Because we live in a globalized world, (almost) everything that happens around us has an impact. The same goes for organizations. The fate of a company isn’t only decided by internal affairs, but is equally influenced by a number of external factors. A PESTLE analysis is used to map these facts and their impact on the functioning of the company in detail.
What is PEST(LE) analysis?
PEST analysis, also known as PESTLE analysis, is a method used to monitor external factors that affect an organization. These factors are:
PESTLE analysis is a much more complex variant of SWOT analysis and gets compared with the company’s internal strengths and weaknesses. It helps you determine your company’s future actions and develop strategies.
What makes a PESTLE analysis useful?
PESTLE analysis helps you decide whether you are going in the right direction when deciding and fulfilling a business plan. It includes a lot of questions to help you get an idea of the things that affect how the company works and those that shouldn’t be overlooked:
- What is the political situation in the country and what effect does it have on your market?
- What economic factors prevail in the market?
- What influence do socioeconomic factors have?
- What technologies are the trend and how will they develop?
- What is the current legislation that affects your industry?
- What are the environmental problems of the sector and what is their impact?
The analysis helps identify external factors that can affect decision-making and the operation of the entire company. Understanding the impact these factors can have will simplify your planning and give you a competitive advantage.
In which areas will PESTLE analysis help you?
PESTLE can help you in several areas of business planning. Which ones are they?
Strategic business planning
PESTLE analysis provides a lot of information set in context – the direction the company is moving, brand positioning, problem areas that can lead to declining growth and productivity, and so on.
PESTLE helps identify changes that can have a major impact on future employment. You often face huge changes in the workforce – a shortage of skilled workers, the creation of jobs that didn’t exist before, the reduction or relocation of jobs, and so on. The analysis will help reduce the impact of these changes because you will be prepared for them in advance.
Because the analysis provides information on external factors, it also provides fundamental knowledge about the market. It will therefore help you prioritize business activities to achieve specific marketing goals.
The analysis brings fundamental knowledge about the market, which indicates the reaction of customers to the product or service. This will help you decide whether to take a particular route or not, whether to modify an existing product or when to launch it.
PESTLE analysis works great with SWOT analysis. It helps to identify potential opportunities and threats in connection with changes in the labour market, legislative changes and the like.
PESTLE analysis factors
Each of these factors affects your organization and its operation. The importance of each can vary depending on the industry in which you do business. You will find out what effect they have on you thanks to careful analysis.
1. Political factors
These factors determine the extent to which the government can influence your industry or society directly. They include tax policy, environmental regulations, trade restrictions, tariffs, as well as the country’s political stability.
For example, the government can bring tax reforms that can change the company’s entire revenue generation system. Tariff barriers can be a barrier to doing business, setting minimum import prices and restricting exports and imports have an undeniable effect as well. Just remember the current situation after Brexit.
2. Economic factors
Economic factors include economic growth or decline, interest rates, exchange rates, inflation and wage rates, minimum wage, working hours, unemployment, the availability of credit and the necessary cost of living. These are all factors that determine the performance of the economy and that have a direct impact on the company – both short-term and long-term.
For example, an increase in the rate of inflation will affect the pricing of products and services. Not only yours, but those of suppliers as well. In addition, inflation also affects consumer behaviour and purchasing power and can lead to a change in the economy’s supply and demand patterns.
3. Social factors
Social factors include cultural norms and expectations, health services, population growth rates, age distribution, safety and other demographic data. Again, it is closely linked to employment. In addition, they will help you understand what mood currently prevails in the market and what services or products consumers might be interested in.
Other social factors you need to take into account are religion, education, demographic change, income and purchasing power of the population, labour force development and the like.
4. Technological factors
Technological factors take into account innovation and technology development. These include, for example, the speed of technological change, infrastructure development and government or institutional research.
Today, these are factors that cannot be left out of any strategy. Currently, there are several new significant development trends, such as artificial intelligence, the Internet (yes, still), machine learning and the like. If you cannot adapt to the trend, you may lose your market position.
5. Legal factors
Legal factors include changes in legislation that affect employment, access to materials used, quotas, imports, exports and taxation. All these factors affect the external and internal side of the company’s operation, some even affect the entire business environment in the country.
In addition, this includes the company’s own laws, rules and regulations. PESTLE analysis considers both of these areas.
6. Environmental factors
These factors primarily consider the effects of the environment and the impact of ecology. These include waste disposal laws, environmental protection laws, energy regulation and more.
Environmental factors are key especially for the tourism industry, agriculture etc. However, global warming, the transition to sustainable resources and ethical sourcing have forced almost every organization to take environmental factors into account.
How to perform a PESTLE analysis?
For the analysis to be as effective as possible, you have to perform it on a regular basis. This gives you a competitive advantage – for example, by noticing trends sooner than your competition or by responding to legislative requirements faster.
The analysis includes several steps:
- Determine the scope of research. The research should cover your current and future situation and should cover all areas of the business world that are affected by your company.
- Identify the team that will handle the analysis and divide responsibilities. The involvement of different people from different areas helps in data collection and subsequent analysis.
- Gather enough data and analyse it – evaluate the impact it has on your business and how much you need to take into account in strategy and planning.
- Create a sequence of questions and factors that need to be addressed. Try to solve each problem as soon as possible. This can have a big impact on the operation of the company.
- Identify solution options that are specific to your company and the environment in which it operates.
- Create a document with information, issues, and issues that need to be addressed.
- Discuss the findings of the analysis with all stakeholders, decision-makers and professionals.
- Decide on the actions that need to be taken and the trends that need to be followed.
Advantages and disadvantages of PESTLE analysis
- It has a simple framework that is easy to understand and implement.
- Facilitates understanding of the business environment.
- Encourages strategic thinking.
- It allows you to anticipate business threats and minimize their impact.
- It allows you to identify opportunities and take advantage of them.
- Using simplified and insufficient data can lead to skewed results.
- It is easy to get lost in the huge amount of data, which can paralyse you.
- Analysis works with assumptions, so there’s always a risk that you’re wrong.
- The pace of change makes it difficult to predict developments.
By failing to prepare, you are preparing to fail
A PESTLE analysis is a great tool for you that can be used in multiple areas of your business. It provides important information about the possible influence of external factors and gives you the opportunity to better prepare for any kind of problems that these factors could cause in the future.
Do not hesitate to turn to a professional when analysing and planning. We will help you create a business strategy and strategic analysis. With us, you will know how to set your company’s goals, how to achieve them, and all the pitfalls that may await you on the way.