PESTEL Factors and the Business Environment

Six forces outside the business

PESTEL factors are the political, economic, social, technological, environmental and legal factors that shape the business landscape. They affect which types of business are viable in a market, meaning able to make a profit there and stay in business.

These are external forces. They come from outside the business, so a business has to respond to them rather than set them. The same change can help one business and hurt another, the way the mill closing hurt the steakhouse and helped the repair shop.

How each factor affects viability

Political. The political system and specific policies encourage some business activities and discourage others. Subsidies and mandates support specific activities: a city might pay half the rent for a grocery store that opens in a neighborhood without one, and a state mandate requiring a carbon monoxide detector in every home sends business to the companies that make and install them. Bans limit specific activities, as when a town bans short-term vacation rentals. Taxes fund the government and can also limit an activity: a city tax on sugary drinks raises their price, so fewer are sold. Political stability matters too, since a company thinks twice about building a factory where the government could change suddenly.

Economic. The stability and performance of the economy shape how much consumers, businesses and the government spend, and on what. When incomes are rising and unemployment is low, restaurants and car dealers tend to do well. When interest rates rise, borrowing costs more, so fewer families borrow to buy a home and fewer businesses borrow to expand. Inflation, a rise in the prices of goods and services, squeezes a business whose costs climb faster than it can raise its own prices. Most businesses are more likely to thrive in a strong, stable economy, but some, like the repair shop, thrive by meeting customer needs in a weak one.

Social. A business that sells to consumers has to meet their needs and wants, and those are shaped by consumer demographics (measurable qualities of a population, such as age and household size), cultural norms and trends. A neighborhood filling up with young families needs daycare centers. A town whose population is growing fast needs more grocery stores and dentists every year. A trend toward plant-based eating brings customers to a vegan bakery.

Technological. Businesses produce, distribute and communicate with customers using whatever technology is available. A clothing brand that sells only online depends on internet access and package delivery. A factory that automates its packing line can produce more with fewer workers. Where the rate of innovation is fast, a phone case designed for last year's phones may not fit this year's.

Environmental. Climate, access to resources and natural disasters can limit what a business is able to produce and distribute. A ski resort depends on snowfall. A bottling plant needs a steady supply of clean water, and a hurricane can close a beach hotel for a season. Customers' environmental perspectives count here too: a shopper who worries about waste may pick shampoo in a refillable bottle over one in single-use plastic.

Legal. Laws affect a business's operating costs and whether some of its operations are legal at all. A higher minimum wage raises a restaurant's labor costs. Health and safety laws mean a food truck has to pass inspections before it serves anyone.

Running a PESTEL analysis

Businesses evaluate market opportunities with the PESTEL framework. That means identifying the PESTEL factors that are relevant to a specific product or business idea, then assessing how each one affects the attractiveness and the potential risks of the market for that idea. Not every factor matters equally to every idea. The weather is everything to a kayak rental shop and nearly nothing to an accounting firm.

A business is more likely to enter a market where the PESTEL factors align with its business model (its plan for creating value for customers and capturing value from them), considering its resources and production processes as well as its potential customers. A tech business is more likely to locate where high-speed internet and electricity are relatively inexpensive. A farm-to-table restaurant is more likely to open where customers prioritize locally grown food.

The analysis does not stop once a business is open. A change in PESTEL factors can affect the viability of a business in a market it already serves by changing its customers' needs, wants and ability to buy, the systems it uses to produce and distribute its product, or its access to resources. When unemployment rises in a town, for example, customers' ability to buy falls, and a furniture store that was doing fine can start to struggle.

PESTEL and your career

The forces that decide which businesses can succeed in a place also decide which jobs are there. Career opportunities in a market depend on the types of businesses that are viable, based on how the PESTEL factors play out in that location. A port city has jobs in shipping and warehousing. A mountain town with heavy snow has jobs at ski resorts and in snow removal.

When PESTEL factors change, the business landscape and the jobs in a market change with them. In an economic downturn, some employees face layoffs as businesses cut back. So when you weigh a career, or a place to build one, its PESTEL factors are worth a look too.