PESTEL model: what is it and how can you use it?

17/10/2024

Businesses don’t exist in a vacuum. Even when all business elements are aligned —from the products and services offered to the team’s dedication— external factors regularly impact a company’s long-term success. Unfortunately, even the savviest entrepreneurs can’t control these external circumstances.

From politics to sustainability concerns to the latest tech innovations, companies across the world must navigate increasingly complex and intertwined circumstances. But there’s a bright side. Business leaders have developed a multi-pronged method to manage external circumstances that impact their business: the PESTEL model.

Do you know what the PESTEL model is and how it works? Keep reading and discover how you can use it today to start analyzing and streamlining your operations.

What is the PESTEL model?

The PESTEL model is a strategic planning outline that makes it easy for businesses to analyze how external circumstances influence their business. After analyzing each component, entrepreneurs can craft a plan to mitigate negative factors while capitalizing on positive ones. 

Using models like PESTEL is part of strategic planning and management —and is one of the core elements taught in business schools. Managers, CEOs, and other business leaders should carefully examine each component to improve their company’s outlook in a changing or difficult market. By studying and weighing each component, a company can improve its readiness.

Components of the PESTEL model

The most important and impactful factors are represented by the PESTEL acronym. Let’s break down what the PESTEL model stands for and how its components influence strategic planning:

  • P – Political factors like government policies, internal political issues, tax policies, regulations, and other regulatory environments that impact how a business runs. 

  • E – Economic factors like inflation, projected growth, job growth, unemployment, labor costs, and other economic realities that influence what is immediately possible for businesses.

  • S – Social factors like demographic shifts, consumer behavior, lifestyle trends, and societal values that frame how a business can operate within a certain market.

  • T – Technological factors like research and development, new innovations, and large-scale advancements that drive immediate change within a certain industry.

  • E – Environmental factors like sustainability, climate change, eco-friendly initiatives, and environmental regulations that affect how a business operates in terms of production, manufacturing, and even branding.

  • L – Legal factors like laws, regulations, labor standards, intellectual property rights, and similar factors that dictate how a business is allowed to operate in a specific region.

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When should you use the PESTEL model?

The PESTEL model can be applied to all business types, from marketing campaigns to electric vehicle market analysis. It helps improve a company’s ability to adjust to change, take on new markets, and evaluate risk.

But how do you know when your business could benefit from using the PESTEL model? Here are the prime times to underdog an analysis:

  • Planning a new project. Before kicking off a new project, the PESTEL model empowers businesses to strategically plan a step-by-step approach. Not only does it help them identify external threats, but it can also uncover potential strengths and opportunities that are worth pursuing.

  • Entering a new market. The PESTEL model helps businesses identify the circumstances that define a market. Using the model is crucial in assessing risk and streamlining operations from the start.

  • Adjusting to change. When markets change suddenly, the PESTEL model allows businesses to adjust to new realities. This might be due to new technology, updated legal regulations, or shifting environmental factors.

  • During a new product/service launch. A business that uses the PESTEL model in strategic planning can do a second analysis as the project’s launch date approaches. This lets businesses refine their strategy pre-launch.

  • As part of regular check-ins. Many successful companies use the PESTEL model throughout the year to analyze new projects, benchmark existing projects, develop new strategies, and study new markets.

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How to apply the PESTEL model

The more thoroughly a company studies each component of the PESTEL model, the more dynamic its approach becomes. In other words, the more meaningful the research, the clearer the outlook for a new business venture.

Here’s how to analyze a business plan using the PESTEL model component by component:

  1. Political. Identify and list all political factors that intersect with your project. For example, moments of great political change could greatly affect your project. Look at political policies that could affect finance, economics, exports and imports, taxation, international trade, and labor regulations specific to your industry.

  2. Economic. Evaluate economic factors that influence how consumers will interact with your product and/or service. This component should cover all potential intersections, from production habits to consumer spending trends to more internal elements like business loan acquisition.

  3. Social. Analyze all relevant social factors that impact your target demographic. Focus on research that uncovers data and qualitative information about your existing targets and potential new demographics. The tighter this social analysis, the more aligned the product/service will be with its intended audience.

  4. Technology. Investigate current technological factors and potential new changes. Look to identify changes that could have a negative impact on your project, along with new developments that could streamline operations, such as using AI. The more tied to tech the product/service is, the more important it is to continually analyze emerging technology. 

  5. Environmental. Look into potential environmental factors that could impact how your business operates. This might mean material acquisition and production for physical products, along with social movements and consumer trends that could impact services. In 2024, for example, sustainability is a major focus for business leaders and business publications like Forbes.

  6. Legal. Analyze relevant legal factors that will influence your business. It isn’t enough to study current legal issues —businesses should also study potential regulatory changes and how these impact similar businesses. 

By working through each component of the PESTEL model, companies can more easily navigate an ever-changing world. Though the model requires time, research, and thorough analysis during the strategic planning phase, entrepreneurs who utilize the PESTEL model have a step up on their competitors.

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