Using PESTEL Analysis

It’s not until you sit a case study exam until you begin to understand the theory and logic behind some of the CIMA E2 models, for example, we are all familiar with the PESTEL analysis and can explain what it stands for;

2018-02-15

PESTEL – An introduction

The modern business world is a challenging and complex place, it’s becoming increasing competitive and difficult to find an edge in crowded market places. Globalisation has opened the doors for businesses to attract more customers, source cheaper materials and labour but this in turn has made it harder for business owners to compete and turn a consistent profit.

The idea of PESTEL analysis gives you 6 key areas in which to consider how current and future changes could affect the business so you can develop strategies to either;

  1. Exploit the opportunities identified in PESTEL analysis
  2. Improve the weaknesses identified.

The resulting strategies and conclusions should allow the business to compete or gain an advantage over their rivals.

So, as I have learnt taking a few mock exams for the MCS, you can use this model as a great way illustrate risks, threats or opportunities and how to deal with them – picking up some much needed technical marks on your case study!

POLITICAL

This is where to what extent the government intervenes in the economy  and how they could affect your operations, there are several political factors that could feasibly crop up and have a major impact.

Tax Policy – the government may decide to increase or decrease corporate income tax, which means businesses will need to consider the impact. If taxes were to increase significantly then it would make sense for the business to perhaps look at transfer pricing as a way to pay less taxes within the scope of the law.

Trade Restrictions/Tariffs – as we can currently see with the current situation in the US, the government have put a tariff on goods imported and produced outside of the USA. So if you main export destination was the US, then this type of tariff what have a major impact on your sales. How would you combat this?

ECONOMICAL

Things like interest rates and inflation need to be considered under the Economical umbrella of the PESTEL analysis, these types of factors can have a major impact on a business and profits they make.

A company that is heavily financed by debt runs a real risk of not being able to meet repayments if interest rates rise significantly.

Is there enough cash on hand to handle any rise in interest rates?

Can the company look to equity financing instead and look to repay some of the debt they have accumulated?

These types of questions needed to asked and addressed.

SOCIAL

Social factors revolve around the community in which a company operates and consumer trades. How old is the general population, how health conscious are we at this moment in time?

i.e. a fast food chain may want to look towards a healthy menu to attract and cater for the needs of those who demand it. What are the current social trends?

Another angle to consider here is how current social climate affects your workforce, is there an ageing population? Is it difficult to attract the type of staff you need? If so, the cost of labour is likely to be higher. What impact would this have the company’s functional costs and operating profit?

TECHNOLOGICAL

Can cover an array of different issues ranging from the automation of robots to carry out non-value added activities to research and development.

Are your competitors currently investing a lot of technology in their products, will the release of these new products make your existing product range obsolete, meaning you’ll also have to follow the industry trend  of investing in technology?

Or perhaps you’ve identified an opportunity to innovate and use technology as a main driver for this innovation, putting you one step ahead of your rivals.

Technology can be a great source of competitive advantage, although the associated risks and costs shouldn’t be ignored.

ENVIRONMENTAL

Weather and climate change would be areas that fall under environmental. i.e. a ice cream shop will be heavily reliant on the summer months, if it looks set to be a wet or cool summer then sales will be under pressure.

With this in mind, should they look to other revenue streams?

That’s quite a simplistic example, but we can also consider how companies operate and they are acting in the best interest of the environment?

It can be a great area to tie in an example linked to CSR – Corporate Social Responsibility or Ethics.

LEGAL

Legal factors include employment law, consumer law and also health and safety law. Is the business meeting the required health and safety laws or perhaps there are new, tighter laws and controls regarding the health and safety on oil rigs – is the business able to meet these new requirements and how much could they cost to implement?

Or there could even be a lawsuit filed against the company by one of the employees for unfair dismissal – has the company followed the right procedures and evaluated the potential impact of the lawsuit i.e. financially and the bad press associated with it.

CIMA Case Study Application

I’ve used PESTEL analysis in one of my answers in a recent mock exam. But don’t worry, you don’t need to cover all of the P.E.S.T.E.L criteria. You only need to mention the relevant points.

For example, I faced a question about some ethical issues in the Middle East and I used the P/E/L parts of PESTEL to explain the issue and how we can address it.

All in all, PESTEL analysis will open the door to a lot of questions and once you begin to scratch the surface and explore these questions you can add more depth to your answer by linking the pre-seen material, recommendations and conclusions to your answer.

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