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Pestle Analysis: A Mechanism for Analysis of Businesses

Ruchi Gandhi

| Updated: May 29, 2020 | Category: Legal

Pestle analysis

What is Pestle analysis?

A PESTLE analysis provides a framework for the analysis of key factors (Political, Economic, Sociological, Technological, Legal, and Environmental) that influence an organization from outside. It gives professional people an insight into the external factors that affect their organization. These factors are assessed to envisage what impact they might have on the organization. The outcomes of a Pestle analysis can then be utilized to populate the opportunities and threats in a SWOT analysis.

The Pestle analysis is flexible, so it can be used by organizations in a variety of scenarios. Individuals, professionals, and senior managers may use the results obtained through Pestle analysis in order to guide their strategic decision-making.

PESTLE is a mnemonic that denotes P for Political, E for Economic, S for social, T for technological, L for Legal, and E for environmental in its expanded form. It gives a bird’s eye view of the full environment from numerous distinctive points that one needs to check and keep track of while mulling over a certain business idea/plan. This business analysis tool is especially useful when starting a new business, augmenting an existing business line, or entering into a foreign market.

Diagrammatic representation of Pestle analysis

Pestle analysis

Although the importance of each of the factors may vary from one industry to another, Pestle analysis, on the whole, is imperative for any strategy that a firm wishes to develop. Moreover, it constitutes a much broader version of the SWOT analysis.

Breaking down Pestle analysis

Let us now comprehend what lies under each of the critical factors of Pestle analysis.

1. Political factors:

Political factors decide to what degree a government will affect the economy or any industry. For instance, a government may impose a new tax or duty that could change entire revenue-generating organizational structures.

Often, political factors influence organizations and the manner in which they do business. Entities must be able to respond to current and anticipated future laws and adjust their marketing policies accordingly.

Such factors of Pestle analysis may include the following:

  • Government stability/instability
  • Corruption level
  • Tax policies
  • Foreign trade policy
  • Voter participation rates
  • Amount of government protests
  • Level of government subsidies
  • Bilateral relationships
  • Import-export regulation/restrictions
  • Trade control
  • Lobbying activities
  • Size of government budgets
  • Freedom of press
  • Government regulation and deregulation
  • Special tariffs
  • Political action committees
  • Government involvement in trade unions and agreements
  • Competition regulation

2. Economic factors:

Economic variables are determinants of the success of an economy that directly influence a firm and have long-term consequences. For example, an increase in the economy’s inflation rate will affect the way their goods and services are priced by the businesses. In addition, it will influence a consumer’s buying power and adjust demand/supply models for that economy.

Such factors of Pestle analysis may include the following:

  • Rate of growth in GDP
  • Interest growth rate
  • Rate of inflation
  • Exchange rate
  • Tendency to unemployment
  • Trends in the financial markets
  • Fluctuations in price
  • Availability of credit
  • Level of disposable income of consumers and businesses
  • People’s tendency to spend
  • Deficits in the Federal Budget
  • Trends in gross domestic product

3. Social factors:

Social variables analyze the market’s social climate, and gauge determinants such as cultural patterns, demographics, population analytics, etc. These areas involve people’s shared beliefs and attitudes. These factors are of particular interest because they directly affect how marketers understand clients and what drives them.

Such factors of Pestle analysis may include the following:

  • Population size and growth rate
  • Immigration and emigration rates
  • Age distribution
  • Wealth distribution
  • Social classes
  • Religion and beliefs
  • Attitudes towards saving
  • Attitude towards investing
  • Attitudes towards retirement
  • Attitudes towards product quality
  • Attitudes towards customer service
  • Family size and structure
  • Lifestyles
  • Health consciousness
  • Buying habits
  • Ethical concerns
  • Cultural norms and values

4. Technological factors:

These factors relate to technological innovations that can favourably or unfavourably, affect the operations of the industry and the market as a whole. This applies to automation, research and development, as well as the amount of technical knowledge a market carries.

Technological forces have three distinct effects on marketing and its management, namely, (i) Fresh ways to render products and services, (ii) New ways in which goods and services are distributed, and (iii) New ways of getting to know target markets.

Technological factors of Pestle analysis may include the following:

  • Incentives to Technology
  • Automation
  • Research and Development activities
  • Technological shift
  • Catching modern technologies
  • Innovation Level
  • Expertise in technology
  • Web infrastructure
  • Transmission infrastructure
  • Technology-life cycle

5. Legal factors:

There are certain regulations that influence a specific country’s market climate, and there are certain policies that companies adopt for themselves. The legal analysis considers these two angles and then outlines the strategies in light of these laws. It is obvious that companies need to know what is and what is not legal for a successful trade.

Such factors of Pestle analysis may include the following:

  • The Laws on discrimination
  • Laws relating to work/employment
  • Laws relating to consumer protection
  • Patent and copyright rules
  • Product labelling and product safety
  • The Laws on health and safety
  • Advertising standards
  • The Laws of Education
  • Laws relating to consumer protection
  • Laws relating to data security

6. Environmental factors:

Environmental factors include all those that influence the surrounding environment or are determined by it. Due to the growing scarcity of raw materials, emissions levels, consideration of a business as an ethical and sustainable company, carbon footprint levels set by governments, etc., the environmental factors have become all the more relevant.

The carbon footprint targets set by the governments is a good example of where one factor could be classified simultaneously as political and environmental.

Environmental factors of Pestle analysis may include the following:

  • Weather
  • Climate shift
  • Pollution targets
  • Greenhouse gas emission factors
  • Climate management and environmental policies
  • Pressure/compliance burden from NGOs
  • Water and land use and biodiversity
  • Natural calamities
  • Air pollution and water pollution
  • Norms on recycling
  • Attitudes in favour of green goods/products
  • Fostering clean and renewable energy

The usefulness of Pestle analysis

Pestle analysis plays a major role in an enterprise’s growth. Either extending a product line or starting a new business in a new area, evaluating PESTEL is a key to creating plans and preparing business strategies.

Its importance can be validated from the following points:

  • Whether it is a startup or an existing company, evaluating PESTEL will help any business owner recognize major changes in political, economic, social, technical, environmental, and legal factors.
  • It helps companies grow their operations by doing strategic planning.
  • Any department in the business, such as accounting, distribution, and promotions, can be managed from within; for instance, more employees can be placed into distribution to generate more revenue. However, unlike internal factors, which are controllable by an organization, Pestle analysis throws light on external considerations, which continue to exist and affect an organization from outside.
  • It is a cost-effective tool of business analysis as the only cost of Pestle analysis is time and effort.
  • It easily summarises the factors that affect the business environment. As far as the production of a new product is concerned, it improves strategic thinking and a deeper understanding of various factors such as consumer regulations, new technological developments, etc. that influence the market launch of the product.
  • It helps companies to plan for future risks that arise from time to time due to external factors. For instance, any technological transition like mobile app enhancement is a challenge if the mobile manufacturing business does not adapt to the changes in its mobile brand.
  • It enables companies to exploit opportunities that emerge from time to time due to external factors. For instance, a lower interest rate in the real estate market is an economic factor that provides an incentive to raise housing demand, as mortgage loans get cheap because of lower interest rates.

How to do a Pestle analysis

Step 1: Brainstorm all the factors under Pestle analysis that surround your business domain.

Step 2: When you have recognized the changes taking place in your business climate, it is time to look at every shift and imagine the opportunities that it could open up to you.

Step 3: It is also necessary to appraise how these changes could undermine your company (threats). You will be able to prevent these issues, or mitigate their effect if you realize this early enough.

Step 4: Build the actions you will take to exploit the identified significant opportunities in your business plan. Similarly, initiate appropriate action to manage or eliminate the identified significant risks.

Few examples of Pestle analysis

Example 1: Pestle analysis of Starbucks coffee

Launched in 1971, Starbucks Coffee Company has evolved to become an international company. Being the largest coffeehouse organization in the world, Starbucks continues to lead the industry of sustainable business and creativity. The Pestle analysis research system reveals the most important Starbucks effects based on remote or macro-environment characteristics.

External factors in Starbucks macro-environment:

External factors in Starbucks macro-environment:
External factors in Starbucks macro-environment:

Outcome: The above Pestle analysis/ study demonstrates that the majority of the external factors pose opportunities in Starbucks Coffee’s remote / macro-environment. On the other hand, the business must, however, work to resolve the identified risks, particularly the threat of substitution linked to the increased availability of speciality coffee machines for home use.

Example 2: Pestle Analysis used by S & P Global in assigning ratings

S & P Global Ratings integrates credit factors into its credit analysis across all industries if they conclude that the factors are important and significant to their creditworthiness opinions. Such factors are deemed to affect headroom ratings, evaluation outlooks, and ratings and their impact varies across industries.

Credit ratings are assigned by S & P Global depending upon how much such external factors affect the capacity and willingness of an obligor to meet its financial commitments. When rated organizations respond to these challenges and opportunities, S&P Global Ratings tracks the credit effects of economic, financial, and governance (ESG) variables.

Takeaway

Pestle analysis is an analysis of the political, cultural, social, and technological factors in an organization’s external environment that may affect its activities and results. It requires the selection and representation of external factors that have, or may have, an effect on business. Such forces will build an organization with both opportunities and challenges.

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Ruchi Gandhi

A CA together with MBA (Fin) and M Com, she relishes taking interest in insightful writing in the domain of taxation and finance. She has gained experience as a full-time author and has also served an accounting role in industry.

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