What is PESTEL Analysis of a Company

No matter how robust your business is, external factors in India will always affect it. Political climate, economic policies, and social trends will impact you in ways that you sometimes don’t foresee.

That’s why the PESTEL analysis is essential.

The PESTEL analysis of a company catalogs external factors and how they might affect your business. It’s critical for strategic decision-making and goal-setting, especially in a market environment as dynamic as it is today.

This article will answer the question, “What is PESTEL analysis?” and discuss everything you need to know to use this framework for your business. Let’s dive right in.

Introduction to PESTEL Analysis: Purpose and Importance

India has a staggeringly wide start-up ecosystem — in fact, it’s the 3rd largest in the world, according to Startup India. Last 2019 alone saw the birth of approximately 2 to 3 startups every single day.

But guess what? 90% of them fail within five years.

Of course, there are many factors about why a startup or a business might fail. One of the most important and overlooked factors, however, is the external environment.

That’s where a PESTEL analysis comes in.

Also called the PESTLE analysis, this framework is a tool that helps you understand the bigger picture of your market landscape. 

PESTEL stands for political, economic, social, technological, environmental, and legal – the big factors that will affect you, in one way or another. This method is especially useful in India, where these factors are diverse and rapidly changing. 

Here are the importance of PESTEL analysis:

• Identifies opportunities and threats. SWOT and PESTEL analysis is a match made in heaven. PESTEL helps you spot emerging trends, while the SWOT analysis gives you a birds-eye view of your capabilities to capitalize on them.
  
• Helps in long-term planning. Understanding these environments assists you in planning for the long term rather than just reacting to day-to-day challenges.
  
• Aids in market entry. If you’re considering entering the Indian market, this analysis will show you the challenges and opportunities of the market.
  
• Enhances business adaptability. By learning about external factors, PESTEL makes your business more adaptable.

Companies across industries use PESTEL analysis to guide their strategic decisions.

For example, say you’re a technology firm. In that case, you’ll use this analysis to understand regulatory changes in India or the impact of new technological advancements on your business model. That’s why you should learn this analysis framework.

Components of PESTEL Analysis 

India is large and dynamic – meaning market changes can happen rapidly.

If you’re blind to what happens outside of your business, you’ll miss growth or expansion opportunities. Worse, you’ll be blindsided by market changes that hit your business out of nowhere.

Conducting a PESTEL analysis will solve this problem. With this framework, you’ll be in tune with the market landscape. You can ride the biggest waves happening within your particular industry.

Learn how to conduct a PESTEL analysis of a company through the sections below.

Political Factors and Their Impact on a Company

Political factors reflect how government actions affect your business. These factors impact everything from laws to the economic environment.

It involves looking at political conditions locally and nationwide in India. Government rules can change how much tax you’ll have to pay, what laws employees follow, the overall safety and order in a place, and how easy it is to run a business. 

For example, one Indian state has higher business taxes than another with lower taxes.  You might move to a cheaper state to save money and be more competitive.

Here are some examples of political factors that affect your business:

• Government policies: Changes in trade policies, trade restrictions, or tax laws can affect your profitability and operations.
  
• Political stability: In unstable regions, risks include sudden changes in government or security disruptions in the surrounding environment. This might affect government policy about trade.
  
• Foreign trade regulations: These can determine market entry and influence your export/import strategies.

Understanding political factors helps you make smart choices by considering how different political and governance structures can affect you. This minimizes risks and highlights opportunities.

Economic Factors and their Influence on Business Operations

This reveals the broader economic environment where your business operates.

When you run a business, it’s crucial to understand the broader economic environment. 

This might involve:

• Economic growth: India’s GDP growth rate can signal market opportunities.
  
• Inflation rate: High inflation may increase your costs and affect consumer purchasing power.
  
• Foreign exchange rates: Changes in international trade and foreign trade policies cause fluctuations that affect the cost of importing goods, impacting your pricing strategy for exported goods.
  
• Interest rates: Changes in interest rates set by the Reserve Bank of India can make it harder or easier for you to borrow capital.
  
• Other economic factors: Other factors like population growth rate, scarcity of raw materials for your specific industry, minimum wage, employment rates, labor costs, and more will directly impact your business.

Every economic factor is important and should be part of your overall market research. They inform critical business decisions, such as who to sell to and where to distribute your products or services.

The impact of these economic conditions can vary depending on your business type.

For example, if you mine raw materials, an inflation-caused increase in the prices of these materials benefits you. On the other hand, if you’re in manufacturing – buying raw materials to make finished goods – higher costs will force you to increase the prices of your finished products.

As a business owner, you must be aware of these economic factors. Being proactive in understanding these changes can help you adapt strategies to maintain or even increase your market position.

Social Factors and their Effects on Consumer Behavior and Market Trends

Societal factors are more of a market determinant than ever.

They might not have the same direct impact as politics or economics, but with the rise of social media platforms and the effects of globalization, societal trends can spread quickly like wildfire.

If you’re selling products directly to consumers, the social environment is crucial. In India, a country with diverse cultures, languages, and traditions, marketing campaigns must be tailored according to social factors. 

Here are some factors to look into: 

• Cultural trends: Knowing the socio-cultural factors relevant to your business aligns your products with the area.
  
• Demographics: Information is power, and learning your business’ audience and customers is key. Age, gender, income levels, disposable income, age distribution, career attitudes, and other demographic data define the preferences of your target markets.
  
• International trends: Increasing awareness of global issues can influence product offerings, especially in food and wellness industries (health consciousness) and the ecological aspects (sustainability).

Being sensitive to social changes helps you connect better with your customers and employees. It ensures that your marketing messages resonate well and that your workplace remains harmonious and respectful of diverse cultural backgrounds.

Technological Factors and their Impact on Innovation and Competitiveness

Technological factors reveal the impact of new and existing technologies on your industry.

Technology is now critical in all sectors, from agriculture to software as a service (SaaS). These factors influence how efficiently you can deliver products or services, introduce disruptive innovations, and manage your human resources.

Thus, staying ahead in technology can be a major competitive advantage. 

Here are some things you should look at: 

• Emerging technologies: Innovations like AI and IoT may offer new business models or improve efficiencies. Determine your business cases for them and see how they will improve operations.
  
• Research and Development (R&D) activity: R&D investments can drive your technological advances, especially in certain industries with a big need for innovation.
  
• Technology incentives: Government incentives for technology upgrades can provide opportunities for cost savings. Look into potential grants of favorable policies.
  
• Marketing strategies: Technological factors affect marketing. The external marketing environment has drastically changed to incorporate technological innovation (like targeted ads, etc) and advertising standards have risen.

As a business owner, staying updated with technological breakthroughs is essential. By understanding the impact of new technologies on your products, services, and workforce, you can plan for continuous growth and business continuity.

To avoid being caught off guard by technological changes, integrate relevant technologies into your business operations.

Environmental Factors, Sustainability and Corporate Responsibility

Businesses in India are now more aware of their ecological impact and are adapting their strategies accordingly. These factors influence how businesses operate and how they are perceived by the public. 

Important environmental considerations include:

• Climate change: Changes in climate can affect your operations and supply chain. Consider this environmental factor especially if you have complex and high-value supply chains.
  
• Resource scarcity: This macro-environmental factor might not affect most businesses. However, in the long run, limited natural resources can impact your production costs and availability.
  
• Waste management: Regulations and public expectations about recycling and waste handling may affect operational practices.
  
• Environmental offsets: For certain industries like food production, carbon footprint is a big concern. You might need to comply with carbon footprint targets and pollution targets or face sanctions. 

This is because consumers want a more ethical and sustainable company for everything, and are prepared to withhold their support from brands that don’t meet their corporate social responsibility.

The effects will vary depending on your industry. You might need to alter supply chains to reduce environmental footprints or adopt new technologies that are more energy-efficient and less polluting.

Understanding and integrating environmental considerations into your strategy doesn’t just improve compliance or public image. It ensures long-term sustainability and takes advantage of emerging opportunities in a green economy.

Legal Factors and their Regulatory Impact on the Company

Legal and ethical factors involve the regulatory framework within which your business operates. These stem from political decisions but specifically involve regulations that affect how you hire and fire employees, conduct business, and manage taxes.

These regulations are designed to ensure fair practices and compliance across all business operations.

Compliance is essential — non-compliance leads to fines, penalties, and damaged reputation. 

During your PESTEL analysis, you should mind the following areas for your business:

• Employment laws: These govern how you must treat your employees and may include wage laws and worker safety regulations. Examples are equal opportunity employment, minimum wages, and insurance coverage.
  
• Consumer rights laws: Designed to protect consumers, these can affect how you market and sell your products. Examples include product safety regulations, item return/refund laws, etc.
  
• Health and safety regulations: These are particularly important in industries like manufacturing and food services, impacting operational standards.

Other legal factors include intellectual property.  

Legal requirements influence your business strategies. In India, this involves adhering to labor laws, dictating terms of employment, or compliance with tax policies, which affect your financial planning

Understanding these legal parameters helps you avoid legal pitfalls and ensures smooth operation. Proactivity in this area protects you from penalties and builds trust with your customers and partners.

How To Use Your PESTEL Analysis for Strategic Decision-Making 

A PESTEL analysis might mean the difference between sinking or swimming in the Indian market. Depending on your business and industry, any one of these important factors can completely change the way you conduct your operations.

But how can you use PESTEL insights for your business? 

Here are the best practices for this:

1. Identify external influences. Start by using the PESTEL framework to identify and understand the Political, Economic, Social, Technological, Environmental, and Legal factors that might impact your business. This broad view helps you see outside your immediate business environment.
   
2. Evaluate impact and relevance. Assess how each factor specifically affects different aspects of your business, like market demand, cost of operations, regulatory compliance, and competitive advantage. Determine which factors are most relevant to your strategic objectives.
   
3. Align your strategy. Align your business strategy to leverage positive impacts or mitigate negative ones. For example, if technological advancements are rapid, invest in tech upgrades and training to stay competitive. If an environmental law affects your business, consider sustainable practices.
   
4. Use insights for risk management. Identifying potential threats from each of the PESTEL factors helps manage risk. Develop contingency plans for risks like political instability or new legal regulations.
   
5. Use insights for opportunity identification. Look for opportunities within these external factors. For instance, economic growth can open new markets for your products, or social trends might allow you to create targeted marketing campaigns that resonate with specific consumer groups.
   
6. Inform long-term planning with PESTEL insights. This helps ensure that your business remains viable and competitive over time, adapting to external changes rather than being caught unprepared.
   
7. Conduct a regular review. External factors change frequently, so regularly update your PESTEL analysis. This continuous reassessment keeps your strategies relevant and responsive to the external environment.

By applying the insights from a PESTEL analysis, you can make informed strategic decisions that align with both external conditions and your business goals.