PESTLE Analysis

PESTLE Analysis is a strategic tool that scans a business's external environment. It comprises political, economic, sociological, technological, legal, and environmental factors. Such a study facilitates the identification of business threats and opportunities and aids in strategic decision-making. It is a widely accepted framework used by senior managers, marketing experts, and professionals.

The pestle analysis template gives an idea of macro-environmental factors that impacts the functioning of a particular business. These factors could have both detrimental or beneficial effects on the business. It gives the top management a detailed insight into the factors external to the company that can have an adverse effect on the daily functioning and the long-term growth perspective.

• The PESTLE analysis refers to the screening of political, economic, sociological, technological, legal, and environmental aspects of the macro environment. It aids decision-making and strategic planning.
• This concept was first introduced in 1967 as PEST analysis by Francis Aguilar. Francis was an American scholar and Harvard professor.
• It is an essential framework employed for strategic business planning, human resource planning, organizational changes, marketing research, product development, and risk anticipation.

PESTLE analysis is a strategic framework adopted by corporations for risk management. It evaluates various threats and opportunities posed by an external environment—and devises mechanisms to deal with those threats.

Pestle analysis business despite gauging the factors beyond the control of the organization or business, helps them to take advantage of the situations in their favor and adapt according to the factors that pose difficulties in their operation.

The term PEST analysis (as it was known initially) was discovered by Francis Aguilar in 1967. Francis was an American scholar and Harvard professor. Later, two more factors were added to it (Legal and Environmental), making it PESTLE.

The word PESTLE is made up of the initials of the following six macro-environment factors:

Political (P): Government policies, regulations, taxation, tariffs, political unrest, trade disputes, fiscal policy, trade barriers, and antitrust issues greatly influence business operations.

Economic (E): Economic factors significantly affects the business decisions related to the demand, supply, and pricing of goods or services. Economic factors include interest rates, inflation, foreign exchange rates, GDP, unemployment, economic growth rate, disposable income, savings, and investments.

Sociological (S): Society and people also influence business operations. The various social factors comprise consumer beliefs, demographics, attitudes, buying patterns, customer preferences, literacy, living standard, status, ethics, values, and religion.

Technological (T): The advancement of science and technology greatly impacts the business process. Technological factors include research and development, innovation, quality, automation, cyber security, patents, information technology, communication, etc.

Legal (L): The regulatory and legal compliance like consumer protection laws, environmental laws, labor laws, industrial regulations, licenses and permits, and intellectual property play a major role in shaping a company's policies and practices.

Environmental (E): Organizations need to plan their course of action based on nature, environment, and ecology. Ecological factors include climatic changes, weather conditions, geographical location, carbon emission standards, natural resources, and environmental protection laws.

Let us understand the concept of PESTLE analysis business with the help of a couple of examples in detail.

Example #1

LMN corporation is a multi-national company that manufactures laptops and monitors. Their business saw a steep decline during the initial stages of the pandemic in 2020. However, following slow release of curbs, they wanted to conduct a detailed analysis and form a pestle analysis template to draft a plan for the next few years of their business.

Their analysis found that countries like India and Bangladesh saw a significant hike in the sales of their competitors as schools and colleges adopted a virtual setting for their classes.

They decided to offer heavy discounts and onboarded new distributors and super-stockists for their operations in Asian and African states.

As a result, they achieved their two-year target in just three quarters of the same year and penetrated into a market that they believed was difficult to enter due to existing stiff competition.

Example #2

Let us now go through the PESTLE analysis of the German multinational sports goods company, Adidas (June 2022):

Political Factors:

• Political differences and trade wars (threat).

Economic Factors:

• Lack of domestic demand (threat).
• Effect of the pandemic on business and economy (threat).

Sociological Factors:

• Trending of fitness and yoga among millennials (opportunity).
• Use of socially responsible materials in manufacturing apparel (challenge).

Technological Factors:

• Technologically innovative products (challenge).
• Automation and digitalization in product manufacturing (challenge).
• Providing premium retail experience using technology (challenge).
• Direct customer relationship management using digitalization (challenge).
• Insight-driven decision-making through analytics (opportunity).

Legal Factors:

• Achieving regulatory compliance using technology (opportunity).
• Effects of regulatory and legislative changes (threat).

Environmental Factors:

• Enhancing sustainable innovation through collaboration (opportunity).
• Handling the impact of the environment on operations (challenge).
• Developing sustainable products (challenge).

In addition to risk management, PESTLE analysis business is applied for strategic management. Whether it is resource planning or policy formation, everything requires macro-environmental scanning.

Following are the uses of different factors of PESTLE analysis in strategic decision making:

• Political Factors: The study of the political environment, including tariffs, taxation, government regulations, and laws, helps frame business policies.
• Economic Factors: The analysis of economic conditions, GDP, employment rate, inflation, and other aspects facilitates determining the demand, supply, and prices of commodities.
• Sociological Factors: The study of consumer behavior, consumer preference, values, ethics, culture, beliefs, and standard of living aids companies in developing marketing strategies and enhancing customer satisfaction.
• Technological Factors: Understanding the role of research and development, automation, digitalization, security, innovation, and information technology in business helps in the growth and progress of the organization.
• Legal Factors: Compliance with the corporate laws, labor laws, industrial standards, licenses, permits, and consumer laws ensure sustainability.
• Environmental Factors: Predicting climatic changes, ecological disbalance, geographical challenges, and scarcity of natural resources makes a business environment friendly and socially responsible.

Let us understand the importance of drafting a pestle analysis template through the detailed explanation below.

PESTLE analysis has been an essential tool for senior management of all multinational companies. Moreover, as businesses expand beyond their domestic boundaries, understanding the macro-environment aspects has become even more important.

Let us go through the various uses of this strategic framework in business:

• Organizational Change: When the external environment is dynamic, the organizations need to adapt to such changes for constant growth and development.
• Product Development: In the era of neck-to-neck competition, PESTLE analysis helps companies innovate and improve their products or services to serve consumer needs better. Such firms can keep up with the market competition.
• Strategic Human Resource Planning: Technological advancements have constantly pushed companies to eradicate the skill gap.
• Marketing Research: The analysis of the sociological factors has aided companies in reading the consumers' mindset and developing products or services accordingly. Moreover, they can plan their marketing campaigns, strategies, and framework to attract the target consumers.
• Strategic Business Planning: When most crucial business decisions are framed according to the macro environment changes and trends, it facilitates attaining the major organizational objectives.

This has been a guide to what is PESTLE Analysis. We explain PESTLE Analysis examples, its presence in strategic management, and its importance in detail. You can learn more about it from the following articles -

• Managerial Economics
• Pareto Analysis
• Gap Analysis