PESTLE analysis, often known as PEST analysis, is a concept used in marketing theories. Also, businesses utilize this idea as a tool to monitor the environment in which they operate or in which they want to introduce a new initiative, product, service, etc. So let’s first determine what these letters mean.
In its enlarged form, the acronym PESTLE stands for Political, Economic, Social, Technological, Legal, and Environmental. While thinking about a particular idea or strategy, it provides a bird’s eye view of the entire surroundings from all the numerous angles that one wishes to check out and keep track of.
Purpose of Conducting PESTLE Analysis
A global pandemic, natural disasters, an impending recession, war, inflation, and other events have all occurred over the past several years, creating a tornado of upheaval and worry. There have been many challenges that companies have had to deal with because of external market variables that directly affect them. Each firm, whether well-established or a newcomer to your industry, should be concerned about the current circumstances because they are stressful enough.
Though many present and prospective leaders find the current state of the world to be scary, this insightful analysis will help you assess and prepare for potential impacts on your business so that you can either exploit those forces as opportunities or try to neutralize them as risks. You can plan ahead for potential difficulties your firm may face and develop solutions by using a PESTLE.
Explaining the PESTLE Analysis Framework
As we already stated, this study considers external Political, Environmental, Social, Technological, Legal, and Environmental aspects that may have an impact on the strengths and weaknesses of your organization. It is preferable to use a PESTLE analysis in conjunction with your SWOT analysis. This approach examines the broad trends in your operating environment, as shown below.
This examines the external analysis section of your environmental scan, commonly referred to as what is occurring in your market, as you finish the planning phase.
Political factors
Political factors are those that are caused by politics or the government. These are the outside political forces that are having an impact on your company. These include governmental policies, political leadership, international commerce and relations, political issues and trends, tax policy, regulations, and tendencies toward deregulation.
A few instances may be the inflow of funds from the Paycheck Protection Plan, the modification of import tariffs from China, and the war and conflict resulting from Russia’s invasion of Ukraine.
Inquiries to make:
- What changes have taken place in the political environment?
- How might those changes affect our company? Do they have a headwind or a tailwind?
- Do they involve long- or short-term plays?
- What political threats need to be kept in mind?
Economic factors
The economic considerations take a look at the outside influences that may have an impact on the economy in which your company operates. Rising inflation rates, adjustments and shifts in consumer spending, adjustments to the supply chain, demand curves, and the condition of the world economy are a few examples.
These economic variables can take into account the regional, national, and international economies.
Inquiries to make:
- What is the state of the economy right now? How might that affect our company?
- Is our supply chain facing any headwinds or tailwinds?
- What aspects of the local economy could be harmful to our company?
Sociological factors
Sociological factors take into account the broader social environment’s changes, such as social justice movements or other social trends like altering consumer preferences or changing population and demography. It’s crucial to take into account social trends that are active, not just in the immediate context of your firm but also in the larger milieu that your clients are coming from.
Inquiries to make:
- Are there any alterations in the population or demographics of our market? How can we help them the most?
- What effects will evolving social elements have on our organization?
- What changes in consumer emotion, behavior, or opinion are distinguishable?
Technological factors
The standing of a firm is impacted by technological changes. The advent of cryptocurrencies (which can also be classified as economic), the development of popular work-from-home technology, AI advancements, and even worries about cyber security or other technological challenges are some recent instances. It’s crucial to think about how technology could present your company with both opportunities and risks.
Inquiries to make:
- What changes has our market’s technology undergone? Is that an opportunity or a threat?
- Are you making the most of the technology that is now available?
- How much does new technology affect your company?
Legal factors
While the legal aspects are similar to the political aspects, they focus on how the political aspects are really implemented via laws and regulations that may have an impact on your business or customers. These are the laws and rules that apply to your company.
This can involve new rules, amended legislation, or even the repeal of existing laws. Local, state, and federal laws and regulations may be worth investigating, depending on your business.
Inquiries to make:
- What modifications to our local, national, and international laws will have an influence on our organization?
- How will these legislative changes affect our organization—for the better or worse?
- What potential legal pressures might emerge?
Environmental factors
Weather, topography, climate change, and health problems all have an impact on environmental variables. Wildfires all across the world have had an influence on the planet, in addition to the public health catastrophe brought on by the COVID pandemic.
The effects of these rapid changes, including as increasing ocean levels, drier and warmer seasons, and recurring weather events like hurricanes and typhoons, should be taken into account by organizations.
Inquiries to make:
- What current environmental factors are affecting us?
- What future environmental factors might affect us?
- What aspects of the environment do we need to keep an eye on?
Ethical Factors
Experts in business and marketing strategy have recently added a third “E” to the PESTLE formula: the ethical consideration. Fair-trade policies, child labor difficulties, and even society’s growing need for ethical business practices and corporate social responsibility can fall under this category.
Inquiries to make:
- What ethical factors from outside are influencing the market?
- What modifications to your company or suppliers might you think about?
- What kind of impression or example do you want your business to make?
What are the advantages and disadvantages of using a PESTLE analysis?
Advantages
Doing this analysis for your company has a number of benefits. Here is an explanation:
- It is an easy framework to integrate into your strategic plan because it is clear-cut and basic.
- Additionally, it enables you and your team to foster a strong grasp of the larger business world and how current events could influence your company.
- Additionally, it assists firms in foreseeing business threats, determining how to reduce risks, and identifying business opportunities that they may seize.
Disadvantage
Although being a fantastic tool, there are a few drawbacks to using this:
- This form of assessment has the drawback that it can be as light or as heavy as the user desires.
- The data might easily be oversimplified or incomplete data can be gathered.
- It is also simple to add too much weight by gathering excessive amounts of data, which can leave you feeling disoriented and unsure of where to begin. This condition is known as “analysis paralysis.”
- Although it’s a fantastic tool, it doesn’t assess the internal strengths and weaknesses of your firm. We advise using it in addition to your SWOT analysis because of this.
When and how to use this assessment?
When developing your business or strategic plan, you should perform a PESTLE analysis alongside a SWOT analysis. A SWOT analysis examines the internal strengths and weaknesses of your firm as well as the external opportunities and market-related dangers. This will be a great addition to your SWOT because it informs it by taking into account all aspects of the external market environment.
Hence, when doing your analysis, investigate each factor and consider both the benefits you may take advantage of (the opportunities) and the risks to avoid (the threats) in the areas of politics, economics, social issues, technology, law, and the environment.
The ideal course of action is to establish a regular cycle for checking in and revisiting this exercise, even if it is normally done at the start of a strategic plan. Your analysis from five years ago might need to be updated today given how quickly things are growing and changing. The ideal time to update it is at least every three years. Alternatively, after a SWOT analysis. A yearly examination of these trends can be beneficial as well. Make it a practice to stay up to date on current affairs and market shifts so that you are always aware of what is happening in your industry and how it will impact your company.
Conclusion: What role does PESTLE Analysis play in strategic planning?
The best method to make sure you know all the areas your business can capitalize on and which hazards you can focus on to prevent is to use your PESTLE analysis as the first stage in your business and strategic planning process. This will provide you with a clearer understanding of the environment in which your company is operating and exactly what you need to do to achieve success.
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