What is PESTLE Analysis?

It is a widely accepted framework used by senior managers, marketing experts, and professionals. The analysis gives an idea of macro-environmental factors that impacts the functioning of a particular business.

Key Takeaways

  • The PESTLE analysis refers to the screening of political, economic, sociological, technological, legal, and environmental aspects of the macro environment. It aids decision-making and strategic planning.This concept was first introduced in 1967 as PEST analysis by Francis Aguilar. Francis was an American scholar and Harvard professor.It is an essential framework employed for strategic business planning, human resource planning, organizational changes, marketing research, product development, and risk anticipation.

PESTLE Analysis Explained

PESTLE analysis is a strategic framework adopted by corporations for risk management. It evaluates various threats and opportunities posed by an external environment—and devises mechanisms to deal with those threats.

The term PEST analysis (as it was known initially) was discovered by Francis Aguilar in 1967. Francis was an American scholar and Harvard professor. Later, two more factors were added to it (Legal and Environmental), making it PESTLE.

The word PESTLE is made up of the initials of the following six macro-environment factors:

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Political (P): Government policies, regulations, taxation, tariffs, political unrest, trade disputes, fiscal policy, trade barriers, and antitrust issues greatly influence business operations.

Economic (E): Economic factors significantly affects the business decisions related to the demand, supply, and pricing of goods or services. Economic factors include interest rates, inflation, foreign exchange rates, GDP, unemployment, economic growth rate, disposable income, savings, and investments.

Sociological (S): Society and people also influence business operations. The various social factors comprise consumer beliefs, demographics, attitudes, buying patterns, customer preferences, literacy, living standard, status, ethics, values, and religion.

Technological (T): The advancement of science and technology greatly impacts the business process. Technological factors include research and development, innovation, quality, automation, cyber security, patents, information technology, communication, etc.

Legal (L): The regulatory and legal compliance like consumer protection laws, environmental laws, labor laws, industrial regulations, licenses and permits, and intellectual property play a major role in shaping a company’s policies and practices.

Environmental (E): Organizations need to plan their course of action based on nature, environment, and ecology. Ecological factors include climatic changes, weather conditions, geographical location, carbon emission standards, natural resources, and environmental protection laws.

Example

Let us now go through the PESTLE analysis of the German multinational sports goods company, Adidas (June 2022):

Political Factors:

  • Political differences and trade wars (threat).

Economic Factors:

  • Lack of domestic demand (threat).Effect of the pandemic on business and economy (threat).

Sociological Factors:

  • Trending of fitness and yoga among millennials (opportunity).Use of socially responsible materials in manufacturing apparel (challenge).

Technological Factors:

  • Technologically innovative products (challenge).Automation and digitalization in product manufacturing (challenge).Providing premium retail experience using technology (challenge).Direct customer relationship management using digitalization (challenge).Insight-driven decision-making through analytics (opportunity).

Legal Factors:

  • Achieving regulatory compliance using technology (opportunity).Effects of regulatory and legislative changes (threat).

Environmental Factors:

  • Enhancing sustainable innovation through collaboration (opportunity).Handling the impact of the environment on operations (challenge).Developing sustainable products (challenge).

PESTLE Analysis in Strategic Management

In addition to risk management, PESTLE analysis is applied for strategic management. Whether it is resource planning or policy formation, everything requires macro-environmental scanning.

Following are the uses of different factors of PESTLE analysis in strategic decision making:

  • Political Factors: The study of the political environment, including tariffs, taxation, government regulations, and laws, helps frame business policies.Economic Factors: The analysis of economic conditions, GDP, employment rate, inflation, and other aspects facilitates determining the demand, supply, and prices of commodities.Sociological Factors: The study of consumer behavior, consumer preference, values, ethics, culture, beliefs, and standard of living aids companies in developing marketing strategies and enhancing customer satisfaction.Technological Factors: Understanding the role of research and development, automation, digitalization, security, innovation, and information technology in business helps in the growth and progress of the organization.Legal Factors: Compliance with the corporate laws, labor laws, industrial standards, licenses, permits, and consumer laws ensure sustainability. Environmental Factors: Predicting climatic changes, ecological disbalance, geographical challenges, and scarcity of natural resources makes a business environment friendly and socially responsible.

Importance

PESTLE analysis has been an essential tool for senior management of all multinational companies. Moreover, as businesses expand beyond their domestic boundaries, understanding the macro-environment aspects has become even more important.

Let us go through the various uses of this strategic framework in business:

  • Organizational Change: When the external environment is dynamic, the organizations need to adapt to such changes for constant growth and development.Product Development: In the era of neck-to-neck competition, PESTLE analysis helps companies innovate and improve their products or services to serve consumer needs better. Such firms can keep up with the market competition.Strategic Human Resource Planning: Technological advancements have constantly pushed companies to eradicate the skill gap.Marketing Research: The analysis of the sociological factors has aided companies in reading the consumers’ mindset and developing products or services accordingly. Moreover, they can plan their marketing campaigns, strategies, and framework to attract the target consumers.Strategic Business Planning: When most crucial business decisions are framed according to the macro environment changes and trends, it facilitates attaining the major organizational objectives.

This has been a guide to what is PESTLE Analysis and its meaning. We explain PESTLE Analysis in strategic management, importance, and example. You can learn more about it from the following articles –

An analyst can follow the below-mentioned steps to conduct a PESTLE evaluation:1. Determine the various elements of each PESTLE factor that affect the business.2. Evaluate the impact of these factors on the company.3. Assign a grade, i.e., low, moderate, or high, to the potential impact of each PESTLE factor.4. Conduct a SWOT analysis for planning further courses of action.

In 1967, the American scholar and Harvard professor Francis Aguilar developed the PEST analysis concept, later known as PESTLE analysis.

PESTLE analysis helps foresee future challenges and opportunities that the external environment puts forward. It aids in SWOT analysis as well.

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