What is PESTLE Analysis?
PESTLE analysis is the tool for the organization to identify the likely impact of external factors on its operation and performance. This tool analyzes external factors to identify the environmental trends and potential opportunities and threats.
Previously this model was PEST analysis which is an acronym for political, economic, socio-cultural, and technological factors. Then, due to environmental and legal concerns, it is added legal and environmental factors and becomes PESTLE.
And, again due to globalization, has further added global factors, and the latest PEST analysis is called the PESTLEG analysis.
And now, the present external environment analysis framework/model is PESTLEG analysis which is the acronym for political, economic, socio-cultural, technological, legal, environmental, and global factors. It is an important tool for firms to analyze the macro environment and is also referred to as an important concept of marketing principles.
It gives very insightful information about the market trends, which can be used in different scenarios, and supports effective strategic management.
Components of PESTLE (G) Analysis
Every factor of PESTLE (G) including politics, economic, social, legal, technology, legal, environmental, and global impact the organization in some way. Some factors may have some little effect and others have more but they affect and it also depends on the kinds of organizations.
Political factors are those actions of the government that influence the operations of organizations. These factors have an extent to influence and control businesses operating in the nation. Some major political factors are:
- Political Structure
- Government Stability
- Tax Policy
- Foreign Trade Policy (Trade Tariffs)
- Public Opinion
- Business Government Relations
For example, in a nation following democratic political ideology private firms flourish but in totalitarian do not. Similarly, if the government brings a new tax policy that might affect the earnings of the company.
Thus managers need to pay close attention to the political environment and understand how new political actions would affect the organization’s strategic moves.
Economic factors have a strong direct impact on the nation’s economy and performance and also affect organizations and the extent to their profitability. An economic environment is the nature and direction of the economy in which an organization competes.
Usually, every organization seeks to compete in a relatively stable economy with strong growth potential. The major economic factors are,
- Economic Systems (Market, Command, Mix)
- Monitory Policy
- Fiscal Policy
- Industrial Policy
- Employment Rate
- Balance of Payments
- Income Level
- Business Cycles
- Economic Integration
As a manager, you should understand how these economic factors would affect your firm’s operations. For example, if inflation increases, it forces firms to increase their products’ prices to meet their expenses. It also reduces the purchasing power of the consumers as such demand and supply of the economy are disturbed.
A business conducts its operation in society. The socio-cultural environment is the total of all the cultural elements that affect the operation of a business directly or indirectly.
Major socio-cultural factors include,
- Family Structure
- Social Institutions
- Social Values and Norms
- Income Distribution
- Attitude to Work, etc.
These factors are significantly helpful to apply marketing strategies. As such managers can choose a particular segment of society, produce products they think are comfortable, and apply marketing efforts that significantly bring in positive results.
In addition, to successfully run a business in such a society a manager must have to comply with the respective societies’ norms, values, attitudes, and so forth (mentioned above).
Technological factors refer to the innovation and development of technologies in the market. Technology greatly affects the operations of the organization as today every organization is based on some technology.
Today technology has reached AI and Robotics through different technological changes such as manual, mechanized, automated, computerized, etc. Technology has pervasive and diversified scope. It affects many parts of society and industry.
Given the rapid pace of technological changes, it is vital for companies to study the technological segments thoroughly. The importance is that early adopters of new and advanced technology often achieve higher market shares and earn higher returns.
Technological factors include such as,
- Level of technology
- Innovations on technology
- Pace of change
- Technology Transfer
- Research and development budget
Legal factors refer to legal laws that a firm operating within must abide by. The firm must know what is legal and what is illegal where it operates.
These factors affect both the internal and external environment of the organization. External that the firm must comply with the nation’s laws and it can also have unique laws inside the firm which its employees must abide by.
The legal factors include,
- Business Laws
- Labor Laws
- Health and Safety Laws
- Consumer Law
- Law Administrators
- Intellectual Property Rights (IPRs)
Environmental factors are mainly concerned with the health of the natural environment and the likely impact of business operations on the natural environment that influence the ecological aspects of the natural environment.
It states that business practices should positively respond to natural changes. There are many parts of the natural environment that a firm should consider, such as,
- Energy Consumption
- Environment Protection Laws
- Waste Disposal
- Environmental Awareness
- Environmental Protection Groups
- Global Warming
Due to such environmental factors now businesses have a responsibility to produce products that are environmentally friendly, easily disposable, and which comply with the environmental protection laws.
The global factor i.e. global environment is the last factor of the PESTLE (G) analysis. This is the globalization age, and firms no more compete locally, they are directly or indirectly competing with international products and companies.
Factors such as,
- Relevant Global Markets
- International Political Events
- Degree in Regional and Global Integration
- International Cultural Characteristics
- International Environmental Peace
To survive in the market, now businesses have to understand the market condition, politics, cultures, and different aspects of domestic as well as foreign nations. Now the world has become a global village and competition is global.
Importance of PESTLE Analysis
Why PESTLE analysis is important? What is PESTLE analysis used for? It is constantly used for finding broad facts about external factors. Such facts are used to formulate different plans and strategies that could help firms to compete and generate profits.
Whether it is expanding the existing business or establishing a new business PESTLE plays a significant role. Without analyzing the environment starting a new business technically will not succeed.
But when every factor of the environment is analyzed and then the decision is made on expanding or establishing, there seem greater success rates. In addition to this, PESTLE analysis also helps organizations in numerous ways.
As mentioned, PESTLE analysis is a useful tool to identify likely opportunities for the firm. Apart from identifying potential opportunities it also works with SWOT analysis which helps identify the relative capacity of the firm to exploit the opportunities.
The likely threats must be mitigated. By identifying likely threats through PESTLE the manager might develop strategies to mitigate or avoid the likely threats before the threats come.
Product Launch or Abandon
PESTLE analysis gives us a thorough picture of market conditions, what products are popular & what are not, consumers changing tastes & preferences, income, habits, and so forth. Based on the market information a manager can easily understand which product is profitable to launch and which have now no market and to abandon.
Helps in Strategic Planning
Strategic planning focuses on developing a long-term plan for the firm. Such plans should not only be based on internal factors of the organization it should include the aspects of the external environment.
A manager is fully aware of his firm’s internal factors and PESTLE analysis gives him insights into external factors, by combining both information the manager may develop an effective strategic plan.
Change is necessary for the organization but not so easy. PESTLE gives information about the changing business environment, business practices, and trends.
So the organizations must change to meet changing demands of customers, for example. In addition, it forces organizations to change to stay competitive with the changing business trends.
As mentioned, PESTLE analysis brings various relevant information about the market from the external environment which can be beneficial to developing an effective marketing plan.
Advantages and Disadvantages of PESTLE Analysis
Some advantages and disadvantages of PESTLE analysis can also be pointed out. They are,
- It is a simple and easy-to-use tool.
- It lets organizations foresee future opportunities and nurture them.
- It lets the organization foresee potential threats and mitigate them.
- It helps businesses to understand the external trends.
- Through this managers better understand the business environment.
- It is very easy to use so most researchers argue it is not a sufficient and comprehensive tool.
- It is only based on the analysis of the external environment.
- The external environment consists of too much information and when too much information is collected managers might not know which one to look for.
Hence, in the end, it can be said that PESTLE (G) analysis is an effective tool for organizations to study and understand the external environment. And, it lets firms solve different external problems and capitalize on the opportunities.