or organizations invest in foreign, foreign markets or want to expand their area of ​​activity into foreign countries, they should of course always evaluate the respective target country beforehand; the PESTEL analysis provides an analysis tool for this.

With this strategic tool, questions about the external environment of a company in the target market can be answered and the effects of macroeconomic developments on companies willing to expand can be assessed. An important basis for decision-making for strategy development by the respective management, because the PESTEL analysis looks exactly at those factors that cannot be influenced by the company itself (more precisely: can only be influenced through political and social engagement or lobbying, i.e. with highly uncertain success).

The influencing factors of the PESTEL analysis

Political influencing factors of the PESTEL analysis

The politics of the target country always has a great influence on company strategies:
How stable is the political situation in the country? Unrest and civil wars make many trade activities impossible and complicate all activities.
Does the economic order even promote economic activity? If the economic goods are administered centrally in a totalitarian state, any private-sector activity is usually highly undesirable because previously unavailable products arouse uncomfortable wishes for the government.
Does foreign policy promote economic activities by foreign companies?
Even in the free market economy of democratic states, trade barriers can make trade and investments by foreign market participants more difficult.
Other political factors are e.g. B .:

  • Existence and situation of political parties
  • Competition oversight
  • legislation

Economic influencing factors of the PESTEL analysis

Economic influencing factors are of course also very important. This step of the PESTEL analysis primarily assesses the sales opportunities in the target country: GDP, population growth, per capita income and unemployment rate enable statements to be made about consumption that is to be expected in this country.
The strength of the currency and exchange rates have an impact on profit, because a strong currency in your own country makes products more expensive in the target country - a considerable competitive disadvantage.
Other economic factors are e.g. B .:

  • Economic growth
  • inflation
  • Interest rates

Socio-cultural influencing factors of the PESTEL analysis

For the influencing factor “social and cultural peculiarities”, the expected effects of attitudes and values, religious activity, language, education and other peculiarities of buyer behavior on the planned economic activity are analyzed. A very religious way of life makes z. For example, the sale of many “Western” products is almost impossible and extends (like almost all socio-cultural influencing factors) to the area of ​​employees and suppliers on site.
Other economic factors are e.g. B .:

  • demographic influences (the "demographic change")
  • Extent of socio-cultural differences
  • lifestyle
  • Food habits or prohibitions
  • Daily routine, extended rest periods

Technological influencing factors of the PESTEL analysis

What are the technological framework conditions in the target country, especially in the respective special market?
Do the technical standards in the country meet the requirements or are they higher than in the country of origin?
Is there enough infrastructure available for energy supply, transport, communication and information?
Other economic factors are e.g. B .:

  • Research landscape
  • Supplier structure
  • Normalization
  • The progressiveness of society, which influences the speed of change

Ecological-geographical influencing factors of the PESTEL analysis

In the meantime, the simple state of the environment in the destination country has become very important among the ecological-geographical influencing factors. This also shows how much the various influencing factors of the PESTEL analysis interact, because the state of the environment depends on government policy, legislation and the control of compliance with the law, the eating and consumption behavior of the residents, etc. If environmental protection is rather unimportant in the target country in which the company wants to become involved, this can seriously damage the company's reputation in the home country.
The ecological-geographical influencing factors also include:

  • Opportunities for climate-neutral production
  • Terrain texture
  • Availability of resources
  • Degree of urbanization
  • Climate and average temperatures
  • Infrastructure for waste disposal and the removal of contaminated sites.

Legal influencing factors of the PESTEL analysis

The legal influencing factors influence both the economic and the actual security of the company.
The worse the legal system works in the target country, the more likely it is that competitors will get away with baseless attacks, landlords with terminations contrary to the contract and consumers with refusals to pay.
Individual laws in the target country can limit the company's room for maneuver with regard to specific products (safety and test regulations), but also when employing employees, advertising certain products, etc.
Further legal influencing factors are e.g. B .:

  • Labor law and health and safety
  • Speed ​​of legislation
  • Legal awareness of society

Imagine that you work in the USA, in the marketing department of a corporation that wants to conquer the German market with a snack with a high sugar content. The snack is to be produced on site in a factory in Germany, a PESTEL analysis is to clarify the macroeconomic framework conditions and describe the risks.

Political influencing factors

PESTEL analysis example:
Stable political situation, foreign investments are welcome and easy and inexpensive thanks to free trade agreements.
If the snack complies with German food legislation and labeling regulations, it can be sold without restrictions in the free market economy.
Overall, the political risk can be assessed as low.

Legal influencing factors

PESTEL analysis example:
Legal system type "Code Law", contracts must be adhered to, the legal awareness of the Germans is similar to that of the Americans. However, the German food laws have a high level of health protection for citizens that could overwhelm an American corporation. In addition, the courts are sometimes overloaded, warning associations rush to every smallest violation of countless labeling, data protection and other regulations. The group has to deal with two extremely complex legal systems and is faced with an excessive amount of bureaucracy in Germany, with too few staff in many departments, which increases the legal risk even more.

Ecological influencing factors

PESTEL analysis example:
Compared to the USA overall at a high level and largely positive. The high proportion of sugar could, however, cause negative media reports and warnings from consumer organizations, and a “hire and fire” treatment of German factory employees is quite difficult in Germany, even with a legal legal construction.

Economic influencing factors

PESTEL analysis example:
High purchasing power, high per capita income, steadily growing GDP and low unemployment figures promise a high sales volume.
A low key interest rate (the ECB) makes investments cheap for US companies.
However, current developments are weakening the economy, which could pose a long-term risk to investments.

Socio-cultural influencing factors

PESTEL analysis example:
German consumers are living increasingly healthier lives, with limited sugar consumption or even completely without industrial sugar additives.
The food manufacturers are following this trend, which increases the risk of non-acceptance of a snack with a very high sugar content due to habituation aspects.
Overall, there is probably a high risk that a high, US-standard sugar content will not arrive on the German market because it no longer tastes good to the "unteachable" because of the displacement of the actual flavoring aromas.

Technological influencing factors

PESTEL analysis example:
To be assessed positively all round, with a high-level infrastructure, a logistical network can be set up for the sale of the snacks with little risk.

In summary, according to the PESTEL analysis, nothing speaks against the investment if part of the sugar in the product can be replaced by food with nutritional value and the management adjusts to the legal risks.

Application of the PESTEL analysis

The PESTEL analysis is used when a company invests in a new, unknown market. She analyzes the macroeconomic framework: All external factors that could play a role for success in the new, foreign market.

After completing the PESTEL analysis, it must be assessed which results flow in which form into the company's strategy development.

Because very different influencing factors play important and less important roles depending on the type, scope and employee composition of a company, PESTEL analyzes carried out only for the individual company are usually sufficiently informative. The frequently asked examples of PESTEL Analyzes, which provide an overview of "the market" of a country or an industry in this country, usually contain so many general statements that they are rather uninteresting for certain individual companies.

It is important to notethat the factors are mutually dependent on one another, i.e. changes in one area (often) result in / cause changes in other areas. This is another reason why a complete PESTEL analysis is not satisfied with identifying the influences, but rather explores the driving forces behind the perceived changes, which often come from completely different categories of influencing factors.

The results of the PESTEL analysis can be converted into a SWOT analysis are incorporated, with which the strengths, weaknesses, opportunities and risks of or for the respective company are analyzed for strategy development and position determination (Strengths, Weaknesses, Opportunities, Threats = SWOT)

The PESTEL analysis should always be started as early as possible and extended to the entire time available so that it reveals as much as possible about developments and upcoming changes in the target country.

PEST analysis vs. PESTEL analysis

The PEST analysis is the origin or beginning, which has been expanded to the PESTEL analysis via the clarifying, sometimes used synonymously, STEP analysis.

While the PEST analysis emerged as a more pleasing acronym from the ETPS analysis of economic, technical (technical), political and social (social) influences and the STEP analysis with its nickname "Strategic Trend Evaluation Process" is a bit in the direction The environment is cross-eyed, the PESTEL analysis today considers technological as well as ecological (ecologic) and legal (legal) influences.

The PEST analysis was created in times of unbroken belief in the "Homo oeconomicus", the exclusively economically thinking model person with an unrestricted ability to behave rationally.

In macroeconomics, Homo oeconomicus still plays a certain role as a “representative agent” in the analysis of economic processes. However, real people have crept into the PESTEL analysis by considering ecological-geographical issues such as environmental protection and including legal issues such as occupational safety, just as they have decided into all of modern economics.

What does the term PESTEL stand for?

PESTEL is an acronym from the influencing factors that are considered in the PESTEL analysis: political, economic, social, technological, ecologic (environmental), legal - i.e. political, economic, socio-cultural, technological, ecological-geographical and legal influences.

Who is a PESTEL analysis suitable for?

Usually companies do a PESTEL analysis when they plan to expand into new markets / countries. The PESTEL analysis helps to assess the risks and opportunities of such an expansion.

To a certain extent, the PESTEL analysis is also suitable for other organizations, as even humane help is always connected to a certain extent with economic activity, the framework conditions of which the PESTEL analysis takes a close look at.

About the author

Philipp Seyss