Understanding what is PESTLE Analysis? (Explanation & Example): Hello readers! We are back with another interesting article on PESTLE Analysis that will help to enlighten your knowledge horizon regarding the nitty-gritty of strategic management for running a prosperous business.
Are you someone who is planning to take the road of entrepreneurship and set up a new business by quitting your 9 to 5? Then, this article is most definitely for you! Well, to start off, there are a lot of factors that are needed to take into consideration for establishing a start-up business. Interestingly, it is not only the startups but also the Blue Chip Companies who need to constantly gauge strategies for sustaining their businesses and make a prominence.
Today, we are going to discuss a strategic management framework known as PESTLE (Political, Economic, Social, Technological, Legal, Environmental) Analysis which has emerged to be an important apparatus for scanning the internal and external factors impacting a business. Let us first learn the definition to understand the concept of PESTLE Analysis.
Table of Contents
What is PESTLE Analysis?
A PESTLE Analysis is a hypothesis under the category of marketing principles ensuring business growth and profitability.
Francis J. Aguilar, a professor at Harvard Business School is considered to be the founder of the PESTLE Analysis in 1964. However, it didn’t commence as PESTLE but started as ETPS and covered four broad factors namely Economic, Technical, Political and Social aspects.
Initially, it was known as PEST Analysis. It is anatomy and a strategic management tool that helps to scrutinize the macro-environmental factors that may have a resonating influence on an organization’s accomplishments. The acronym PESTLE is the shortened form of Political, Economic, Social, Technological, Legal factors and Environmental factors. The concept largely helps companies to acquire a transparent insight into the intramural and extramural factors affecting their organization. It also provides a general overview of the environment from multifarious points before launching a new project, new product, new service, etc.
PESTLE Analysis is contemplated as the backbone of strategic management that interprets the approach of a company and defines an organization’s strategies and intertwined futuristic goals. The theory can be applied to different industries in divergent scenarios because of its analytical flexibility. In order to conduct the PESTLE Analysis, it is utterly important to understand each letter of the “PESTLE” in depth.
— Political Factors
Political factors usually indicate the authoritative powers that a government possesses in the economy or, in case of a certain industry. Such factors consist of policies of the government, extent of political stability, foreign trade policy, fiscal policy, trade tariffs, labor law, health regulations, education system, environmental law, infrastructure, corruption, and etcetera. All these aspects need to be taken into account when evaluating the lucrativeness of a potential market.
Example: A government may levy a new tax policy or fiscal policy or trade tariffs in a new financial year which can affect the revenue generation of organizations to a large extent. Recently, the Government Of India has reduced corporate tax rates to 22% from 30%. Consequently, this move will help the top-notch companies to revive their profitability and would be a good catalyst for luring investment from foreign investors. The announcement also arrives at a perfect time because major American organizations are involved in a trade war with China and are finding alternative global manufacturing pedestals.
— Economic Factors
Economic factors are crucial determinants and plays an important role in the performance of an economy. Such factors generally end up becoming a key decision-maker in the success or, failure of a company. A surge in the rate of inflation of any economy can affect the pricing pattern of a companies’ products and services. In addition, it also impacts the purchasing power parity of the consumers and brings about a change in the forces of demand and supply in the economy. The economic factors include inflation rates, exchange rates, interest rates, economic growth, gross domestic product, unemployment rates, economic growth and disposable income of consumers.
EXAMPLE: In India, in the past few weeks, vegetable prices have skyrocketed and as a result, there is a rise in the rate of inflation. Consequently, due to the hike in prices, the purchasing power of people has gone down which ultimately indicates that there will be a fall in consumer demand.
— Social Factors
Social factors pin-point the social environment in relation to the industries and constitute the demographic features, customs, norms, and values of the population within the operating periphery of the organization. Social factors consider the population trends such as age distribution, cultural barriers, income distribution, the growth rate of population, lifestyle attitudes, career inclinations, and health consciousness.
All the above-mentioned aspects are very significant for marketing strategists when earmarking the customer bases. Apart from that, the factors also reveal information about the local workforce and their compliance to work under certain conditions.
EXAMPLE: In today’s era, the demand for junk foods like Pizza and Burgers has gone up extensively, especially amongst the younger generation. Thus, companies like Dominos, Pizza Hut, Burger King and KFC are churning out huge profits because of the consumers’ behavior. On the contrary, the same doesn’t hold true for the people in rural areas. This is how social factors affect companies’ revenue structure.
— Technological Factors
Technological Factors have relevance to modernization in technology which influences the performance of an industry. Such factors include a level of innovation, research, and development (R&D) activity, amount of technological awareness, technology incentives and automation. Technological Factors highly affect the decisions regarding entry/exit in an industry, launching of a new product and outsourcing production-related activities. Possessing a sound knowledge regarding technology helps companies from spending a lump sum amount of money on obtaining a technology that would become obsolete in the near future due to the innovation of newer technologies globally.
EXAMPLE: The business space is filled with cautionary sagas of large scale companies that became failures due to their inability to keep up with the dynamic technological innovation. One such prominent example is Kodak, a technology company that used to produce camera-centric products and hegemonized the photographic film market during most of the 20th century. The breakthrough in digital photography contributed to the catastrophic misfortune of their film-based business model.
— Legal Factors
Legal factors include laws such as health and safety laws, discrimination laws, safety standards, employment laws, consumer protection laws, copyright and patent laws and antitrust laws. Every company is bound to have awareness regarding the laws for the purpose of conducting ethical business. In addition, a business owner also needs to be aware of any possible alteration in legislation which may have an impact on the business in the long term. Interestingly, the set of rules and regulations varies from country to country. Analysis of legal factors figures out strategies based on the backdrop of the legislations. However, it is always advised to have an appointed lawyer or an attorney to guide through the complexities.
EXAMPLE: Nestle had to take away the packets of Maggi from the stores’ shelves after the Food Safety and Standards Authority of India (FSSAAI) summoned Nestle because of their negligence to adhere with the laws of food safety. Regulators found lead content beyond the permissible limit in its instant noodle product.
— Environmental Factors
Environmental factors have appeared to become a pivotal character recently. They have become utterly valuable due to carbon footprint targets, scarcity of raw materials and pollution targets fixed by governments. Environmental factors include ecological facets like climate change, weather conditions, environmental offsets which highly govern tourism, agriculture, and farming industries.
Especially, large-scale campaigns regarding the burning issue of climate change are leading to the change in operation and products of the companies. Therefore, practices of Corporate Social Responsibility (CSR) and Sustainability forms an integral part of the companies and is taking new shapes with each passing day.
EXAMPLE: Due to the imposition of government rules as a measure to curb global warming, regulations on fossil fuel industries have increased considerably and as a result, this move has started threatening the thriving coal, oil, and gas industries.
PESTLE Analysis Example — SONY
SONY is a Japanese MNC and has abruptly metamorphosed into one of the dominant entertainment organizations in the world. Its versatile business products consist of electronics, entertainment gaming,and financial services. The company is the owner of the largest music entertainment business around the globe and also a chief player in the film and television entertainment industry.
— Political Factors
SONY is a world-class brand and has a prominent presence in several countries around the world. The political scenario in different countries largely impacts the SONY’s success. As we know, political Stability ignites growth and political instability, on the other hand, paralyzes the rules and regulations of an economy. In Sony’s context, its supply chain is located in China. Thus, any kind of political disturbance in China will have a heavy influence on Sony’s generation of profits.
— Economic Factors
SONY products fall under the category of luxury goods. Such goods are not items of necessity but are usually purchased when people want to splurge on themselves. In a nutshell, if you living paycheck to paycheck, a SONY product would not be a priority in your list of necessities. In another instance, economic instability and the high rate of unemployment in a country will never attract buyers for the high-end SONY products. Consequently, the profits will touch a rock bottom. Therefore, it is crystal clear that a big giant like SONY extensively depends on stable and emerging economies to merchandise their entertainment products.
— Social Factors
Traditions, culture, age distribution, taste, and preferences vary from nation to nation. SONY offers entertainment products beginning with movies to music which basically acts as an escape to reality. It is to be kept in mind that not every nation has the same pattern of entertainment. Therefore, it is extremely important for SONY to keep up to date regarding the buying trends of the consumers and consequently tailor the products and services fitting the requirements of the customers.
— Technological Factors
SONY is a true blue technology company because every other product is correlated with the usage of technology in some way. The company’s Video Game Consoles are nothing but computer devices that produces video signal or, optical image to exhibit a video game for multiple players. On the other hand, laptops help users to stay connected to social media and other websites on the world wide web.
In today’s era, the availability of the internet has removed all the possible obstacles of communication and SONY has bagged this opportunity to market their products online. It has become convenient for the company to announce any new launch of products via the medium of the internet.
— Legal Factors
Since SONY is an international company and sells its products across many countries, it also has to abide by the diversified legal regulations of different countries. Any failure to adhere to the legalization like labor laws to tax policies, the company might end up in serious legal trouble or lawsuits which can further affect their prosperous business.
— Environmental Factors
Sony believes that their corporate pursuits will be possible when there is a practice of sustainable development and thus they are so full of conviction regarding climate change, conservation of biodiversity, renewability of resources and other valuable measures to save the environment. SONY has taken up initiatives regarding environmental activities since the 1990s. In April’10, a new environmental plan was introduced by SONY to set up a sustainable community by accomplishing a zero carbon footprint by the year 2050.
We will now elaborate on the major pros and cons of PESTLE Analysis.
Advantages And Disadvantages of PESTLE Analysis
— Advantages of PESTLE Analysis
- PESTLE Analysis has a basic framework and follows a simple process for conducting an assessment.
- It furnishes a mechanism that allows an organization to pinpoint and cash in on golden opportunities and utilize them to reinforce a firm’s business model.
- It helps to diminish the impact and consequences of possible threats to an organization.
- It sanctions a company to examine the process of entering untapped markets both nationally and internationally.
- It helps to build a custom of strategic thinking for strengthening the company’s position.
- It is absolutely cost-effective and the cost to do any level of the assessment isn’t exposed to oscillations.
— Disadvantages of PESTLE Analysis
- PESTLE analysis cannot showcase the full picture because it only focuses on six factors that are external in nature. In strategic planning, one needs to go beyond these six factors which can provide internal insights as well.
- The Political, Economic, Social, Technological, Legal and Environmental factors are very dynamic in nature. Any shift in any of these factors can change the result of PESTLE Analysis drastically.
- PESTLE Analysis is time-consuming in general and requires loads of data. Each of the factors needs to be thoroughly examined to come to a conclusion and thus, takes up a lot of time.
PESTLE Analysis provides a basic framework and follows a simple process for conducting an assessment. It is a hypothesis under the category of marketing principles ensuring business growth and profitability.
In order to conduct the PESTLE Analysis, it is utterly important to understand each letter of the “PESTLE” in-depth i.e. Political Factors, Economic Factors, Social Factors, Technological Factors, Legal Factors & Environmental Factors.
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A PESTLE analysis is a tool used to gain a macro picture of an industry environment. PESTLE stands for Political, Economic, Social, Technological, Legal and Environmental factors. It allows a company to form an impression of the factors that might impact a new business or industry.What is a PESTLE analysis example? ›
For example, a PESTLE analysis could help a clothing business to decide whether they should launch their services in a particular country. If the analysis finds that the country has low economic growth and an unstable political situation, it could be best to wait until conditions improve before entering that market.How do we use PESTLE analysis in creating a business? ›
- Step 1 - List external PESTLE factors for the business. ...
- Step 2 - Identify the implications of each PESTLE factor on the business. ...
- Step 3 - Rate the impact and likelihood. ...
- Step 4 - Further action.
- Have a good reason. With any business analysis tool, you need to have a good reason for using it. ...
- Know your organization. ...
- Look to the future. ...
- Use other tools. ...
- Draw simple conclusions.
Political factors include government policies, leadership, and change; foreign trade policies; internal political issues and trends; tax policy; regulation and de-regulation trends.What is PESTLE analysis PDF? ›
Doing a PESTEL analysis helps you to look at all important factors. that might affect the success or failure of your project. PESTEL is an acronym for the following factors (Political, Economic, Social and cultural, Technological, Environment and Legal)What are the 6 PESTEL factors? ›
In particular, PESTEL reflects the names of the six segments of the general environment: (1) political, (2) economic, (3) social, (4) technological, (5) environmental, and (6) legal.How PESTLE analysis is beneficial for organizations explain in detail with examples? ›
A PESTLE analysis is often used as a broad fact-finding activity. It helps an organization establish the external factors that could impact decisions made inside the organization. By understanding the impact these external factors can have on an organization, it becomes handy for organizations to plan better.How do you reference a PESTLE analysis? ›
Your Bibliography: Contributor, P., 2015. PESTLE Analysis: Business Environmental Analysis. [online] PESTLE Analysis. Available at: <http://pestleanalysis.com/pestle-analysis-business-environmental-analysis/> [Accessed 10 June 2016].What is Pestel analysis essay? ›
What is a PESTEL analysis? A PESTEL analysis is an acronym for a tool used to identify the macro (external) forces facing an organisation. The letters stand for Political, Economic, Social, Technological, Environmental and Legal.
PESTLE and SWOT analysis give internal and external insight about a topic. This is beneficial for people of all walks of life. Without it, you may never discover your true strengths and weaknesses. Or realize how much the macro-environmental factors of PESTLE analysis truly influence everything around us.How can the PEST analysis be applied for making decisions in the organization? ›
PEST Analysis can assist an organization in recognizing and thereby capitalizing on opportunities offered by existing conditions in the business environment. 4 It can also be used for identifying current or possible future challenges, allowing for effective planning of how to best manage these challenges.How political factors affect business as of this day? ›
Governments can raise or lower corporation tax , which will impact on profits. They can also affect businesses by increasing value-added tax on products or business rates. They can bring in new laws like the National Minimum Wage , which impacts on profits and employment rights.How can political affect the business? ›
The stability of a political system can affect the appeal of a particular local market. Governments view business organizations as a critical vehicle for social reform. Governments pass legislation, which impacts the relationship between the firm and its customers, suppliers, and other companies.How will PESTEL analysis help the business manager operate effectively? ›
By expanding the PESTEL analysis framework to include the multi-levelled and three-dimensional aspects of modern business operations, managers will be able to achieve sustainable and more competitive performance and growth within their organisations.How can a small business use PESTLE analysis in their marketing plan? ›
PESTLE analysis is applied in a marketing plan when a company is targeting an audience, a product is produced for the market, or a potential partnership and investment opportunity is enabled. PESTLE analysis requires know-how of external events taking place outside a company.How does PESTLE affect marketing? ›
A PESTEL analysis or more recently named PESTELE is a framework or tool used by marketers to analyse and monitor the macro-environmental (external marketing environment) factors that have an impact on an organisation. The result of which is used to identify threats and weaknesses which are used in a SWOT analysis.How do you mitigate PESTLE risks? ›
Without efficient management of the economic risks in your business and supply chain, you put current and future transactions at risk.By taking advantage of up-to-the-minute information on economic and market trends, potential legal measures and other factors, you can respond proactively and thus mitigate risk.What are the political factors in pestle? ›
Political factors include government policies, leadership, and change; foreign trade policies; internal political issues and trends; tax policy; regulation and de-regulation trends.How do you conduct an environmental scan? ›
- Identify the scope & frequency of the environmental scan. ...
- Identify the people to scan the environment. ...
- Scan for information. ...
- Analyze and summarize the information. ...
- Conduct gap analysis.
Doing a PESTEL analysis helps you to look at all important factors. that might affect the success or failure of your project. PESTEL is an acronym for the following factors (Political, Economic, Social and cultural, Technological, Environment and Legal)What are economic factors in pestle? ›
Economic factors include inflation rate, interest rates, foreign exchange rates, economic growth patterns etc. It also accounts for the FDI (foreign direct investment) depending on certain specific industries who're undergoing this analysis. Example Index Terms – Ownership Changes, Bankruptcy, Company Relocations.How do you explain political factors? ›
Lesson Summary. Political factors constitute external constraints upon a business and its activities that are usually outside of the control of the business. Typical political factors include laws and regulations that either force a business to pursue certain actions or prohibit it from taking certain actions.How political factors affect business as of this day? ›
Governments can raise or lower corporation tax , which will impact on profits. They can also affect businesses by increasing value-added tax on products or business rates. They can bring in new laws like the National Minimum Wage , which impacts on profits and employment rights.What is the impact of political environment on business? ›
Political factors can impact a business by making the market environment more or less friendly for that business. Typically, governments have a great deal of power over businesses and many times, there is not much that businesses can do about it. Political factors can impact businesses in various ways.How will you describe the environmental scanning process and its importance? ›
Environmental scanning is the process of gathering information about events and their relationships within an organization's internal and external environments. The basic purpose of environmental scanning is to help management determine the future direction of the organization.What is an example of environmental scanning? ›
A SWOT analysis is a common method of environmental scanning. SWOT stands for strengths, weaknesses, opportunities and threats. When performing a SWOT analysis, the marketing department of an organization must look internally at the company's strengths and opportunities and externally at its weaknesses and threats.What is an environmental analysis describe its nature objective and uses? ›
An environmental analysis, also called an environmental scan, is a strategic tool used to identify and assess all external and internal elements in a business environment. It examines organizational and industry factors that can positively or negatively affect the business.What are the 6 PESTEL factors? ›
In particular, PESTEL reflects the names of the six segments of the general environment: (1) political, (2) economic, (3) social, (4) technological, (5) environmental, and (6) legal.Why PESTEL analysis is important PDF? ›
A PESTEL analysis is a framework or tool used to analyse and monitor the external environment factors which have an impact on an organisation. The result of which is used to identify threats and weaknesses, strengths and opportunities which can be considered or used in a SWOT analysis.
PEST is an acronym for four sources of change: political, economic, social, and technological. PEST analysis is a powerful and widely used tool for understanding strategic risk. It identifies the changes and the effects of the external macro environment on a firm's competitive position.What are some examples of economic factors? ›
Economic factors include economic growth, percentage of unemployment, inflation, interest and exchange rates, and commodity (oil, steel, gold, etc) prices.What are the factors that influence the business in the area? ›
- Technological factors. ...
- Economic factors. ...
- Political and legal factors. ...
- Demographic factors. ...
- Social factors. ...
- Competitive factors. ...
- Global factors. ...
- Ethical factors.
- Consumer confidence. Consumer confidence measures the overall consumer optimism about the state of the economy. ...
- Economic growth and development. ...
- Inflation. ...
- Interest rates. ...