PESTEL analysis: how to do it and feed your EFE
PESTEL analysis (also written PESTLE): the six factors with Philippine examples, how findings become EFE opportunities and threats, and common mistakes.
PESTEL analysis (also written PESTLE) sorts the outside forces on an industry into six factors: political, economic, social, technological, environmental and legal. For each factor you write findings with a source, then judge whether each is an opportunity or a threat for your firm.
The result is a short list of sourced external findings. It is the raw material for your EFE matrix, where the key findings become weighted opportunities and threats. PESTEL has no score of its own.
Each PESTEL finding becomes an opportunity or threat in your EFE. Try the sample EFE, no account needed.
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What PESTEL analysis is for
PESTEL organizes the external audit that the EFE matrix, in the input stage of the strategy-formulation framework, then summarizes. It stops you from reading the environment through the industry alone, and it gives every external factor a home and a source before you weigh anything.
- It is fed by research: government notices, central-bank and statistics releases, industry reports, dated news.
- It feeds the EFE matrix, whose opportunities and threats later become the O and T of your TOWS matrix.
- It covers the wider environment. Rivals are a separate part of the audit, handled with competitor analysis and a competitive profile matrix.
PESTEL or PESTLE? They are the same six factors. PESTLE puts legal before environmental, and Strama's own matrix is called PESTLE. This guide writes PESTEL. Use whichever spelling your program uses.
How it relates to David's external audit. David's own external audit groups the forces as economic; social, cultural, demographic and natural environment; political, governmental and legal; technological; and competitive. PESTEL is a common way programs organize the same audit: the same ground, cut into six headings. Follow your program's headings if they differ.
What you need before you start
You need to know which firm and which industry you are analyzing, and the market you sell in. A PESTEL for a coffee roaster in Metro Manila and one for a regional bank share headings but almost no findings.
You also need a place to keep sources. Each finding in the table needs a name, a publisher and a date, so you can show where it came from when someone asks. In Strama that is the evidence you attach to the factor; on paper it is your reference list.
Step 1: Scan the six factors
Go through the six factors in turn. The examples below are the kinds of thing to look for in the Philippines, not findings in themselves.
Political
Government action and stability that shape the industry: trade and tariff policy, taxes, subsidies, government priorities for a sector. Example: a change in excise tax on your product category.
Economic
The state of the economy and its effect on costs and customers: exchange rates, interest rates, inflation in your inputs, consumer spending. Example: a weaker peso that raises the cost of imported inputs.
Social
How people live and buy: demographics, lifestyle, attitudes, habits. Example: a growing habit of ordering groceries and drinks online.
Technological
Technology that changes how the industry makes, sells or delivers: platforms, payments, automation. Example: wider use of e-wallets and delivery apps.
Environmental
Climate, weather, natural resources and environmental rules. Example: typhoons and flooding that disrupt supply routes or stores, or a rule on plastic packaging. David's audit places the natural environment alongside the social, cultural and demographic forces, so check where your program files it.
Legal
Laws and regulation that bind the firm: data privacy, labeling and safety rules, labor standards. Example: the Data Privacy Act's duties for a business that holds customer details.
Step 2: Write findings, each with a source
A finding is a specific, checkable statement about the outside world, such as “import duties on green coffee beans rose”, and not a topic like “tariffs”. Attach the source next to it while you write, not afterwards.
Aim for a few strong findings under each factor, and accept that some factors will be thin for your industry. An empty factor is a result: say you looked and found nothing that matters, rather than padding it.
Step 3: Judge the effect on your firm
For each finding, write what it means for the firm in one sentence, then mark it an opportunity, a threat or a watch item. A watch item is something you cannot yet call either way, or cannot yet support with a source.
Add a time horizon, short, medium or long, so the list shows what needs a response soon. The direction depends on the firm: a falling tariff is an opportunity for an importer and a threat for a local grower.
Step 4: Carry the sourced findings into the EFE
Each sourced finding that matters to the firm is a candidate key factor for the EFE: the opportunities and threats you keep are the same statements, now with a weight and a rating. A PESTEL row without a source stays on the list as a watch item and is not weighted.
Not every EFE factor comes from PESTEL. The competitive forces of David's audit, such as a rival's pricing, come from your competitor analysis. Do the PESTEL first, then add those, so the EFE covers every force in the audit.
Worked example: Tala Provisions (fictional)
Tala Provisions, Inc. is a fictional coffee roaster. Below, one finding per factor, and where each goes. 4 of the 6 findings have a source and become rows of the sample EFE; 2 are watch items.
| Factor | Finding | Becomes |
|---|---|---|
| POL1 | Import duties on green coffee beans rise | F-002 |
| ECO1 | The peso weakens against the dollar | F-004 |
| SOC1 | Specialty-coffee demand grows among urban professionals | F-001 |
| TEC1 | Online and subscription ordering grows | F-003 |
| ENV1 | Weather swings affect the green coffee harvest | |
| LEG1 | Packaged-food labeling rules change |
Take POL1, import duties on green coffee beans rise. It is a political finding, a threat with a short-term horizon, backed by source S-D02, and it becomes the EFE's F-002.
Two sample EFE rows have no finding here: F-005 and F-006. The competitor-pricing row is a competitive force, so it comes from the competitor analysis. The mall foot-traffic row is an economic or social finding, but the sample attaches no source to it, so it is the row a panel would press on. It needs a PESTEL finding with a source behind it.
Each PESTEL finding becomes an opportunity or threat in your EFE. Try the sample EFE, no account needed.
How to read the result
Tala's table has 1 political, 1 economic, 1 social, 1 technological, 1 environmental and 1 legal finding, with 2 opportunities, 2 threats and 2 watch items. A count is a way to see coverage, not a score: six findings do not make the environment six units of good or bad.
Read it for gaps and for sources. A factor with no findings needs an explanation, and a finding with no source is a claim you cannot yet defend. The weighting and rating happen in the EFE, not here.
Where sources disagree: PESTEL, PESTLE and David's five groupings cut the same environment differently. If your adviser prescribes one form, follow it, and keep each finding under one heading only.
Common mistakes
Listing facts with no implication.
“The peso is weaker” is a fact. It becomes a finding only once you say what it does to the firm, for example that it raises the cost of imported beans.
Fix: after every fact, write “so what for this firm?” and mark the result an opportunity, a threat or a watch item.
Findings with no source.
An unsourced finding cannot be checked, so it cannot carry a weight in the EFE or survive a question.
Fix: attach a publisher and a date to every finding. If you cannot find one, keep it as a watch item or drop it.
Mixing internal factors in.
Your own brand, staff or cash position is not a PESTEL factor. It comes from inside the firm and belongs in the IFE matrix.
Fix: keep only what happens outside the firm. If you could change it by deciding to, it is internal.
Filling every box for its own sake.
Padding a factor with generic points, such as “technology is advancing”, hides the findings that matter.
Fix: keep a few findings you can source and that change a decision, and say so when a factor has none.
Putting one finding under two headings.
Counting the same tariff change as both political and economic inflates the list and later double-counts it in the EFE.
Fix: choose the heading that best explains the cause, and mention the other effect in the same finding's sentence.
What your panel will ask
What is a PESTEL analysis, and why did you use it?
It sorts the external forces into six factors so none is missed. Say that it is a way of organizing your external audit, and show the findings that went on to become EFE rows.
Where did this finding come from?
Give the publisher and the date, and open the source if you can. A panel is checking that the finding is real and recent, so have the source ready for every row.
Why is this a threat and not an opportunity?
Answer with the direction of the effect on your firm, not on the industry. If it cuts both ways, say so and explain which side you weighted and why.
How did this become a factor in your EFE?
Point to the same statement in both tables. Each key factor in your EFE should trace to a sourced PESTEL finding or to your competitor analysis. The EFE adds the weight and the rating, and your paper should say where each came from.
Where it goes next
Your sourced findings go into the EFE matrix, where each is weighted and rated. To see how you stand against rivals, which PESTEL does not cover, build a competitive profile matrix. To see where all of it sits in a paper, read the STRAMA paper format guide.
Each PESTEL finding becomes an opportunity or threat in your EFE. Try the sample EFE, no account needed.
Sources
Method: Fred R. David's strategy-formulation framework, as set out in his Strategic Management: Concepts and Cases. PESTEL is a common way programs organize the external audit, so the headings you use are your program's call. Check the edition your program uses for page references.
Tala Provisions, Inc. and its sources are fictional, made up for this guide. The EFE rows named are the sample EFE's.
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Each PESTEL finding becomes an opportunity or threat in your EFE. Try the sample EFE, no account needed.
Related guides
- EFE matrix
Build an External Factor Evaluation (EFE) matrix: weights that sum to 1.0, ratings from 1 to 4, and what the total weighted score tells you.
- Competitive profile matrix
Build a competitive profile matrix (CPM): pick critical success factors, weight them to 1.0, rate each firm 1 to 4, and compare the totals.
- Your STRAMA paper format
Your STRAMA paper format, part by part: background, external and internal audits, the matrices, recommendations and evaluation, and what your panel asks.