PESTLE Analysis

Definition: PESTLE Analysis is a study that takes into consideration the six crucial factors of macro environment, namely Political, Economic, Social, Technological, Legal and Environmental for determining the gap in business operations. It is an excellent analytical tool used for strategic decision making and gap analysis by the companies.

With this one strategical move, the business can anticipate the upcoming dangers as well as business prospects in the long run.

Content: PESTLE Analysis

Components of PESTLE Analysis

As we have already read that PESTLE analysis is a process of examining the various macro environment elements, let us understand about each one of these below:

Components of PESTLE Analysis

Political Factors

An organization is highly influenced by the various political factors by the way of government rules, regulations, policies and restrictions. Thus, changes in tariffs, tax policy, interstate trade policy, trade restrictions, etc. may prove favourable or unfavourable for the business entities.

For instance; the government levied high export duty on the sale of certain medicines to the other countries. The manufacturer, therefore, experiences a gradual decline in the international demand for such drugs.

Economic Factors

Being the crucial one out of all, are the economic factors. These are monitored by the central bank in association with the different government agencies. Some of these economic circumstances are deflation, inflation, fall in growth rate, exchange rate fluctuation and unemployment.

For instance; the country experienced inflation and the people had to dispose of their savings. As a result, the demand for precious items like gold and diamonds went down.

Social Factors

There are multiple constraints related to the society, these include demographic trends, social norms, culture, perception, pressure, attitude and recognition which equally impact the business activities. The consumer’s age, income, gender, living standard, health status, etc. mould their buying behaviour.

For instance; during the covid-19 pandemic, people became more health-conscious and stopped visiting the eat out places which ultimately shattered the restaurant industry.

Technological Factors

With technological development, many times companies face a setback. These factors involve innovation, automation, the pace of change, artificial intelligence, research and development activities, e-commerce and many more. Although making the related changes involve huge expenditure, it is crucial for keeping the organization updated.

For instance; Kodak is a classic example of ignoring the innovation. The company overlooked the emergence of digital cameras and stuck to its old product i.e., the roll cameras. As a result, it vanished from the market that was once led by the brand.

Legal Factors

The laws of a country can restrict organizations from performing certain tasks. Such legal barriers comprise of labour laws, trade permits, industrial practices, intellectual property, cyber laws, business standards and licenses.

For instance; a company was found exploiting the labour laws by paying off only 60% of the wages to the labourers. After a surprise inspection, the officials penalized the company heavily and ordered the management to release the retained funds with compensation.

Environmental Factors

Most often ignored but the ecological changes act as a key player in the business functioning. The common ones out of these are pollution, weather conditions, natural resources, climate changes, natural calamities, temperature and deforestation.

The companies have to fulfil their corporate social responsibility along with profit-making. Since it is a step taken in the way of a better ecological balance and eco-friendly trade practices.

For instance; PHOOL.Co came up with an extraordinary business idea of reusing the floral waste of the temples to make incense sticks, cones and vermicompost. Such an incredible eco-friendly business idea it is.

How to do PESTLE Analysis?

The process of PESTLE analysis is somewhat similar to that of other gap analysis tools. One may proceed with the following steps while conducting this analysis:

  1. Determine the scope of research by stating the present situation and desired future position clearly.
  2. Gather ample information about the different macro-environment factors that influence the organization in any way.
  3. Arrange the data and understand the impact of changes in these macro environment elements over the business operations.
  4. Discover the prevailing opportunities which these developments bring for the company.
  5. Also, beware of the forthcoming dangers or risks indicated through the macro environment changes.
  6. Disclose every bit of information related to your analysis in a report and present it in front of the stakeholders or the board of directors.
  7. Lastly, the top management, stakeholders and the board of directors can jointly take appropriate decisions in this context.

Use of PESTLE Analysis

What makes PESTLE analysis essential for the business entities?

Even after the availability of various other analytical tools like SWOT analysis and Ishikawa diagram, this tool has its unique place and is applicable for:

Use of PESTLE Analysis
  • Organizational Change: As the macro environment changes result in a need for transforming the organizational ways, for this purpose PESTLE analysis is applied along with other analytical tools.
  • Product Development: This tool is widely used by organizations to analyze the need for product or service improvement to stay competitive in the market.
  • Strategic Human Resource Planning: When it comes to strategic human resource management, PESTLE analysis plays a key role in skill gap analysis and workforce planning.
  • Marketing Research: Whether it is consumer preference or market segmentation analysis, companies adopt this tool for determining their marketing objectives, strategies and framework.
  • Strategic Business Planning: PESTLE analysis is considered quite essential for accurately determining business goals and strategies.

Advantages of PESTLE Analysis

For the companies which operate globally, PESTLE analysis is one of the favourite tools to keep a track of the macro environment of different countries. Also, it has the following benefits to business organizations:

Advantages of PESTLE Analysis
  • Risk Anticipation: PESTLE analysis makes the organization aware of the outer world uncertainties which are difficult to predict otherwise.
  • Easy to Apply: This tool can be effortlessly applied to any kind of business organization and doesn’t require much expertise, even the basic analytical skills may work.
  • Discover New Opportunities: It helps the management to uncover future prospectives and the opportunities that the outer world brings about for the business entity.
  • Crisis Management: The organization can foresee the macro-environment adversities to become familiar with the unfavourable situation and prepare for the same.
  • Perceives Business Environment: The internal environment of a business is highly affected by the macro-environment elements which are facilitated by the PESTLE analysis.
  • Broadens Perspective: Rather than focusing just internally, a company can go through the overall scenario and various macro-environment aspects to understand its impact on the business functioning and organizational performance.
  • Backs Decision-Making: Every business entity strategically plans its goals and operations in the long run, this tool is quite prominent for such decision-making.

Disadvantages of PESTLE Analysis

A company cannot solely rely upon PESTLE analysis for business decision making. This is because this tool comes along with multiple limitations as discussed below:

Disadvantages of PESTLE Analysis
  • Rapid Development Hinders Analysis: In the present era of development, the pace of change is so fast that it becomes difficult to conduct PESTLE analysis effectively.
  • Requires Frequent Implementation: With constant changes and uncertainties of the macro environment, the company needs to periodically conduct the analysis process.
  • Insufficient Data or its Oversimplication: The information inadequacy can hinder the process of PESTLE analysis, also, it is prone to the limitations of user interpretation.
  • Rely upon Assumptions: Many times, the companies end up creating blunders due to lack of realistic data, since this tool functions on mere assumptions.
  • Excessive Data Reduces Efficiency: When the analysts are more concerned about the quantity of data rather than its quality, there are more chances of inaccurate analysis.

Conclusion

No analytical tool can be good enough alone. They most often require the findings of one another to reach a sensible conclusion.

PESTLE analysis can be extensively applied by organizations operating oversees whether they are outsourcing or offshoring; exporting or importing; and even for the multi-national companies.

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