Speaker 1: So, you want to map out the external environment of an organization, but you don't know where to start. PESTEL is your answer. Today, I'm going to tell you everything you need to know about the PESTEL analysis. My name is Lars and welcome to a new episode of Business To You. PESTEL, PEST, STEEPLE, DESTEP or the SPELLET analysis, they're all different versions of basically the same thing with the exact same goal, which is to help you analyze the external environment of an organization. This is especially useful when starting a new business or when entering a foreign market or a different industry with an existing company. Before I go into the actual framework, I want to clearly define the external environment that is being examined, because PESTEL analysis does not just look at any external factor out there, but more specifically, to macro-environmental factors. In order to explain it better, let's imagine a fictional company. First of all, you have the company itself. Everything that exists and happens within that company can be considered internal. Think about the organizational structure of the company, the culture, the employees, the management, shareholders, reward systems, etc. The entities surrounding the company, which are therefore external, are competitors, suppliers, distributors, customers or strategic partners. These external elements, so to speak, are in a direct contact with the focal company. They interact with one another. It's a two-way relationship. Sometimes this part of the external environment is called the task environment. It's very important to realize that even though PESTEL is looking at external factors, it is not looking at these factors. Like mentioned before, PESTEL looks at the more general environment, the macro-environmental factors, which can have a massive impact on a company, but not the other way around. They therefore have a one-way effect, rather than an interaction like with the task environment. If you want to look more into the task environment, I advise you to use Porter Five Forces, which I will make a video on very soon. So now we have that cleared up. Let's go into the PESTEL analysis. PESTEL is an acronym that stands for Political, Economic, Social, Technological, Environmental and Legal Factors. Together they make up quite an exhaustive list of the general environment. In other words, if you look at all of these six factors combined when scanning the organization's environment, you are less likely to miss out on any important macro-environmental factors. Let's go through all of them one by one. Political. These factors are all about how and to what degree a government intervenes in the economy or a certain industry. Basically all the influences that a government has on your business could be classified here. This can include government policy, political stability or instability, corruption, foreign trade policies, tax policies, etc. Furthermore, the government may have a profound impact on how a nation's education system works, how infrastructure looks like and how the health sector is regulated. These are all factors that need to be taken into account when assessing the attractiveness of a potential market. Economic factors are determinants of a certain economy's performance. Factors include the economic growth, exchange rates, inflation rates, interest rates, disposable income of consumers and unemployment rates. These factors may have a direct or indirect long-term impact on a company since it affects the purchasing power of consumers and could possibly change the demand and supply in the economy. Therefore, it also affects the way companies price their products and services. You can imagine that in a country where purchasing power is relatively low, prices are also lower. The social dimension. This dimension of the general environment represents the demographic characteristics, norms, customs and values of the population within which the organisation operates. This includes trends such as the population growth rate, age distribution, income levels, but also attitudes towards careers, health, lifestyle and possible cultural barriers. These factors are especially important for marketeers when targeting certain customers. In addition, it also says something about the local workforce and its willingness to work under certain conditions. Some people like to distinguish these factors by separating social factors into demographics and cultural or intercultural factors. That explains these different versions of the PESTEL analysis. Personally, I'm fine with the social category since it combines all factors related to the people, but feel free to adapt it in a way that suits you. Cultural factors. These factors pertain to innovations in technology and the regulations surrounding technology that may affect the operations of the industry and the market favourably or unfavourably. Think about technology incentives, the level of innovation, automation, R&D activity, technological change and the amount of technological awareness that a market possesses. These factors may influence decisions to enter or not enter certain industries, to launch or not launch certain products, or to outsource production activities abroad. By knowing what is going on technology-wise, you may be able to prevent your company from spending a lot of money on developing a technology that would become obsolete very soon due to disruptive technological changes elsewhere. Environmental factors have come to the forefront only relatively recently. They have become important due to the increasing scarcity of raw materials, pollution targets and carbon footprint targets set by governments and pressure from NGOs like for example Greenpeace. It is important to mention that you shouldn't be confused about the term environmental here since we also use that to indicate all external factors combined. Environmental simply has a double meaning here and in this context we use it to address ecological aspects such as weather, climate, environmental offsets and climate change. Basically, the well-being of our planet. Growing awareness of the potential impacts of climate change is affecting how companies operate and what kind of products they offer. This has led to many companies getting more and more involved in practices such as corporate social responsibility and sustainability. So finally, the legal factors. Although these factors may have some overlap with political factors, they include more specific laws such as discrimination laws, antitrust laws, employment laws, consumer protection laws, copyright and patent laws and health and safety laws. It is clear that companies need to know what is and what is not legal in order to operate successfully and rightfully. If an organization trades globally, this becomes especially tricky since each country has its own set of rules and regulations. In addition, you want to be aware of potential changes in legislation and the impact it may have on your business in the future. So I recommend it is to have a legal advisor or an attorney to help you with these kind of things. So all of these factors combined give a good overview of the general environment out there. Which factors are most important for your business might vary based on the country and industry you are in. As you might be able to imagine, environmental and ecological factors are more important to the oil and automotive industry than for example the software industry. So if you want to bring pestle into practice and actually use it properly, I recommend you to calculate weighted averages of the available options you have. Imagine you are a European company and you are thinking of entering the South American markets but you don't know which country to enter first. What you could do is select a number of pestle factors that are most important to your business. Let's say we want to look at the economic growth, corruption and how intellectual property is protected. Give them a weighting of their importance relative to the other factors. And assign grades for each factor per country. In the end you are able to give each option a weighted average grade and compare them to each other. So you might be wondering where to get that data from. You will actually be surprised how many of the factors that I have just mentioned in this video are already measured and given a score. Even something as corruption for example is measured by the Corruption Perception Index. There are many helpful websites where these factors are quantified per country and of course I am here to help you out so I included some useful links in the description down below. If you like business related stuff feel free to subscribe to not miss out on any of our future videos. And if you have any questions on the subject please ask them below in the comment section because I will try to answer as many as I can. And of course I highly encourage all of you to help each other out as well and get the discussion going. Thanks for watching and don't forget, alone we are smart, together we are brilliant. See you next time.