PESTLE – An External Environment Analysis Tool –
When a business wants to enter into a new market, launch a new product or both (often both when a business is starting out) there are several different factors that must be considered in order to be successful. Many of these factors are external to the actual business itself, and often completely out of the control of those running the company; however, they may have profound effects on the growth of the business or sale of a product. Often, trying to consider all of these outside topics can seem overwhelming; however, this is where analysis tools such as PESTLE become useful. PESTLE, and acronym for Political, Economic, Social, Technological, Legal, Environmental (or Ethical), allows for the user to compartmentalize these topics, and to review the implications in more focused areas first before looking at the larger picture. Using PESTLE type analysis tools usually isn’t to purpose solutions right away, but rather to consider what external factors the company has little control over, which category they exist in, and how they may impact the growth of your business or product.
The PESTLE system is flexible, with the user free to add or remove letter as needed or as necessary. For example, PEST (Political, Economic, Social, Technological) may be used if Legal or Environmental do not need to be considered. Or there is PESTLIED which adds International and Demographic to the analysis.
For this project, we will outline what factors a PESTLE user should consider when using the system. Each letter will be looked at individually and examples are considered in each case.
Political factors have substantial influence on the way firms conduct their operations. Governments are responsible for implementing laws and codes that can directly or indirectly affect every aspect of a business. Political factors are therefore innately intertwined with legal factors. The main difference being that political factors are trends in attitude toward certain things, while legal factors are defined and must be complied with. A few examples of political factors that should be considered when conducting a PESTLE analysis are:
- How much does a government deem fair to tax?
- What tax incentives and benefits exist based on the vision of a political regime?
- Trade Agreements and Regulations;
- Does the government have free trade deals with other countries (such as NAFTA)?
- Consumer Protection;
- What standards must your products and services meet?
- Competition Regulation;
- Does the government impose regulations to promote competition and restrict monopoly?
- Government Stability;
- Is there civil unrest under a certain regime, or a potential conflict forming between two countries? How does this affect the level of risk for a firm?
For a list of more political factors to consider in a PESTLE analysis See table 1.
The effects that governmental regulations have on a business are extensive, and cause direct or indirect consequences. An example of an indirect effect would be emissions reductions incentives causing an increase in demand for electric vehicles. These incentives are set forth in order to reduce pollution but can indirectly influence market demand for certain products. An example of a direct effect would be the abolishing of trade deals, causing an increase in the cost of importing and exporting materials, and subsequently a firm’s budget.
The amount of influence that certain political factors have on business operations will be unique to a firm. Analysing positive and negative effects caused by governance can aid in determining potential risks and rewards for a business and should be taken into consideration when examining the external environment.
The economic environment that a business operates in is arguably the most significant source of opportunities to capitalize on, as well as challenges and risks that must be addressed. Economic factors encompass everything to do with growth rates, trade, supply and demand, market trends, competition, currency fluctuations. Economic forecasting can be used to predict the direction and scope of economic trends and can be a valuable tool in decision making. Major Economic factors that should always be taken into consideration are:
- Growth rates and projections;
- Is growth expected in your industry?
- Stock market and investment trends;
- Is your industry hot for investing, or stagnant?
- Are stocks expected to increase or decrease in value?
- Currency fluctuations;
- Are your holdings in the currency of a particular country? Will their value hold?
- Customer preferences;
- Are consumer trends changing? How will this affect demand for your product or service?
- Interest rates;
- Significantly affect the growth of capital.
The set of economic factors that a company might face will vary significantly between industries. It is the responsibility of a particular company to take into account the economic environment they are operating in. The performance of the economy has direct effects on the success of a business, and can have long lasting consequences. Companies, for example, must operate carefully during economic downturns, so as not to burn through all the resources they possess.
This segment of a PESTLE analysis focuses on the socio-cultural factors of a region that can affect an organization. The influence these factors have can be overt or subtle, but they play an important role in shaping the way an organization operates. Socio-cultural factors include, but are not limited to:
- Population demographics
- Cultural values & traditions
- Social taboos
- Buying trends
- Popularity of forms of media
- Prevalence of technology
- Spending & saving attitudes
These factors can provide crucial information about the local populace that an organization can use to when deciding how to operate. Socio-cultural factors can have some obvious impacts on organizations such as influencing what products and services they develop, how they advertise and their overall revenue. These are some of the more overt impacts of socio-cultural factors, however there are more subtle impacts that they can have. For example, if the area of operation is saturated with an aging/retired population more resources may need to be allocated to employee operations to provide employment incentives.
The way an organization responds to, and works with, the sociocultural factors in the area they operate can have a large impact on their overall success
There are a few different technological factors that need to be considered during a PESTLE analysis. These topics fall into a few different categories. The first is manufacturing technology. These look at the technology used by a company to manufacture a product. These considerations are applicable from small scale to large automated production lines. Some questions that need to be answered are:
- What technology is available to aid in manufacture the product?
- What new technology exists that would make manufacturing better?
- Higher quality materials
- Better quality control technology
- Is upgrading affordable? Will it save money or increase profit?
- What technology does the competition use to manufacture its products?
- Does this give them a competitive advantage?
Examples of manufacturing technology are easy to find. There are countless large-scale manufacturing operations today, with an obvious example being the automotive industry whose advancements in automation has allowed them to increase production . In the biotech industry there are also many examples of increased efficiency of manufacturing technology. Looking at alcohol production or bio-pharmaceuticals, better molecular biology understanding and techniques, improved bioreactors, and downstream process equipment has allowed for these industries to gain increased production through these technological advantages. PESTLE analysis of these manufacturing technologies gives the user an overview of what type of tech is out there and what is the proper fit for their business model or product development.
The technological analysis must also consider the technology of the product itself and the trends of innovation surrounding the tech. Things that need to be considered are:
- What do consumers use the product for?
- Can this application be improved?
- Consider additional applications using the same product
- How rapidly does technology change in your sector?
- What is the life cycle of the technology?
- Does it change every year? Or is it stable over decades?
- How is your product distributed or sold?
- Will advancement in other technology change the distribution?
An example of changing technology trends that had a large impact is in the film industry. Technological advancements have changed the landscape of how this product is distributed. The development of television and home video technologies would give rise to the home video market, and eventually the video rental market, which was a huge deviation from the traditional theater model. However, advancement of the internet and digital content technologies lead to digital downloads and streaming services and which caused huge problems for the home video and rental market. A PESTLE analysis considering these factors may allow for a user to keep ahead of these trends and adapt the product or company accordingly.
Finally, there are also technological considerations that overlap with social, political and economic factors. Biotechnologies like GMOs have a negative status in many markets, and politically they are banned in Europe (for GMO crops.) An example of technological/economic factor, is when the the government increases of decreases spending in a technological sector, health or agricultural research for example, which will impact the funding available to develop technology in those areas.
This segment of the PESTLE focuses on the legal factors that an organization can operate within, these can range from federal to local and includes all laws, rules, regulations and policies. It also includes all the internal rules, policies and regulations that an organization might have.
- Employment Laws
- Minimum wage rate
- Tax laws
- Laws specific to certain products
- Biologicals for example
These factors are very important as they make up a strict framework that an organization must operate within, failure to meet legal requirements can lead to severe penalties. These can include fines, suspension of operations and loss of reputation. Larger organization that operate on a global level must deal with the multiple legal frameworks that exist over the multiple countries they operate it.
Environmental awareness is of increasing importance to businesses operating in modern society. We are living in a world which faces changes in climate and where there are increased frequency environmental disturbances caused by human activity. Environmental impacts can include issues such as natural resources limitation, waste management and recycling procedures. There are lots of factors that are changing in the environment and therefore gathering information about them is a priority step in PESTLE analysis.
Environmental factors take into consideration ecological and environmental aspects. Ecological factors consist of all forms of natural resource conservation and its management which includes water, oil and land. They can also affect the workforce’s health and moral and can cause uncertainty and risk if it is ignored.
The factors in this tool are determined and influenced by the surrounding environment. For example, in tourism, farming and agriculture business, environmental aspect holds a crucial value.
Factors of environmental (ecological) analysis could include but are not limited to the following:
- Geographical location of the company or organization
- Changes in climate
- Weather offsets
- Concerns in causing pollution;
- Is there a more sustainable alternative to current operations?
- Waste disposal and sustainability;
- What opportunities exist to reduce pollution?
- Whether the company/organization is affecting any endangered species or not
- Whether the organization is open towards the use of renewable energy, ecological or “green” products.
- Carbon emissions
These factors have become important recently over the years due to the scarcity of raw materials, increased burning of fossil fuels, pollution level, carbon emissions targets set by the government, etc as way of doing business as sustainable company. Nowadays consumers are demanding that the products they are using are sourced out ethically and sustainably. It is necessary that these elements be analyzed as the importance of corporate sustainability and responsibility (CSR) is growing. Climate change is a hot topic these days. Discussions are taking place on how to reduce the global warming effect and thus the operation of businesses needs to be reconstructed so that more space can be given to innovation and can also lead to development of green business. Ecological and environmental factors not only engage the organizational behavior and culture but also involve engagement of the employee.
A firm’s decision regarding doing their business must be impacted by environmental factors as the business in question needs to be environmentally and socially acceptable. In this way, they will also gain a positive image in the consumer’s eyes.
Ethics is another factor that needs to be taken into consideration. It is one of the new factors that have recently came into the forefront when conducting a PESTLE analysis. PESTLE analysis underwent some changes as ethical concerns can be utilized in the framework of PESTLE while researching about the market. Ethics can be defined as a “set of moral principles and values that govern the actions and decisions of an individual or group” (Oxford Learning Labs). Ethical analysis can provide guidelines for an organization on how to act rightly and in a just manner so that the organization does not have to face dilemmas regarding ethics, such as public backlash.
The factors of concern in ethics can include the following:
- Whether the practices in sales and advertising are ethical or not;
- Is everyone getting a fair end of the deal?
- Standards with accounting, management, and marketing are acceptable or not
- The attitude of the organization towards counterfeiting and breaking patents
- The recruitment process and the standards of employment are ethical or not (for example hiring children to do the work is not acceptable).
- Affiliation between corporations and charities
Ethical factors are important as they address responsibilities regarding the corporate and social actions.
These PESTLE factors can be weakness or opportunity for an organization or company depending upon the situation. Therefore it is crucial that the above factors are identified and analyzed so that any alterations in the business climate change arises, appropriate actions could be taken so to respond to factors that could impact the product or service offering in an ever changing business environment.
Using the above PESTLE analysis will allow a business to consider many external factors before launching a new product or entering a new market. While PESTLE is extensive, there are more factors that can be considered if needed. The analysis should not feel limited and those performing it can freely add or remove sections that are applicable. The one thing to keep in mind is that this is not meant to provide immediate solutions. It is a tool to neatly identify all factors that a company may not have any control over, see the connections between them and gain insight that should give an edge in the market and over competition.