PESTLE Analysis: 6 Powerful Factors for Business Success
Introduction
An analysis of the business environment is important for every organization. Many businesses use PESTLE analysis to conduct a quick environmental assessment when formulating their strategies. The analysis of the PESTLE environment focuses on the impact of politics, economics, and society; technology; law; and ecology on the success of the organization. The analysis also relies on the judgment of managers of the organization in negotiating the threats and opportunities in the business environment and on identifying the most important external factors. It is therefore, necessary for teams who wish to function in this environment to create strategies that enable them to manage the threats in the environment and take advantage of the existing opportunities.
The focus of this analysis is primarily on the managers of the team. It seeks to minimize the uncertainty that will be experienced when the team enters the environment. This will enable the managers to make informed decisions for the organization.
PESTLE Analysis
A PESTLE analysis identifies the influences of politics, economy, society, technology, law, and the environment on a business. Businesses use this analysis to determine their ability to respond to external factors, as well as how their competitors remain relevant. PESTLE is less extensive than SWOT. Aspects of the surrounding environment may not fit the PEST framework, and these should be ignored to preserve the analysis. For example, analysts may choose to insert PEST components with new technologies and the unpredictability of the new consumer behavior and/or changes in tax rules. Changes in the social environment may present new opportunities to the market for new products and changes in the legal environment may present new opportunities to a business for new practices.
The Political Factor
The nature of a business’s surroundings may be economic or political. Businesses function and thrive in environments with involved and committed governments and policies of trade, taxes and spending, as well as employment and international policies. Most business owners are willing to undertake lengthy investment in stable political environments. Volatile politics offers no such preference. International businesses are most in contact with the changing intents of government policies. Managers of businesses engaged in a PESTLE analysis understand the impact of the changes of the political environment on the cost of conducting a business, the accessibility of markets, and the sustainability of the business in the long run.
Policies of a government can be an opportunity for a business. One type of policy involves the government placing a subsidy on renewable energy. Other policies could be the enactment of high taxes and constraining businesses by regulating or prohibiting the sale of certain goods and services. This constrains businesses and drives up the cost of doing business. The political environment should be evaluated. Proactive businesses respond to changes in government policies and alter their business operations. Other businesses take an attitude of reacting to changes in government policies after those policies start creating downward pressures on their business. Political analysis is best employed by businesses in procurement, international trade, imports and exports, and licenses and regulated markets.
The Economic Factor
Every economy impacts the business activities either positively or negatively. Businesses are impacted by the same factors as their customers. Examples of these factors include the interest rates, the inflation rates, the unemployment rates, the foreign currency rates, the rate of economic growth in a given country, the level of consumer expenditure, the levels of consumer savings, the extent of availability of credit to consumers, and so on. These factors have a positive or negative impact on businesses and their customers. During a period of economic growth, businesses are likely to invest, and consumers are likely to be spending beyond their means. In contrast, during a period of economic decline, businesses and consumers tend to be spending within their means and are careful about the cash inflows and outflows.
The impact of the economy on a business can easily be recognized by analyzing the PESTLE. This analysis enables a business to determine the impact of the economy on customer demand, business pricing, investment opportunities, and business profitability.
The price of business inputs influenced by infection rates, including labor, remains unpredictable. Foreign currencies impact every business that participates in cross-border trades. A business must consider the effects of currency changes on the business and potentially new procurement avenues for good.
The Social Factor
The social factor impacts how customers interface with the workforce and how customers formulate their purchase expectations. The social factor consists of demography, aging, level of attainment, lifestyle, attitudes, health, family, and culture. An example is how the growing population of the elderly drives demand for health and wellness services, whereas, the growing population of young millennials may create demand for the information technology services. One of the frameworks that businesses can adopt to address shifts in consumer demand is PESTLE analysis.
The social factor provides a company with a strong brand reputation. Customers are interested in how a company sources, how a company’s workforce is diversified, how a company’s employees and products are safe, and how a company is accountable. Even if you think your products are top notch, you could be losing customers to your competition because of a lack of social consideration. Understanding social factors is a way to build customer loyalty.
The Technological Factor
Technology has been a disruptive force on businesses world-wide. From automation to traffic management systems and data analysis to cloud computing, the potential for growing and changing how businesses serve and interact with their customers is unprecedented. It is vital for a PESTLE Analysis to consider the opportunities and threats that technology offers. The ability to increase productivity and offer services in new and unique ways provides companies with new revenue streams while decreasing costs. Failure to innovate means that businesses become quickly outdated compared to their competition.
The integration of technology increases a company’s inability to mitigate the risks associated with that technology. These can be financial, legal, or reputational in nature. The risks can stem from a company’s inability to update its technology or from a reliance on old and outdated technologies or from the company’s systems posing a threat to its employees or financial systems. The evaluation of a company’s technologies and systems offers a company the opportunity to assess whether its departments can use technologies to their full employer potential while offering a company the ability to serve its customers in innovative ways. Companies must look beyond their direct competition and consider how its industry will change and grow beyond what it is currently. The evaluation of a company’s technologies allows the decision makers to forecast what the company will need to invest in the training, innovation, and risk management areas of the company.
The Legal Factor
Legal factors relate to laws, acts, and statutes. This can include laws for the protection of consumers, product safety laws, employment laws, laws for safe and fair competition, business taxes, environmental laws, data protection laws, laws for workplace safety, laws on marketing, and laws on services. The legal obligations of a business vary from country to country. A PESTLE analysis shows the laws that concern a business. This type of analysis encourages managers to incorporate compliance obligations for the law into business strategies, rather than addressing these obligations as last-minute additions.
Legal changes affect costs and create new business opportunities. An example is a change in a law to protect consumers. As the law requires the company to have a compliance system, the company may have to update its information systems. An example of a law may be to create safer products, which increases costs to the product, but, over time, the company gains consumer confidence, which reduces the likelihood of the company incurring the cost of litigation. For this reason, the legal support systems of a company must be continually updated to address future possible legal needs. This avoids the burden of a violation of the legal operational requirements.
Environmental Factors
Concerns about the depletion of natural resources as well as the issue of climate change have resulted in the importance associated with sustainable business practices by consumers. These issues are causing the business world to think in terms of one of two things; either how they will source their materials or how they will reduce their carbon footprint, improve water consumption and minimize energy consumption. Shifts in consumer behavior and changes in the availability of resources can be explained using the PESTLE analysis, and can show how the environment can impact cash flow and the reputation of the business. Environmental risks can be physical (flooding, extreme weather, etc.) or regulatory (new emissions standards).
In many cases, sustainability is the means to an edge over the competition. Companies that have sustainable practices have benefitted the environment and the economy by improving the industry’s waste and energy consumption and resource extraction. Sustainable practices help with the cost of doing business and provide a competitive edge as well as answering the growing demand for increased accountability and sustainability by the consumer and investors. Innovations that improve sustainability help companies raise investments and are effective in helping complete mergers and acquisitions. Sustainability is not a cost center, it is a Green innovation driver. This is shown by developing systems that protect the environment and address logistics, packaging, products and services and the transition to the circular economy.
Importance of PESTLE Analysis
Management personnel tend to think internally, and the consequences of doing so are external. The threats and opportunities that exist outside of the company may actually shift management focus. Social, economic, technological, political, and legal factors may affect a company along with changes in legislation. Internal reports may not even recognize the risks that may affect the company. PESTLE Analysis focuses on the external environment, evaluates the risks, and helps develop effective strategies.
PESTLE analysis also helps in the identification and management of risks. There will always be risks that are beyond our control, but we can always control how we manage the risks that are within our control. One of these risks may be related to the energy sector. There are constantly increased costs. The energy sector poses a risk of increasing costs to an organization. One of the possible solutions is for the organization to upgrade equipment to more efficient models. Another organization may have identified the growing need for digital services; in order to meet possible competition from market shares, the organization may implement the digital service in a proactive manner before the competition does.
PESTLE Analysis for Strategic Planning
A PESTLE analysis looks at several elements, but strategic planning looks at more depth and the effects of these elements. The effects of the elements can provide insights into the next steps. Managers have to analyze the essential elements of the six sections. Based on what they analyze, they have to determine if particular elements of the six sections are threats or opportunities, or if they can be both. The most important elements are the ones that are likely to happen and the ones that will have the most impact.
Externals from a PESTLE analysis can be integrated with other strategic tools. For instance, those elements can be used in combination with a SWOT analysis and addressed from the viewpoint of how external opportunities and threats factors transcend an organization’s internal strength and weakness. Similar competitive industry frameworks can be used to analyze suppliers, customers, and market forces. A PESTLE analysis, from a strategic perspective, has to be repeated more times than the usual making of a business plan.
Performing a PESTLE Analysis
The first step is defining the boundaries and aims of the research. The difference between a PESTLE analysis for a company launching its product in a new country and that of a well-established local business stands in the boundaries and aims of the research. With these clearly established, management will need to understand how things can shift in the political, economic, social, technological, legal and environmental territories with data derived from reputable sources. The strength of your analysis and the decision you make after will be as strong as the data you gathered, meaning reliable sources must be used. Government data, trade data, research data, news, professional associations, and reputable journals are some of the sources that may be considered reliable.
The second step is looking at the crucial drivers. Not all external factors will be significant, and management will need to single out the issues that will affect the net revenue and total costs, operations, reputation, compliance and the company’s advantage relative to its competitors. These drivers will then need to be prioritized and the company will need to prepare for them. The results of the analysis will need to be made known to the stakeholders, and the analysis will need to be done on a regular basis. Due to the nature of competition, analysis that was done some time ago will have lost its value.
Common Mistakes to Avoid
That some managers have been known to collect data points in excess should not be too surprising. Of course, one can argue that the more data points you have, the more comprehensive your answer will be; however, as a strategy for decision-making, having ambiguity in one’s reasoning does lead to trouble. Managers must refine their ability to gauge what evidence exists, what is to come, and what is impossible to reason. For example, during a PESTLE analysis, addressing threats is not the only thing that should be done. The external environment may contain opportunities that will influence the company’s innovation, and potentially decrease its spending while retaining and improving its services.
Additionally, some managers perform the PESTLE analysis, but end up doing nothing. Analysis without execution is pointless. A strategic analysis should inform the direction that a company takes in investing, marketing, and even hiring. In addition, the analysis should give the company’s exposure to risk and its reputation. To execute the strategy, a manager must be assigned to an external trend.
Conclusion
External factors will become more prominent and will pose more problems to businesses in the future. This will require every business to perform an analysis based on the external factors and how it will impact the business on a larger scale, how the business can create innovative and effective strategies to protect the long term interest of the business, how the business is prepared to face threats and how it will exploit potential opportunities. The business would benefit from the PESTLE framework in its risk management strategies. The value and scope of the PESTLE framework will depend on the thoroughness and quality of the research done. It will also depend on the receptiveness and response of the management.
In the light of market competition and the changing dynamics of the business ecosystem, the utility of the PESTLE framework will diminish in the long run. However, in the short run, it will be useful. Changes in the business/legal environment, the business ecosystem, and the environment make the market more and more competitive. PESTLE is not a full-fledged research or management framework for businesses, but along with some other effective market research frameworks, PESTLE can contribute to better long-term business decisions.
