PESTEL analysis is very similar to Porter's five force theory.
Porter's Five Forces evaluates the competitive situation, whereas PESTEL identifies how several macro-environmental factors may affect an organization or a sector and its competitive standing. As we have already covered Porter's five force theory earlier, let us begin with the PESTEL analysis.
PESTEL analysis stands for "Political, Economic, Social, and Technological, Environmental and Legal analysis" and describes a framework of macro-environmental factors used in the environmental scanning component of strategic management.
- Political factors can be thought of as the extent of government intervention in the economy. Specifically, political factors include areas such as tax policy, labour laws, environmental laws, trade restrictions, tariffs, and political stability. Political factors may also include goods and services whose production & consumption the government intends to boost/restrict.
- Economic factors include economic growth, interest rates, exchange rates and the inflation rate. These factors have major impacts on how businesses operate and make decisions.
- Social factors include the cultural aspects and health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a company's products and how the company operates.
- Technological factors include ecological and environmental aspects, such as R&D activity, Automation, Technology incentives and the Rate of technological change. These factors determine barriers to entry & exit as well as minimum efficient production level and thus influence outsourcing decisions.
- Environmental factors include weather and climate change, which may especially affect industries such as tourism, farming, and insurance.
- Legal factors include discrimination laws, consumer laws, antitrust laws, employment laws, and health and safety laws.