PESTLE Analysis

See also: Porter's Five Forces

A PESTLE analysis looks at political, economic, social, technological, legal and environmental factors affecting an organisation.

It is a useful tool for businesses and other organisations wishing to understand their external environment in a structured way. Many organisations choose to use only the PEST elements, but an examination of legal and environmental issues can be a useful addition for a more thorough analysis.

This type of analysis enables businesses to understand more about an environment or market in which they are either operating, or considering entering. It is usually considered to be a marketing tool, but can also be useful in a broader strategic analysis.

PESTLE analysis is often used together with a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) to identify the opportunities and threats in a more structured way that ensures that all possible factors are considered.


The PESTLE Factors

The six areas that are considered in a PESTLE analysis are:

  • Political

    Political factors include anything connected to government, whether local, national, or even international (for example, laws from the European Union). Considerations under this heading include changes to laws, including regulatory regimes, taxes, government priorities for grants and funding, and tariffs.

    Likely areas to examine include laws on trade, tariffs, labour and human rights, and environmental law, as well as overall political stability.

    In general, legal changes are signalled at least months, if not years, ahead, so businesses have time to prepare. The timing and effects of elections, however, may be harder to predict.

  • Economic

    Economic factors are the broader macro-issues in the environment, such as interest rates, availability of capital, inflation rates, and foreign exchange rates, and how these may affect supply and demand for the business.

    It is important to consider how these factors will affect your business, and be as specific as possible with the likely costs of each element.

    For example, a firm that exports most of its goods will be strongly affected by foreign exchange rates. Interest rates will affect the cost of capital; a firm whose foundation is more debt-based than equity-based may find it more difficult if the interest rates go up. Interest rates and inflation will affect customer behaviour and buying.

    Modelling can be helpful to examine the effects of some likely scenarios.

  • Social

    Social factors include hard facts, such as population growth rate and other demographics, and ‘softer’ issues such as attitudes towards health and safety, or seasonal buying trends. They include anything in the social environment, and therefore related to people.

    Social factors may affect:

    • How the company operates, for example, how it manages its staff to reflect an aging population, and/or the increasing desire to work remotely or part-time; and
    • The company’s profitability, for example, some time periods, such as holidays, are more profitable than others.
  • Technological

    The technological category generally refers to technological innovations that may change either the market, or the way that businesses operate. Examples of technological change that have radically changed markets include Amazon’s model of online-only buying, and the way that social media has enabled peer-to-peer recommendations to become a key part of buying decisions.

    This area can be very hard to predict because it is very fast-moving.

    It may therefore be helpful to scan the technical press for predictions of likely disruption in the next year or so.

  • Legal

    Legal factors can be considered a subset of political issues, but focused on the effect of legislation, rather than government actions more generally. These factors cover all the legal aspects of operation, including health and safety law, labour and employment law, contract law, and elements like money-laundering laws.

    For companies operating across national boundaries, this area is a useful point to chart distinctions in legal regimes, and consider whether operations need to be different in different countries.

  • Environmental

    This area considers the effect of the external environment on operations. This includes the effect of climate, weather and unpredictable events such as volcanic eruptions or earthquakes. These will obviously be more important in certain industries (for example, farming) or geographical locations.

    It also, however, covers issues of environmental impact, such as the move towards a low-carbon society, and the effect of this upon reputation and/or profitability.


Making PESTLE Work for You

From the description of each category, it should be clear that a PESTLE analysis is potentially very broad. However, for each business or organisation, there will be some aspects that are more important.

For example:

  • Foreign exchange rates will be more important to a firm that either exports a lot of its goods, or imports a lot of raw materials.
  • Some industries are more inflation-resistant than others.
  • The effect of weather will be greater in industries like farming, and will also be location-dependent.
  • Legal factors will be different in different countries.

It is therefore important to focus on the factors that matter most to your business.

This does not mean focusing only on certain areas among the six, but recognising that the factors within each area will be industry-, business- and location-specific.

WARNING!


Like any other analysis tool, PESTLE is subject to the ‘garbage in, garbage out’ rule.

It is therefore worth taking time to gather all the necessary information, in as much detail as possible, before embarking on your analysis.

PESTLE analysis requires little or no knowledge of the company’s own operations, apart from a broad appreciation of the market in which it operates. Some companies therefore choose to engage external consultants or analysts to carry out a PESTLE analysis, and then simply feed the results into their SWOT analysis, or strategic decision-making. This can save time finding all the necessary information. Companies should, however, check the analysis thoroughly to make sure that it covers all the necessary issues.


Using a variety of tools

A PESTLE analysis is a useful addition to the organisation’s toolkit, because it gives a very precise and structured analysis of the external environment. This can be particularly helpful in identifying opportunities and threats to feed into a SWOT analysis.

PESTE should not, however, be used as the only analysis tool, or you will end up with a very one-dimensional picture.

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