PESTLE Analysis Explained [2022]

Coined in the 1960s by Harvard scholar Francis Agular, PESTLE is an analysis tool used for macro (external) business analysis. The framework evolved from the PEST or STEP analysis and mainly considered the threats and opportunities that the political, economic, social, technological, environmental, and legal factors of the business’ local, national, and international circumstances and situations may bring.

As a budding Restauranteur and co-author of their own business operations manual, I, alongside my team, had to go through the arduous process of bringing our idea to life. This process took us from formulating the business concept, drafting the proof of concept, and running the numbers through cost accounting to creating and testing the prototype products in warm and cold markets. It was a long two-year process of finalizing these steps in several presentations that resulted in the business operations manual.

In the midst of the proof of concept procedure, my team and I utilized multiple frameworks to understand the macro and micro-operations and business environment. Among the frameworks employed are the business model canvas, lean canvas, SWOT analysis, Porter’s 5 Forces, the 4Ps of Marketing, VRIO, and the PESTLE analysis served as the core anchors that solidified my understanding of our soon-to-be be business.

What is PESTLE?

The PESTLE framework is one of many frameworks and analysis tools for an entrepreneur or business owner to effectively organize data concerning the market landscape in which they compete.

Political

When speaking about political factors, the company looks to what the local and national governments have in place. These are to consider how the entity should conduct itself in a way that abides by the rules and regulations set by the government. Some examples include, but are not limited to:

  • Tax: The most common example of a political factor would be the rate of tax that the company would then have to file and turn over properly. With this in mind, companies would tend to avoid municipalities with high tax rates as a general rule of thumb. Understanding that each company would have a level of tolerance for such factors will then involve the leaders in deciding if the location and what it offers are worth the cost of a heavier level of taxation.
  • The people or persons within the government: Policies are only as influential as those who enforce them; However, at times, neglected, the projects, laws, and regulations that present members of the government would push for could highly affect the stance of certain businesses. This factor is particularly true for the construction market and other parties relevant to that business area. Large-scale projects that increase the quality of life for its citizens are often commissioned by the government (i.e., bridges, railways, roadwork, etc.)

Economic

The country’s economic state often dictates the ebb and flow of business. Economic factors are frequently one of the most significant driving forces that change the company’s trends and practices. Examples of economic factors include, but are not limited to:

  • Strength of Currency: When speaking of the value of the country’s currency, an entity would typically look towards how such a factor could be utilized internationally. For instance, if a country has a strong currency such as the Dollar or the Euro, able businesses will generally look into importing goods; this is the case because the stronger currency allows for more materials, especially from weaker currency countries, for cheaper overall cost. The inverse is then true for countries with a weaker currency. Businesses in such countries would look to export, as there is a steady demand for affordable, high-quality materials.
  • Strength of buyer: This factor is true for any kind of good. It speaks to the level of disposable income of the general populous regarding non-essential goods producers while setting margins and price floors and ceilings for good essential producers.

Both factors mentioned considering the supply and demand of their products and how the pricing of their products can become a competitive factor depending on the economic environment they find themselves in.

See also: UPS Mission Statement Explained

Social

How the masses interpret, the product is also a significant driving factor for businesses to note. When settling on a location to start a business, entrepreneurs and, later on, business owners would look toward social factors such as buying habits and age range, amongst others to consider.

  • Age range: It speaks of the immediate age of the business’ potential audience or market. A toy store would have no business opening its doors in a location with a median age of 40 or higher unless conjoining data present that this is due to the large amounts of families within the area.
  • Buying habit: This factor dictates patterns perceived by the company that their audiences have regarding particular products. One of the most common examples would be when people decide to eat; restaurants take advantage of these “hot” hours to make the most money, filling their heads per table within each increment.

Technological

As innovations continue to shake and change the way we do things today, understanding the technological landscape is paramount to a business’s ability to be on the cutting edge of efficiency and effectiveness. Any software or hardware that can better aid in the process of production and service is what businesses should look at when considering Technological factors; examples of such are

  • E-commerce: As one of the largest platforms for sales, E-commerce speaks to the ability to buy and sell things online. Several companies can be seen investing in e-commerce one way or another, be it in having an online store and delivery system or partnering with a third-party service (i.e., Uber) to enhance their availability.
  • Equipment: Technology doesn’t simply talk about what is online but also the tools that an entity can employ to differentiate itself from its competition. The most concrete examples of these practices can be seen once again in the Food and Beverage business, where restaurants constantly compete to differentiate and identify themselves from another. Some notable examples of this would be the interest in Nitro brew in the coffee market or the craze for KBBQ in the fast-casual and Korean cuisine experience.

Environmental

The environmental factors consider how the company’s conduct affects the environment and how the environment may affect the company and, by extension, its partners (i.e., suppliers).

  • Corporate Social Responsibilities (CSR): These responsibilities include but are not limited to the company’s carbon footprint, which speaks to the number of emissions and wastes the company generates as it operates and how those wastes are handled to minimize their damage to the environment. Outside of this, several companies now have adopted green initiatives into their company cultures. These initiatives are instated as means to reinvest into the environment.
  • Raw Materials: Natural disasters are the first that come to mind when talking about raw materials that can come from the suppliers’ side. A bad harvest or ruined crops may negatively impact the level of service, if not the output of products a business can provide.

Legal

The lines in which the company can operate are dictated by the legal factors surrounding the entity’s context. If the employment rate is something that would go under the political factor, equal rights and opportunities for those employees would then fall under the legal aspect. Other examples include but are not limited to

  • Permits, License & Certification: These are all documents that are necessary for entities to operate. For example, restaurants require permits to operate under the heavily controlled safety regulations due to Covid-19. Engineers, doctors, and lawyers must all have their respective certifications of passing the bar to work with the hospitals and firms they may one day associate themselves with.
  • Intellectual property rights: Plagiarism is a severe and rampant issue within creative communities. Music producers, editorials, and even tech and game companies alike must screen and test rigorously to ensure that their products do not infringe on the copyright or intellectual property rights that protect patented products.

The primary guideline to effectively use the PESTLE framework would be as follows.

  1. Identify if not restate your business model. Doing so lays the foundation of the business opportunity being pursued if not reiterates and solidifies the business’s current standing. This step also identifies the differentiating factors of your business to inform the necessary parties on what gap in demand the idea or product will be fulfilling. In this step, the company also understands the target market if they haven’t already.
  2. Decide on the research methodology and set a limit to the scope of relevance for the research. Having too general scope will result in an overload of data, which would lead to more resources being used down the line in sorting and deciding which data is relevant to the business context.
  3. Create a rough draft of all the information gathered. In this step, the framework will begin to be formalized.
  4. Organize and remove data as necessary in doing so, formalizing the data in a presentable manner so that the decision-makers of the entity may pick out options that the business can take with ease. In this step, trends and patterns come to light and need to be highlighted.
  5. Present the data to decision-makers and stakeholders of the company
  6. Acknowledge the cost-benefit of each option and decide on the entity’s next course of action.
  7. Repeat as needed. Trends and patterns change, and signs of these changes are likely to originate from these external factors. Like any product, data sets also have a shelf life; once the data is no longer reliable due to the changes within the market, the frameworks used by the entity must be employed once again to renew the data. Doing so keeps the practices and efforts of the company relevant to the market landscape.

Benefits

  • It paints a picture for the company, its stakeholders, and decision-makers, bringing attention to external factors that need to be considered for company planning.
  • Pin-points and acknowledge critical threats and opportunities that the entity can capitalize on.
  • Aids in ensuring the company remains relevant in its operation.
  • Simplifies excessive amounts of data for ease of decision making
  • Encourages efficiency and effectiveness within the company
  • Develops a business savvy culture within the company

Limitations

  • Analysis paralysis is a risk for the amount of data it can bring if not processed correctly.
  • Those trained in data analytics and data mining are required.
  • Proper sourcing of data is crucial to avoid permanent damage to the firm.
  • Resource incentive due to the need for repetition.

FAQs

Question: How/where can PESTLE analysis be best utilized?

Answer: PESTLE is a versatile tool that is utilized in several parts of a business. By understanding the business’s macro environment, a business owner and their upper management will best understand how to best operate their business.
PESTLE asks and answers questions like “Who should we have as a target audience,” “How should we handle our suppliers?”, “What type of people should we look to hire?” etc.

Question: Can PESTLE be used as the sole framework when analyzing the macro environment of a business?

Answer: Like the other frameworks, the PESTLE analysis doesn’t cover everything a company could need, even if it’s just the macro environment. There are many other factors, such as barriers to entry or competitive analysis, that help better understand the competitive landscape of the business.

Question: If not PESTLE, what other substitute framework can one use?

Answer: Even with the number of frameworks presented to a business, it would be difficult to pinpoint an exact substitute for PESTLE. Frameworks answer specific questions and clarify the context in which an entity may find itself, whether structurally, competitively, externally, or internally. It would be best to use these frameworks to help supplement each other rather than seeing them as substitutes for one another.

Question: How do we differentiate between Legal and Political factors?

Answer: When we talk about political factors, we look at things on a larger scale (i.e., international and local laws and regulations). While the legal factors point to rules specific to the company’s context (i.e., permits, licenses, and certifications.) Although both factors speak of rules and regulations that can affect the business’s operation, the political factor speaks to the government. In contrast, legal factors cross the Ts and dots the Is to make sure that the company does not violate any legal proceeding that may suspend if not terminate their operations.

Conclusion

To conclude, the PESTLE analysis is a framework used by a business to better their understanding of their business’s macro environment. It is a handy and versatile tool that can significantly benefit the company’s ability to thrive within its market when utilized correctly. However, the company would be required to invest in people with the right set of skills and be decisive on the risks and trade-offs the company would be willing to take to maximize the data that comes from the research.

Although the framework is helpful, there is no such thing as a free lunch; ergo, there are pros and cons when utilizing the framework. The framework itself is not an all-encompassing solution for the business. It should be used in the correct context, supplemented by other frameworks, and bolstered by a strong business model.

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