PESTLE analysis, also referred to as PEST analysis, is an analytical tool used for strategic business planning. This strategic concept is used by companies for understanding the impact of external factors on a business. In addition, it helps in tracking the environment that the companies operate in so that they can plan to launch a new product/service/project etc.
‘PESTLE’ is a used as a mnemonic where each letter represents a macro-environment factor that can influence a company –
- P stands for Political,
- E stands for Economic,
- S stands for Social,
- T stands for Technological,
- L stands for Legal, and
- E stands for Environmental.
Every company is under the influence of several macro-environment factors that affect its strategic planning. Some of these factors include changes in tax policies, new laws, trade barriers, and demographic changes.
Macro-environment factors are all those factors that affect a company but, are beyond its direct control. These factors are likely to have a lasting impact on the performance and productivity of the company. PESTLE analysis aims to find answers to 6 key questions in order to bring macro-environmental influences to light. These questions are:
- Political – What is the political environment of the country and in what ways can it influence the business?
- Economic – What are the key economic issues that can influence the business?
- Sociological – What is the impact of cultural aspects on the business?
- Technological – What technological development can influence the business?
- Legal – What current legislations regulate the business and how impending legislation will influence the business?
- Environmental- What are the ecological aspects that can influence the business?
PESTLE analysis has modified over time as Marketing gurus added elements like an E that stands for Ethics to include the aspect of demographics while using the concept to analyze the market. The outcome of this analysis is used to identify weaknesses and threats that are further used in SWOT analysis.
Let’s have a look at each of these external environment factors:
These factors describe how and to what extent the government regulates the economy of the country. This includes political situation in the country, government policies, volatility in the overseas markets, tax policies, foreign trade policy, labor laws, trade limitations, and environmental laws, etc.
It becomes quite clear from the above factors that the political environment of the country has a huge impact on companies and how they run their business. The companies should be equipped to handle the current and upcoming legislation and amend their marketing policies accordingly.
The economic factors can significantly impact the way companies do business and how much profit they make. Broadly, these factors can be identified as inflation, financial growth, exchange rates, interest rates, spending capacity of companies and consumers and so on.
The economic factors can be divided into micro-economical and macro-economical factors. Micro-economic factors define how people spend their money. This factor has a huge impact on companies that directly sell their products or services to consumers.
Macro-economical factors define how demand is managed in the current economy. Governments use mechanisms like interest rates, taxation policies, and government spending to manage demand in the market.
They are also referred to as socio-cultural factors that represent the common beliefs and outlook of the population. Socio-cultural factors comprise age distribution, population growth, health awareness, and career mindsets, etc. These factors are particularly important as they help the companies to understand the behavior, expectations, and demands of consumers.
There is an unprecedented growth on the technological front and this has impacted the way the companies market their products. Technology has influenced marketing in many ways such as:
- Modern techniques of manufacturing products and services
- Innovative ways of supplying products and services
- Latest methods of interacting with target markets
- Legal Factors
There are several legal factors that have a major bearing on the way business is conducted in the country. These include equal opportunities, health and safety, marketing standards, product classification, product safety, and consumer rights and policies. Clearly, the companies should recognize all the legal aspects of doing business successfully. Moreover, if a company has overseas operations, legal aspects have to be considered more carefully as different countries follow a different set of rules and regulations.
The past two decades have been like a wakeup call for all the companies to realize and recognize the environmental issues arising due to conducting business. They have become aware of issues like the shortage of raw materials, pollution limits, and carbon footprint limits set by the government. The environmental factors incorporate some of the political issues that the marketers have to face in order to operate as a sustainable and ethical company. The demand amongst consumers is rising for products that are sourced ethically from sustainable sources.
Why is Pestle analysis important?
The PESTLE concept offers an overview of the complete environment from different perspectives that one should check and monitor while deliberating on a particular idea/plan. Irrespective of the business they might be in, it is imperative for any industry to analyze all the perspectives of this concept. Besides helping in understanding the market, this concept assists the strategic management team in defining the actions of a company and formulating the company’s goals and the strategies associated with them.
PESTLE analysis helps managers and analysts in identifying the strengths and threats for conducting a SWOT analysis. It is clear that the significance of these factors is different for different kinds of companies. However, it is necessary that a company conducts a PESTLE analysis whenever they want to develop any strategy as it provides a comprehensive basis for the SWOT analysis.
PESTLE helps companies in their strategic planning, promotion planning, organizational change, product development, business expansion, and research reports. By understanding the external environment and how it can impact the working of the different departments of the company, the managers can successfully capitalize on the opportunities and reduce the threats to the business. By conducting a PESTLE analysis, a company can make optimum use of its resources and get ready to deal with external factors in a better way.