PESTLE Analysis is a business analysis framework used to scan the external macro-environment in which a business operates.
PESTLE analysis can identify and study the key influences in any environment and how these components are interrelated. The PESTLE framework can be used for many purposes, including business planning, marketing planning, business change, business and product development, and research reports.
Let’s take a closer look at PESTLE analysis and how it can be used.
What is PESTLE Analysis?
PESTLE is an acronym for the six categories of factors analysts typically include in PESTLE analysis. PESTLE stands for the Political, Economic, Social, Technological, Legal, and Environmental factors influencing a business’s ability to succeed in a given market.
Factors may be altered by the government’s influence on a country’s infrastructure. This may include tax policy, employment laws, environmental regulations, trade restrictions, tariffs, reform and political stability. businesses may need to consider where a government does not want services or goods to be provided.
Political factors are those driven by government actions and policies. They include but are not limited to, considerations like:
- Corporate taxation
- Other fiscal policy initiatives
- Free trade disputes
- Antitrust and other anti-competition issues
It’s worth noting that even the overhang of potential trade disputes or antitrust issues can present material risks and opportunities for management teams.
Divergent stances on key issues between parties on the left and the right can also make run-ups to elections particularly challenging for a firm’s management team, as the range of possible outcomes can vary considerably depending on election results.
Factors include economic growth and declines, interest rates, exchange rates, inflation, wage rates, working hours and cost of living.
These factors may have significant impacts on how businesses operate and make decisions.
Social factors tend to be more difficult to quantify than economic ones. They refer to shifts or evolutions in how customers approach life and leisure, which can impact commercial activity.
Examples of social factors include:
- Cultural changes / Immigration
- Health and Safety Consciousness
- Population Growth Rate
- Demographic changes (for example, an ageing population)
- Lifestyle trends
- Consumer beliefs
- Attitudes around working conditions
In today’s business landscape, technology is everywhere – and it’s changing rapidly. You must understand how technological factors impact a business or industry.
The speed and scale of technological disruption in the present business environment are unprecedented, and it has had a devastating impact on many traditional businesses and sectors.
They include, but are not limited to:
- How research and development (R&D) may impact both costs and competitive advantage
- Technology infrastructure (like 5G, IoT, etc.)
- Cyber security
Legal factors are those that emerge from changes to the regulatory environment, which may affect the broader economy, certain industries, or even individual businesses within a specific sector. They include, but are not limited to:
- Industry regulation
- Licences and permits required to operate
- Employment and consumer protection laws
- Protection of IP (Intellectual Property)
Environmental factors emerged as a sensible addition to the original PEST framework as the business community began to recognise that changes to our physical environment can present material risks and opportunities for business. Examples of environmental considerations are:
- Carbon footprint
- Climate change impacts, including physical and transition risks
- Increased incidences of extreme weather events
- Stewardship of natural resources
How to perform a PESTLE analysis
PESTLE analysis is a fact-finding activity that anyone in the business can do. The first step is to list the categories that you think are relevant.
For example, if you are doing a PESTLE analysis for a new business. In that case, you may brainstorm the government regulations in your state that may affect your business. You may also brainstorm what your target customers are interested in and what they do in their spare time.
Once you have identified all the potential factors, rate each on a scale of 1 to 10, with one being the least impactful and ten being the most impactful. Once you have rated each factor, use the information to develop strategies to mitigate the impact of negative factors and capitalise on positive ones.
Why Perform PESTLE Analysis?
A PESTLE analysis is helpful because it allows business owners to analyse the external forces that will affect their business and, therefore, can help leaders identify new opportunities and threats, which they can use to inform their strategic planning process.
Limitations of the PESTLE Analysis
Like any analytical approach, a PESTLE analysis has limitations. First, the categories that make up the PESTLE analysis may only be relevant in some situations. For example, analysing the political climate in your region may be insignificant for another business in a different part of the country.
Even if the categories are relevant, the information you discover through your analysis may need to be more reliable.
You can only assess the situation as it exists at present. Therefore, updating your PESTLE analysis at least once a year is important.
PESTEL and Financial Analysis
You can take your PESTLE analysis to another level by recognising your findings and quantifying them in your financial models and risk assessment tools.
Some examples include:
- You may adjust model assumptions such as revenue growth rates and gross margins based on inflation expectations.
- A business that has done a poor job managing its carbon footprint may be subject to future fines or carbon tax levies, so analysts may wish to project a cash reserve accordingly.
- An uncertain economic environment may require you to forecast for higher working capital levels to act as a buffer.
PESTLE Analysis is a really useful tool and can help businesses to identify potential areas of growth. To get the best out of your analysis, you need to use your PEST Analysis with SWOT Analysis, which provides an internal analysis of your business.