PESTLE analysis is also known as PEST analysis and is the most important tool of business analysis. It is one of the concepts in principles of marketing. Most of the companies use this analysis as a tool so that they can track the environment in which they are operating or planning to introduce a new product, service, or project.
PESTLE in its expanded form refers to:
You can get a bird’s eye view of the entire environment from several angles with the help of this analysis. You can keep a check on the environment while envisioning a specific plan or idea.
The structure of PESTLE analysis has undergone definite changes because the marketing experts have added more things like an E which refers to ethics. Ethics help in introducing the component of demographics while using the framework and exploring the market.
When you are conducting this analysis, there are some questions that you must ask yourself. It will give you an idea of the things to be kept in mind.
Check out the following questions:
- What are the political condition of the country in which you are operating and what are its effects on the industry?
- What are the existing economic factors that can affect your business?
- Does culture have any significance in the market? If yes, what are its determining factors?
- What kind of technological innovations can come up in the market and how they can affect the structure of the market?
- What are the concerns of the industry which are related to the environment?
- Are there any kind of current legislation that has the ability to control the industry or can the legislation be changed for the industry?
No matter what kind of industry your business might be in, every aspect of this technique is vital. Not only you can understand the market, but this framework will help in representing one of the vertebras of the support of strategic management. It will help you to understand what your company should do and what strategies you should follow to attain organizational objectives.
The significance of each factor may not be similar for every kind of industry, but it is important for every kind of strategy that is developed by a company.
PESTLE analysis is considered as a broad version of SWOT analysis.
Understanding each element of PESTLE analysis is very important. Take a look below:
- P- Political
The extent to which the government can impact the economy or an industry is outlined by political factors.
For instance, the structure of revenue of an organization might change because of a tax or duty imposed by the government.
Policies related to tax, fiscal policies, trade tariffs, etc. are all included in political factors. These can be imposed by the government in a fiscal year and can have a direct impact on the environment of the business.
- E- Economic
Economic factors help in defining the performance of an economy that has an effect on the company and also has deep long-term effects.
For instance, an increase in the rate of inflation of the economy will have an impact on the way in which companies fix the prices of their goods and services. It will also have an impact on the purchasing power of the customers and the models of demand and supply will undergo a change. Foreign exchange rates, rates of inflation, rates of interest, patterns of economic growth, etc. are all included in the economic factors. Foreign Direct Investment is also affected as it depends on the industries that undergoe PESTLE analysis.
- S- Social
The social environment of the market is examined by these factors. Determinants like demographics, cultural trends, and population analysis are also estimated by social factors.
An example of social factors is the buying requirements for Western countries like the UK as there is a vast demand when the holiday season arrives.
- T- Technological
Technological factors are related to the innovations in technologies and have an impact on the operations of the industry. These factors can affect the market favourably or unfavourably. Technological factors include automation, awareness related to technology, and research and awareness that are possessed by the market.
Legal factors contain external as well as internal sides. The environment of the business can get affected by certain laws prevailing in the country. On the other hand, certain other policies are maintained by the companies for themselves. Both these angles are taken into account by the legal analysis. After that, strategies are formulated in the light of these regulations.
For instance, standards related to safety, laws made for consumers, labour laws, etc. are all included in legal factors.
The factors that are determined by the surrounding environment refers to environmental factors. These factors are especially vital for those companies which are involved in farming, tourism, agriculture, etc. Factors which are included in the analysis of the business environment are not limited to geographical location, climate, environmental offsets, and global changes in weather.
An organization is able to recognize the external forces that can affect their market with the help of PESTLE analysis. It is very important that all the factors of PESTLE analysis are not only understood but are also assessed properly. Also, the results of PESTLE analysis can be utilized to populate the threats and opportunities in a SWOT analysis.