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:
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.
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.
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.
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.
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.
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:
- Determine the scope of research by stating the present situation and desired future position clearly.
- Gather ample information about the different macro-environment factors that influence the organization in any way.
- Arrange the data and understand the impact of changes in these macro environment elements over the business operations.
- Discover the prevailing opportunities which these developments bring for the company.
- Also, beware of the forthcoming dangers or risks indicated through the macro environment changes.
- 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.
- Lastly, the top management, stakeholders and the board of directors can jointly take appropriate decisions in this context.