In today’s world, we have so many examples of successful organizations before us. From small startups to bigger firms, every organization is focused on improving and heading ahead. Different tools are leveraged by them for this purpose. The competition has become so fierce in the market that every single decision can change the whole dynamics- either negatively or positively.
It becomes necessary for organizations to keep a check on each decision making which in turn aids them in sustaining through the blows of market fluctuations.
Since we are living in a ‘global village’, everything happening around us leaves an impact on us. The same goes for an organization. Generally, in marketing theory, we separate a micro and macroeconomic business environment, with the micro environment primarily being the internal factors affecting a specific industry, that includes the stakeholders and competitors of a particular firm and the macro environment being the external factors influencing a firm, factors which it cannot control.
It is not only internal matters that decide a company’s fate, but many external factors also make an equal impact. The political situation in a country, technological developments, environmental factors, the legality of actions, economics, social factors, all play an important role. Organizations are well-aware of this fact, so they leverage an economic tool- PESTLE analysis.
In this blog, we will discuss this same tool. We will discuss everything about PESTLE analysis. What does it mean? What are those different factors? How to do a PESTLE analysis? What are its advantages and disadvantages? What is it used for?
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What is PESTLE Analysis?
PESTLE analysis sometimes referred to as PEST analysis, is a concept in marketing principles. This concept is used as a tool by organizations to keep a track of the external factors impacting the organization. PESTLE is a mnemonic which in its expanded form denotes P for Political, E for Economic, S for Social, T for Technological, L for Legal, and E for Environmental. On the basis of the organization, it can be reduced to PEST or additional areas can be added (such as Ethical).
PESTLE analysis forms a much more comprehensive version of the SWOT analysis. This form of analysis is then compared with the company’s internal strengths and weaknesses via a SWOT analysis. This aids in determining the future scope of action and in developing measures for strategic management.
Why is PESTLE analysis used?
Businessmen and entrepreneurs often turn towards business analysis tools for aiding them in making suitable decisions for their firm. Before any business venture, the business owners often remain doubtful regarding its outcome and how it would be received. Pestle analysis is adopted for determining an answer to these questions. This analysis involves asking questions that give the analyst an idea about the things to keep in mind. These questions are:
What is the political situation of a country and what is its effect on the markets?
What are the prevalent economic factors?
How is culture affecting the markets and what are its determinants?
What are the technological inventions that are trending and what are other future possibilities in this field?
What are the current legislations that regulate the industry and if they need to be changed?
What are the environmental concerns for the industry?
Analysts find answers to these questions and try to cover all the aspects through this analysis. The PESTLE analysis is more than just understanding the market. This framework represents one of the backbones of strategic management by not only defining what a company should do but also accounting for an organization’s goals and the strategies strung to them.
Factors of PESTLE Analysis
Each of the factors mentioned above, from Political, Economic, Social, Technological, Legal to Environmental, have an impact on an organization. Yet the significance of each of these factors may differ based on the different kinds of industries.
1. Political factors in PESTLE Analysis
Political factors include tax policy, environmental regulations, trade restrictions and reform, tariffs, and also political stability. These factors determine the extent to which a government may influence an industry or a company. For example, the government may bring new tax reforms that might change the whole revenue-generating system of a company.
Some tariff trade barriers that can prove to be a hindrance in the way we run our business operations include customs policy and export subsidies. Non-tariff trade barriers meanwhile include determining minimum import prices as well as bans and restrictions on exports.
2. Economic factors in PESTLE Analysis
Economic factors include economic growth/decline, interest, exchange, inflation and wage rates, minimum wage, working hours, unemployment (local and national), credit availability, and cost of living. These factors are determinants to an economy’s performance that directly impacts a company and also have resonating long term effects.
For example, a rise in the inflation rate of any economy would affect the way companies price their products and services. Besides, it would also affect the purchasing power of a consumer and may result in a change in demand/supply models for that economy.
You can also take a look at our blog on 4 Ps of Marketing.
3. Social factors in PESTLE Analysis
Social factors include cultural norms and expectations, health consciousness, population growth rates, age distribution, career attitudes, health, and safety. These factors are helpful for companies to better plan their marketing analytics and strategy. For example, the Indian market generally witnesses a surge in demands for vehicles during the last months of the year, due to marriage and the festive season.
These factors are particularly significant for marketers as they target certain customers. Additionally, they also highlight the local workforce and its zeal to operate under certain circumstances.
The factors of PESTLE Analysis
4. Technological factors in PESTLE Analysis
Technological factors mean the innovations and developments in technologies. These factors impact an organization’s operations. Several new developments like Artificial Intelligence, IoT, Machine Learning, Deep Learning, are being made in the technology field and if a company fails to match up the trend it may lose its position in the market.
A few of the technological factors which are included in the PESTLE analysis include the rate of technological change, the evolution of infrastructure, and any government or institutional research.
5. Legal factors in PESTLE Analysis
Legal factors include changes to legislation impacting employment, access to materials, quotas, resources, imports/exports, and taxation. These factors have both external and internal sides. Certain laws have an impact on the business environment in a country.
Apart from these laws/rules, companies maintain their own set of rules and regulations by which an employee is expected to abide by. So, the legal analysis takes accounts of both these angles and forms strategies keeping them in mind.
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6. Environmental factors in PESTLE Analysis
These factors are mainly concerned with the effect of the surrounding environment and the influence of ecological aspects. These include waste disposal laws, environmental protection laws, energy consumption regulation.
This aspect of the PESTLE is crucial for certain industries particularly example tourism, farming, agriculture, etc. However, Global warming and the increased need to switch to sustainable resources; ethical sourcing (both locally and nationally, including supply chain intelligence) have compelled every organization to consider the environmental factors. Corporate Social Responsibility (CSR) has been made compulsory for organizations.
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How to do a PESTLE Analysis?
Conducting a PESTLE Analysis involves some steps which we have mentioned below:
Identify the scope of the research. It should cover the present and the future scenarios. It should apply to the areas of the business world where the particular organization operates.
Form a good team and assign responsibilities accordingly. Involving diverse people helps in collecting content-rich data.
Identify appropriate sources of information. These may include people seeking professional help regarding an issue or a change/update in current policy.
Gather and assemble the information. Better create a template as the basis for recording the information.
Analyzing the collected information is a significant step.
Create an order of the issues to be addressed. Try to resolve the issue, that can create a big impact, at the earliest.
Identify the business-specific options to address the issues.
Create a well-informing document for all the stakeholders
Disseminate and discuss the findings with stakeholders and decision-makers
Decide on the actions to be taken and trends that need to be monitored on an ongoing basis
To be effective, organizations must perform PESTLE analysis on an ongoing or regular basis. Organizations that do so enjoy a competitive advantage as they spot trends before others.
What is a PESTLE Analysis used for?
A PESTLE analysis is often used as a broad fact-finding activity. It helps an organization establish the external factors that could impact decisions made inside the organization. By understanding the impact these external factors can have on an organization, it becomes handy for organizations to plan better. They can form strategies to minimize the threats and maximize opportunities for themselves.
Uses of PESTLE Analysis
A PESTLE analysis is an appropriate framework that fulfills these purposes. Apart from that, it also helps organizations in a range of business planning situations. These include:
1. Strategic business planning
A PESTLE analysis report is a useful document to have by your side when starting a business planning process. It provides the senior management team with loads of contextual information about the company like the direction in which the business is heading, brand positioning, growth targets, and the areas of concern that may lead to a decline in growth and productivity.
2. Workforce Planning
Workforce planning is a business process that aligns business and people strategies. A PESTLE analysis helps businesses to identify disruptive changes to business models that may have a profound impact on the future employment landscape. Organizations are facing huge changes in their workforce from increased skills gaps, the creation of job roles that did not exist 10 years ago like the IT department, and job reductions or displacement.
3. Marketing Planning
As PESTLE analysis brings a lot of information on external factors, it also brings crucial market insights. So, it can help prioritize business activities to accomplish specific marketing objectives within a set timeframe.
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4. Product development
As mentioned above, a PESTLE analysis also has crucial market insights that tell about the response from customers about a product or service. This helps businesses to decide on whether to enter or leave a route, modify an existing product, and when and what to launch as a new product.
5. Organizational Change
A PESTLE analysis is a powerful tool for understanding the context for change, and focusing on the areas to make that change successful. In this situation, PESTLE analysis works best with a SWOT analysis. This helps an organization to identify the potential opportunities and threats around labor changes, for example, skill shortage and workforce capabilities.
Advantages and Disadvantages of a PESTLE Analysis
Everything has both aspects and so does a PESTLE Analysis. Let us look at the advantages as well as the disadvantages of it.
It is a simple framework- easy to understand and conduct
It facilitates a better and broader understanding of the business environment.
It encourages organizations to develop external and strategic thinking
The most talked advantage- it enables an organization to anticipate future business threats and allows it to minimize or nullify the impact
It also allows organizations to spot an opportunity and to capitalize on them
Some PESTLE analysis users oversimplify the amount of data used for decisions – it’s easy to use insufficient data.
It’s easy to get lost in the enormous amount of data. So, there always remains a risk of capturing too much data and undertaking too much data analytics that may lead to ‘paralysis by analysis’
As a PESTLE analysis works on assumptions, there remains a risk of being wrong
Once in a while an attitude doesn’t work with PESTLE analysis. So, it must be a regular practice.
The pace of change makes it difficult to anticipate the developments and this may affect the organization in future
It can be stated that PESTLE analysis is a great tool for businesses that can be leveraged for several purposes. It brings information about the possible impact of the six external factors on an organization. This makes it easier for organizations to prepare for any sort of problems caused by these PESTLE factors.