As part of a strategic approach, this tool is used in conjunction with the SWOT (Strengths, Weaknesses, Opportunities and Threats) to assess the environmental effects and make a diagnosis of the company.
In fact, our market is changing everyday the way it is working. Among that, there are many things that we can control and others that fall beyond our control -these are called systematic factors. Systematic actions take place in the environment that surrounds us and in many cases they greatly influence us.
Moreover, businesses are influenced by the environment they grow in and these situational factors. Because of this businesses constantly need to check and analyze the environment they work in.
A detailed analysis of the macro-environment or the environment as a whole is called the PESTLE analysis. The PESTLE analysis ascertains for the managers and the strategy builders as to where their market currently stands and where it will head off in the future. It consists of components that influence the business environment and each letter in the acronym refers to a set of factors that directly or indirectly affects every industry.
The letters refer to the following information:
P for Political factors:
These factors take into account the political situation of a country and the world in relation to the country. For example, what sort of government leadership is affecting what decisions of a country? All the policies, all the taxes, laws and every rates that a government levies over a trade falls under this category of factors.
E for Economic factors:
Economic factors include all the determinants of an economy and its condition. The inflation rate, the interest rates, the monetary or fiscal policies, the foreign exchange rates that affect imports and exports, determine the direction in which an economy might move. Therefore, businesses analyze this factor based on their environment so as to build strategies that fall in line with all the changes that are about to occur. That is to say, the state of macroeconomic health (growth rates, consumer confidence, inflation …) that creates deep-rooted trends in consumption level.
S for Social factors:
Every country is different and has a unique mindset. These mindsets cast an impact on the businesses and the sales of their products and services. The cultural implications, gender and connected demographics, social lifestyles, domestic structures; are studied by companies to better understand the market and the consumer. So, they analyze the evolution of the population and its characteristics (demographics, age structure, new socio-cultural behaviors etc.) generating, among others, new purchasing behaviors.
T for Technological factors:
Technology greatly influences a business, therefore a PESTLE analysis is also conducted upon this factor. Technology changes every minute and therefore companies need to stay connected along the way and integrate those technologies. Also, these factors are analyzed to understand how the consumers react to technological trends and how they use them for their benefit. So, there is a need to analyze the progress and innovations.
L for Legal factors:
Legislative changes occur from time to time and many of them affect the business environment. For example, if a regulatory body would set up a regulation for the industries, then that law would impact all the industries and businesses struggling in that economy, therefore businesses also analyze the legal developments happening in their own environment. In fact, they analyze changes in the regulatory and legislative framework (labor law , commercial law … ) which can have all kinds of impacts that can create additional costs , administrative burdens, limited access to markets , etc.
E for Environmental factors:
The geographical location of a country influences on business. Adding to that, many climatic changes alter the trade of industries and the way consumers react towards a specific offering launched in the market. The environmental factors include geographical location, climate, weather and other factors that are not just limited to climatic conditions. These factors in particular affect the agri-businesses, farming sectors etc. That is to say, analyze environmental regulations and constraints, new standards set by the positions taken in sustainable development.
How to proceed?
- First of all, create a listing of all the factors of influence thanks to the PESTLE analysis made to identify structural trends.
- After this work, determine whether the trends can have a positive or negative impact on the company and how.
The PESTLE is often a great way to step back from a company’s industry and market, and thus determine the points that promotes or hinders the development of the company.
But it will really highlights major events looming in the horizon that will require a course adjustment. For a business leader in investment research, this will give visibility for the next five years.