The concept PESTEL Analysis Example(s) STATES it is a ‘structured approach‘ to analyzing the External Environment of an entity. The influences (current influences and possible future influences) of the environment on the entity are grouped into categories.
Table of Contents
There are SIX categories of environmental influence:
- P – Political Environment
- E – Economic Environment
- S – Social and Cultural Environment
- T – Technological Environment
- E – Ecological Influences
- L – Legal Environment
PESTEL Analysis Example(s) – Practical
1. Political Environment
The ‘Political Environment’ consists of political factors that can have a strong influence on business entities and other organisations.
|Google has to assess the prevailing ‘Political Environment’ in a country and its influence on the information dissemination.|
Google, in the recent past had to deal with ‘Political Issues’ with China. This is due to the laws and regulations regarding access to sensitive information in China.
Google is still dealing with these censorship issues and has even lost greater share of the market to a Major Chinese Search Engine ‘Baidu’.
[Such ‘Political Factors’ can prevent Google from thriving in certain countries.]
2. Economic Environment
The ‘Economic Environment’ consists of the economic influences on an entity and the effect of possible changes in economic factors on future business prospects.
|Example: Starbucks Corporation|
|Starbucks Corporation is an American Coffee Co. and Coffeehouse Chain. It was founded in Washington in 1971, it operates globally with major presence in United States, China, Canada, Japan and United Kingdom.|
The effect of ‘Economic Environment’ on Starbucks revenues is quite direct and supreme. The Major ‘Economic Factor‘ responsible for determining the profitability is the buying power of consumers which explains the overall economic state in the country. During 2007 – 2009, the economic crises had disrupted the consumer buying power significantly and consequently Starbucks saw a noticeable decrease in revenues. In 2008, the revenues had dropped by 28 % as compared to the previous period that led to the closure of around 900 stores and a layoff of about 6,700 employees.
Another important ‘Economic Factor’ Starbucks and such other businesses operating worldwide, is the Currency Exchange Rate. Strengthening home currency compared to foreign currencies diminishes the profits of companies operating globally.
[Simply put, as home currency increases in value, revenues generated in foreign markets in local currencies buy fewer units of the home currency, thus diminishing the total profits.]
3. Social and Cultural Environment
An entity is affected by ‘Social and Cultural’ influences in the countries or regions in which it operates, and by social customs and attitudes. Some influences are more significant than others.
|Example: Aging Population|
|In Western Europe, the average age of the population is rising. A large number of individuals are reaching retirement age, and (as a proportion of the total population) the number of people in work is declining.|
This ‘Demographic Change‘ will have consequences for many companies in the countries affected. It could be much more difficult in the future to attract and retain employees. In addition, a large part of the population will be older and in retirement from work. This could affect the demand for various goods and services, such as holidays and health products.
Among people of Retirement age, Two Distinct Social Groupings might emerge: (a) those who have retired because they have a sufficiently large pension AND; (b) those who cannot afford to retire because their pension would be inadequate for a reasonable living.
[An Increase in the number of older people continuing to work past normal retirement age will have an impact on human resources planning for employers.]
|Example: Healthy Living|
|In some countries there has been a growth in the awareness of ‘Healthy Living’ and ‘Healthy Eating’. This has affected companies in industries such as health and leisure (the demand for fitness clubs), clothing (the demand for sportswear and running shoes) and food manufacture (the demand for organic food).|
As a result, a large number of consumers have been prepared to pay more to obtain goods and services that offer healthier living and healthier foods.
[Companies might need to consider whether the trend towards ‘Healthy Living’ will continue, and if so, how they should respond to the continuing change in society.]
4. Technological Environment
The ‘Technological Environment’ consists of the science and technology available to an organisation (and its competitors), and changes and developments in science and technology.
|Example: Apple Vs Nokia|
|‘Apple’ is a great example of a successful consumer technology company known for its leading-edge product innovation and style.|
Apple was established in 1976 to sell personal computers. The original Macintosh was released in 1984 becoming an instant success. Apple remained focused on the PC market and despite enduring challenging times in the 1990’s launched the iPod digital audio player in 2001 shortly after launching iTunes. The incredible (and somewhat unexpected) success of the iPod laid the foundation for future product innovations such as the iPhone (launched in 2007 and now the best-selling mobile device in history) and the iPad (launched in 2010).
In contrast, ‘Nokia’ declined from being the market-leading vendor of mobile phones during the early 2000’s to exiting the mobile phone market in 2014 and selling-off its ailing mobile phone business to Microsoft in a deal totaling just $7bn (a fraction of its peak Market Capitalization).
[The contrast in fortunes lies in the fact that ‘Apple’ focused on developing leading-edge software, whilst ‘Nokia’ focused more on hardware.]
5. Ecological Influences
For business entities in some industries, ‘Environmental Factors’ have an important influence on strategic planning and decision-making.
|In 2007, ‘PwC’ announced a business strategy aimed at becoming climate neutral in its business operation and travel. Since 2004, it had reduced Carbon Emissions by over 40% through measures such as buying renewable energy. It planned to offset its remaining carbon emissions by purchasing carbon credits.|
‘PwC’ was also increasing the proportion of its waste that would be recycled to over 60%, cutting paper consumption per head of the workforce by 20% and reducing the amount of waste sent to landfill by more than 80%.
|Example: Shell Petroleum in Niger Delta|
|In 2012 lawyers representing a Nigerian Fishing Community took legal action against ‘Shell Petroleum’ seeking compensation for oil spills. ‘Shell’ accepted responsibility for the spillage of around 4,000 barrels of oil in Ogoniland in the Niger Delta in 2008 causing environmental damage to local communities. A contributing factor was the sabotage of oil pipelines in the Niger Delta as well as leaks from old and allegedly poorly maintained pipelines.|
[A UN environmental assessment of Ogoniland concluded that the region may take up to 30 years to recover fully from damage caused by years of oil spills.]
6. Legal Environment
The ‘Legal Environment’ consists of the laws and regulations affecting an entity, and the possibility of major new laws or regulations in the future.
|Example: Punjab Food Authority|
|In 2015 the ‘Punjab Food Authority’ (PFA) raided many restaurants offering fast food as well as continental dishes in Lahore. Most of the restaurants were sealed due to the provision of sub-standard food and non-compliance with the proper regulations regarding food safety put in place by the Government.|
As a consequence, many restaurant owners had to invest much in their ambiance, staff policies and kitchen hygiene as well as storage locations. They also had to invest in equipment to be used by the staff while cooking and serving (e.g. caps and gloves).
The Bottom Line
The concept PESTEL Analysis Example(s) STATES it is a ‘structured approach‘ to analyzing the External Environment of an entity. PESTEL analysis is a framework to help you to organize your ideas.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)