Firms are impacted by changes in their broad macro-environment – factors outside of the firm and the industry’s direct control. One framework for simplifying the external environment is the PEST or PESTEL framework. The framework identifies groupings of factors that firms should be paying attention to – the political, economic, social, technological, ecological, and legal factors. Considering how these factors influence your industry and firm can help you identify opportunities from changes in the environment or threats that you may want to develop contingency plans to protect against.
The political component of a firm’s broad environment concerns decisions made by the government. These may include decisions on the legality of various industries, taxation policies, or environmental standards – essentially all decisions made by a local or national government.
Given the scope of the government, the decisions made can have a broad impact on a wide variety of industries. Some firms are particularly influenced by political decisions – those whose products are most likely to face restrictions, or for whom the government itself is a primary purchaser (such as in construction, education, or health areas).
The economic component focuses on the impact the state of the economy can have on the company. The current economic environment may influence the availability and cost of capital for firms, economic growth rates, or exchange rates.
The broad economic environment can have considerable impacts on purchasing decisions (economic growth is for example often associated with increased consumer confidence/spending, particularly in the retail area), as well as investment decisions by companies (e.g., the ability to raise funds for expansion).
The social component of the PEST(EL) framework considers the impact of changing demographics and social trends. Prevailing beliefs in what is acceptable for firms to engage in have changed dramatically over a very short period, and it is important that companies are aware of shared beliefs of acceptable organizational behaviors.
The technological component of the PEST(EL) framework examines the impact of new technologies on companies. Technological changes can have profound impacts on the products that companies can produce, as well as the internal operations of the company. These changes may for example enable radically new business models for competing in a given market (for example Lyft and Uber’s entrance into the taxi-cab area), as well as enhancements to existing products.
Ecological (or environmental)
The ecological factors concern how the factors such as weather, climate, natural disasters, and pandemics influence companies. These may have significant short-term impacts on firms (for example disrupting supply chains), as well as long-term consequences on how firms must operate in a changing world.
The final component of the extended PESTEL framework is the legal segment. The legal component relates to how laws are implemented and enforced – for example, consumer-focused laws, anti-trust legislation, environmental laws, and employment laws that companies must follow.
There are clear connections between the legal component of the PESTEL framework and the political – many political decisions are enacted in laws. One way of thinking of the difference is to make the distinction between what the law is (political) and how the law is implemented (legal). Often regulators have large discretion in what companies they will prosecute and the penalty associated with various wrongdoings. The uncertainty for firms is not in the political arena per se, but rather the legal of how the enacted laws will be implemented.
Environmental components can influence one another
It is important to recognize that the components of the PEST framework can impact one another. Social pressures may lead to political decisions that are implemented in the legal area. Technological factors may influence how society interests.
Final thoughts: The key thing is to be aware and take account of external factors
When implementing the PESTEL framework, it is possible to get hung-up on which box a certain environmental consideration falls in – whether it is legal or political for example. Sometimes this may be because different components of the PESTEL framework can influence one another, and so the boundary is not always clear.
The key thing to keep in mind though is that the specific ‘box’ that an environmental component falls into is ultimately not important. The key thing is to be aware of these external factors – and the impact that they may have on your business.
This article explains the difference between the political and legal components of the PESTEL framework.
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This article explores strategic foresight – the opportunities that come from understanding your environment and how to predict likely industry trends.
This article explores the importance of external consistency – consistency between your strategy and the demands of the market.
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