The Importance of PESTEL Analysis for Environmental Scanning Process

The Importance of PESTEL Analysis for Environmental Scanning Process

Tuğberk Çitilci (Nisantasi University, Turkey) and Murat Akbalık (Marmara University, Turkey)
DOI: 10.4018/978-1-7998-2559-3.ch016

Abstract

Strategy and tactic are two inseparable dynamics for organization which can be the same as a chess game. Organizations' theoretical infinite life cycle needs well-established strategic management. To create competitive advantage among competitors, top management of organizations must scan environmental factors very carefully. Without environmental scanning process organization can be viewed as blind and deaf in an ecosystem which definitely ends with shutdown of activity. Environmental scanning has two parts; internal environmental analysis and external analysis which aim to create early signals for organization. Internal analysis deals with micro-based factors which can be controlled by organization whereas external analysis universe is larger and wider when compared to internal analysis. External analysis covers all the factors such as political, economic, social, technological, environmental, and legal, which an organization cannot control and cannot affect. This type of analysis can be named as top-down approach analysis aims to create competitive advantage.
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Introduction

The word origin of strategy comes from ancient Greeks which is the combination of “stratos” and “ago”. Evolution of strategy backs to 400 - 200 B.C. and depends on Chinese Sun Tzu’s “The art of war”. Use of strategy has a very large universe which covers lots of disciplines. One of these discipline is Strategic Management for business organizations. The main assumption of business organizations is having an infinite life cycle. With this assumption firms need the best strategic management process. The process can start from delineating environmental analysis and can be classified as external environmental and internal environmental factors. External factors cannot be controlled and replaced by firms so there is a need of well –managed/ designed top down approach in order to adapt these factor for infinite life cycle. External environmental analysis process can be categorized by scanning, monitoring, forecasting and assessing dynamics.

Actors of this ecosystem are competitors, customers, suppliers, regulatory authorities and social/political etc. As a whole ecosystem external and internal analysis cannot be separated from each other. This can be summarized as from macro analysis to industry analysis.

Development of strategic management starts from military literature and transformed into business organizations in 1950 – 1960 periods.

Starting with brief history of strategy and environmental analysis let it come to main purpose of this book chapter. As planned chapter will cover detailed external analysis on behalf of PESTEL analysis. (Different variations for PESTEL can be mentioned). It is the combination of political, economic, social, technological, environmental and legal factors.

PEST concept was mentioned in “Scanning the business environment” book by Francis J. Aguilar. After his contribution, PEST analysis started non-stop development process.

Authors briefly explain history, evolution and analysis process of PESTEL analysis on behalf of these factors.

Examples of some subtitles of main topics;

  • Political factors can cover subtitles such as; tax laws, government policies, political risks, elections and stability/instability, trade restrictions etc.

  • Economic factors can cover subtitles such as; central bank monetary policies, fiscal policies, growth, interest rates, Exchange rates, inflation, wages and taxes etc.

  • Social factors can cover subtitles such as; Demographics/population, NGO, health/insurance system etc.

  • Technological factors can cover subtitles such as; innovations, computer systems, copyrights etc.

  • Environmental factors can cover subtitles such as; climate/weather/nature, raw materials, pollution etc.

  • Legal factors can cover subtitles such as; labor laws, legislation, consumer rights/law etc.

Subtitles as mentioned above will be detailed during book chapter process.

Topics will go further with details of PESTEL components and searching for main questions about analysis. These questions can be what is the pros and cons of analysis? How to setup template and setup variations of analysis or what is the difference of PESTEL from well-known SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) and other well-known commonly used strategic management tools.

At the end of chapter, further topics and debates about PESTEL model will be discussed in order to support academic literature

Key Terms in this Chapter

BSC: Balanced Score Card

BCG: Boston Consulting Group

PESTEL: Political, Economic, Social, Technological, Environmental and Legal

SWOT: Strengths, Weakness, Opportunities and Threats

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