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PESTLE Analysis

A PESTLE analysis, sometimes referred to as a PEST Analysis, is a useful tool for understanding the industry situation as a whole, and is often used in conjunction with a SWOT analysis to assess the situation of an individual business.

A PESTLE Analysis is one of the most important frameworks of macro-environmental analysis, a framework which is a key part of advanced strategic management.

Throughout the past few years, the acronym PESTLE has suffered a number of changes, but PESTLE seems to be the most commonly used and almost unanimously accepted name now.

PESTLE Analysis

PESTLE stands for “Political, Economic, Sociological, Technological, Legal and Environmental” factors. The questions to ask yourself are:

  • What are the key political factors likely to affect the industry?
  • What are the important economic factors?
  • What cultural aspects are most important?
  • What technological innovations are likely to occur?
  • What current and impending legislation may affect the industry?
  • What are the environmental considerations?

Each and every category of factors is of crucial importance to advanced strategic management, and the PESTLE analysis in itself is definitely a must for any business or company, regardless of its industry. It is true that the importance of each category of factors will always vary from business to business and from company to company, but nonetheless PESTLE remains a mandatory analysis technique that is usually a part of the larger and more comprehensive SWOT analysis.

PESTLE helps a company determine exactly how various types and categories of factors influence its ‘well-being’. As aforementioned, the same factors will influence different companies in different ways. For instance, an online business will be less concerned about environmental factors while a waste management company will have to pay extra attention to environmental factors.

To further understand what PESTLE is and how it can be used, it is essential that you know a thing or two about each individual category of factors. The below descriptions should help you gain a better understanding of each factor and of just how powerful and effective a PESTLE analysis can be for a business.

Political Factors

These factors represent the way and the extent to which a government influences the economy and a certain business. Political factors are represented by specific areas, such as labour law, tax policy, tariffs, trade restrictions and even environmental law.

When political decisions result in legislation which is not favourable to a particular company they may sometimes use astroturfing techniques in an attempt to put pressure on the government to change its mind.

An example of this occurred in 2012 in the UK when the Chancellor of the Exchequer, George Osborne, announced that VAT would be applicable on all ‘hot takeaway food’. Greggs bakery quickly jumped onto the press reaction and created a very clever campaign which put a huge amount of pressure on the government to reverse its decision, which it subsequently did.

Economic Factors

This refers to areas unique to the economy and directly influenced by the economy, areas such as the inflation rate, interest rate, economic growth or exchange rates. All these areas can greatly influence a business or company, which makes them an extremely important part of the PESTLE analysis.

For example, international businesses are always influenced by changing exchange rates. Similarly, UK exporters are also influenced by the exchange rate as when the sterling becomes weaker their exports become more competitive.

Social Factors

These factors refer mainly to demographic factors, which comprise factors like population growth rate, cultural aspects, age distribution and health consciousness.

Technological Factors

Technological factors refer to automation, incentives, the rate of technological change and R&D activity. These factors greatly influence areas such as the minimum efficient production level, quality, costs and even outsourcing decisions.

Legal Factors

The legal part refers to all the laws directly connected to a business or company and its area of activity, including consumer law, antitrust law, anti-discrimination law and health and safety law.

A lot of the controversy surrounding the EU is related to this, as many consumer and health and safety laws have been introduced where businesses don’t feel they are required.

Environmental Factors

This refers to all the factors directly related, influenced or determined by the surrounding environment. This includes, but is not limited to, weather, climate, geographical position, climate change and even insurance.

Environmental factors are crucial to industries such as farming or tourism and can greatly influence a company’s way to operate or even the products it offers.

The PESTLE analysis is a way of identifying and analysing all these factors, thereby helping a company to plan for the future and deal with any risk factors which are identified.

The video below is a good overview and also applies the analysis to British Airways (from 5 minutes into the video):