The PESTEL diagram – aka PESTLE, PEST or STEP – is one the most useful tools to help an organisation understand the external pressures and factors that will affect its business.
This article covers what the PESTEL diagram can do, what the six basic categories cover, and how to create a PESTEL tool for your organisation.
This is a long post, so use the buttons below to jump to specific sections below, and use the blue arrow at bottom right to jump back to the top.
What is a PESTEL?
A PESTEL diagram is a simple tool or framework for discussion to determine, analyse and monitor external factors that may affect an organisation’s overall performance. It’s often used in collaboration with a SWOT Analysis, a Force Field Analysis or a Porter’s Five Forces Analysis and/or VRIO framework.
The PESTEL diagram itself can be a specific tool or exercise completed as a group on a whiteboard or through online collaborative tools. I’ve also known departments, teams, even individuals (myself included) who have used it merely as a discussion element or thought starter. I’ve completed one written out by hand, sometimes in a Word document, or even a flipchart page in a small group. Like the very best business tools, it’s easy to adapt to suit the your specific purpose.
(I’ve included a simple fillable PDF of the PESTEL diagram here if it helps, with Instructions provided below.)
The value of a PESTEL diagram lies in helping people articulate and prioritise the distinct external factors by category, which in turn, encourage a more robust debate about what the organisation may need to do to manage, control or eliminate (if possible) the negative factor(s).
The Acrynom of the PESTEL Diagram
If it’s not obvious, PESTEL is an acronym, each letter standing for the most common areas of external factors:
- Political – Government actions and policies, including the political landscape
- Economic – Economic health and risks, from globalisation to local communities
- Social – Social-cultural aspects, trends and behaviours of consumers, if not the general population
- Technological – Impact of new and emerging technologies and digital advancements
- Environmental – Ecological and environment considerations of the physical landscape
- Legal – Regal, regulatory and legislative environment, including ethics and compliance
Over the years, people have added to the acronym to include or define more specific areas, such as Ethical, Ecological, Cutural or Intercultural, so you may come across variations such as DESTEP, STEEPLED or SLEPIT. (The original tool was called ETPS, from the 1967 book Scanning the Business Environment, written by Francis Aguilar, a faculty member at Harvard Business School.)
However, for this article, I’ll focus on the six basic areas. But again, like all good tools, feel free to add and re-arrange the categories as needed to fit your organisation’s situation.
What are the PESTEL Categories?
Political Factors
These factors focus on how and/or to what level the actions and policies of a government influences the economy, specific industries, or an organisation’s operations or its profitability. Any influence or factor should be included in this category, from policy, decision-making, tax, labour, trade, health and education. It should also include political stability, including elections and election cycles, shifting majorities of the political parties, corruption, war and conflicts, or political trends which may impact an organisation’s strategic direction or the attractiveness of a potential market.
Economic Factors
Economic factors determine the economic conditions that influence how an organisation operates, as well as its effects on customers, distributors, supply chains and vendors to name a few. These factors cover economic health and growth, stock market and market values, GDP growth, globalisation, exchange rates, currency devaluations, inflation rates, interest rates, disposable income of consumers, unemployment rates and compensation. In this category specifically, it’s important to distinguish between long-term trends vs. seasonal or cyclical issues.
Social Factors
This category broadly covers all aspects of the population where an organisation operates, from globalisation to a national perspective to its local communities. These dimensions include both demographic characteristics (population growth, age distribution, education, income and salary levels, career attitudes, religion beliefs, healthcare) and psychographic characteristics (norms, customs, values and cultural trends; consumer opinions; purchasing patterns; lifestyle choices and attitudes; health consciousness; eco-sustainability). Another key area is popular, traditional, social and digital media and its influencers.
Technological Factors
These factors pertain to innovations in new and emerging technologies that could affect the operations of an organisation or its industry. In particular, this segment seeks to identify and understand how rapid technological change can help organisations remain competitive, whether that’s staying in front of product obsolescence, using innovations like artificial intelligence, deciding whether or not to launch products or services, outsource production or change distribution, manage energy, maximise the internet including cloud software, and communicate with key stakeholders such as customers and suppliers through new or social media.
Environmental Factors
Environmental factors are both new and rapidly evolving for most organisations. These issues range from ecological and environment considerations of the climate upon weather, climate change, natural disasters, farming, agriculture and insurance; to environmental and green practices which balance consumer needs and expectations, long-term sustainability of raw materials, and government or political mandates, particularly on pollution and carbon footprint targets; and to ethical and responsible practices, such as corporate social responsibility, diversity and equity inclusion, human rights, and fair trade.
Legal Factors
Many of these factors overlap with the first category – political – but at the same time include specific laws (if not ethics) in employment, labour, discrimination, occupational health and safety, consumer protection, antitrust, compliance, copyright, patent, intellectual rights, and import-export parameters. These are particularly important when an organisation operates in different countries with its own unique laws, rules and regulations.
Instructions to Complete a PESTEL Diagram
There are five-ish basic steps to create a PESTEL diagram.
- Prepare
- Gather
- Complete
- Interpret
- Develop and Monitor
Prepare
Define the scope, objectives. Why does the organisation want to assemble a PESTEL diagram? What’s the purpose? What do you want the final document to do or demonstrate?
Double-check the categories. Are the six categories relevant? Do you need to expand or contract the categories before you start to do your research? It may also determine where you’re going to look for information.
Identify the people who will help develop the PESTEL diagram.
Decide the format. Are you doing it live? (Whiteboards, flipchart paper?) Virtual? (Which tools?) Where? (Do you need to book a conference room for longer than a few hours?)
If it helps, here is an article on the most common .
Outline your timeframe. Some teams do one segment at a time. This will bring focus to the project but may also slow it down. Don’t make it a bigger task than necessary.
Don’t rush this first phase because the nuances of why and what will guide the next step: doing the research.
Gather
This is the single most time-consuming part, so plan before doing.
Decide what type of information you need. Quantitative vs qualitative? Primary vs secondary? Internal vs external? Case studies vs best practices? Past vs current?
Determine the process. How will you gather it? Who will do the actual work? Does everyone have the time needed? Consider this if you’re speaking directly with key internal stakeholders, consulting with external industry experts, or talking to consumers. What methods are you using to gather and record the interviews? Simply scheduling time and travel can add days to your timeline, if not weeks.
Complete
Get team members to add their information and insights to the PESTEL chart.
As much as possible, avoid duplicating information. Try to sort and organise as the team goes along.
Don’t get over-focused on making sure information is the right segment or column. Just get it down because the real work comes next …
Interpret
To make sense of the information gathered in the PESTEL diagram, the team should:
Re-review the objectives and scope. This is important because it allows the team to remove information that doesn’t makes sense now in context.
Analyse each category, and …
- Merge the duplicates
- Remove anything that does not make sense in context
- Group like-minded or similar items together (Do they become sub-categories?)
- Sort, grade and prioritise using any of the following:
- By chronological order (short, medium or long-term)
- By type (positive, negative, neutral, maybe)
- By dynamics (is it increasing, waning, remaining unchanged)
- By impact (high to low) – a risk assessment?
- By likelihood (high to low)
Finally, take a physical and mental step back from the PESTEL diagram:
- Which are the most significant factors to consider?
- What are the biggest problems, issues or aspects pop out as immediate or intriguing?
- Does the organisation have strategies to address those, even if that means adapting them to suit?
- What actions should the organisation consider, even if it’s just monitoring the issue?
- What’s the key insight in each category?
- Do you need advice from other experts? Share with other key stakeholders to get feedback or opinion.
- Would scenario planning help to visualise different alternatives?
The ‘usual’ outcome are clearly identified insights, risks, threats and/or opportunities. How or what the organisation does next depends upon the original purpose of completing the PESTEL diagram, the process to integrate learnings into an existing (strategic) plan, the timing of the diagram itself, the severity of the external factors, senior management’s interest and engagement, available budget, etc. But in short, find a way to turn strategies into action in the next step:
Develop and Monitor
Create a suitable action plan based on the insights from your PESTEL diagram. For some organisations, this means it may:
- Incorporate the insights into a strategic plan, either for the organisation overall or for specific departments or areas
- Translate conclusions into a project management plan or similar
- Create scenario planning to develop potential solutions for the near or long-term future
- Form the basis of ongoing monitoring systems or alerts of the external factors to assess how they will affect the business, its plans and its decisions
- Schedule periodic or regular reviews to continually assess the changes in the external environment, and then adjusting strategies and decision accordingly
Category Examples
Finally, here is a more detailed list of the potential factors for each of the six sections of the PESTEL diagram. Use them as is or brainstorm your own.
Political Factors
- Bilateral relationships
- Competition regulation
- Defence policy, expenditures and spending
- Environmental policies
- Fiscal policy
- Foreign trade policies, restrictions and agreements
- Elections, election cycles, coalitions
- Freedom of speech, the press
- Funding grants and initiatives
- Government bureaucracy
- Government policy, laws, regulation/deregulation at all levels
- Involvement in trade unions, agreements
- Government stability, protests
- Import-export regulations and restrictions
- Labour policy
- Legislation
- Government subsidies, tariffs
- Lobbying activities
- Political action committees
- Political harmony/conflict and stability/instability
- Government budgets
- Social welfare
- Tax policies
- Terrorism, war and other military considerations
- Trade control
- Voter participation
Economic Factors
- Availability of credit, finance
- Commodity and raw materials prices
- Consumer, business spending
- Cycles and bubbles
- Disposable income of consumers and businesses
- Economic growth (e.g. GDP)
- Employment/unemployment rates
- Exchange rates
- Financial markets
- Government budget deficits
- Gross domestic product trend
- Growth rate
- Inflation rate
- Interest rates
- Price fluctuations
- Property prices
- Savings and investment rates
- Stock market trends
- Supply and demand factors
- Taxation
- Unemployment trend
- Wages
Social Factors
- Population size and growth rate
- Birth rates
- Death rates
- Number of marriages
- Number of divorces
- Immigration and emigration rates
- Life expectancy rates
- Age distribution
- Wealth distribution
- Social classes
- Per capita income
- Family size and structure
- Lifestyles
- Health consciousness
- Average disposable income
- Attitude towards government
- Attitude towards work
- Buying habits
- Ethical concerns
- Cultural norms and values
- Sex roles and distribution
- Religion and beliefs
- Racial equality
- Use of birth control
- Education level
- Minorities
- Crime levels
- Attitudes toward saving
- Attitudes toward investing
- Attitudes toward retirement
- Attitudes toward leisure time
- Attitudes toward product quality
- Attitudes toward customer service
- Attitudes toward foreign people
Technological Factors
- Access to new technology
- Automation
- Artificial intelligence (AI)
- Communication infrastructure
- Digital and mobile technologies
- Emerging technologies
- Energy management
- Level of innovation
- Life cycle of technology
- Product lifecycles: launches, improvements or upgrades, discontinued
- Technological lifecycles: from innovation to maturity to obsolescence
- Potential return on investment
- Production and distribution of goods and services
- R&D activity
- Software/hardware changes or upgrades
- Technological changes
- Technological awareness
- Technology incentives
- Internet infrastructure
- Increased training and proficiency
Environmental Factors
- Weather
- Climate
- Climate change
- Carbon footprinty
- Farming and agriculture
- Environmental legislation
- Environmental policies
- Climate change
- Pressures from NGO’s
- Natural disasters
- Insurance
- Air and water pollution
- Recycling standards
- Pollution, greenhouse gas emissions
- Attitudes toward green products
- Support for renewable energy
- Corporate social responsibility
- Business ethics and sustainability
- Raw materials availability
- Carbon footprint
- Renewable energy, waste management and recycling
- Geographic location and accessibility
Legal Factors
- Advertising and marketing standards
- Anti-trust and competition laws
- Consumer rights, consumer protection laws
- Copyright, patent and intellectual property laws
- Data protection laws
- Discrimination laws
- Education laws
- Employment, labour laws
- Equal opportunity laws
- Health and safety laws
- License and permits
- Product labelling laws
- Product safety requirements
- Safety standards
Whew! Anything else to add? Please add comments or thoughts below.
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