What Is PESTLE Analysis and How to Use It Effectively

By Indeed Editorial Team

Published 3 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Many businesses use the PESTLE analysis as a tool to assess macroeconomic factors that affect their operations. Companies that successfully monitor PESTLE factors and react appropriately may gain advantages over the competition and increase their sales. Understanding what PESTLE analysis is and how to implement it can help mitigate external risk factors that are often outside of a company's control. In this article, we define the different components of PESTLE and show you how to use it effectively.

What is PESTLE analysis?

PESTLE analysis is a concept in marketing principles. PESTLE is a mnemonic that represents the terms political, economic, social, technological, legal, and environmental. The different aspects of PESTLE sometimes overlap, as they represent important and related elements of society. Here is more information about each factor of PESTLE:

Political

Political factors refer to how and to what extent the government gets involved in economics and industry. The government commonly introduces legislation that affects businesses and the economy, so political factors often overlap with legal ones. The government's relationship with external parties, such as other governments or global corporations, might affect imports and exports. For example, to protect the local economy or as political leverage, the government may impose tariffs or restrict certain products. This can heavily affect a business if its products fall under a new policy.

Economical

Political and economic factors may overlap, such as monetary policies established by the government. Economic factors typically include economic growth, interest rates, employment rates, foreign exchange rates, supply and demand, cost of raw materials, inflation rates and consumer spending power. These factors often directly impact a company's operations and profits.

For example, companies often borrow more money when interest rates are low, which may lead to higher growth with increased capital. There are many economic factors that are related to and affect each other, which often leads to compounding effects. A rise in inflation may result in reduced consumer spending power, which reduces demand and slows economic growth.

Social

Social factors involve demographics, beliefs, attitudes and traditions. These factors help businesses understand the background and needs of their potential and existing customer base. Keeping up with social trends is crucial for many industries, such as fashion, food and beverage and technology. For example, restaurants and snack shops often have seasonal items, such as mooncakes during the mid-autumn festival. Organisations often use this information to develop marketing strategies targeting specific people.

Social media is a common way of keeping up with different cultural trends, such as popular fashion and activities. A company's marketing and public relations departments often handle the social aspect of a company. This social aspect may include creating a social media profile for a brand.

Technological

There are many technologies specific to each industry. For example, health care facilities rely on many unique medical devices and analysis software. It's essential for companies to utilise up-to-date technology to keep up with competitors, as there are often many benefits to newer hardware and software. For example, a factory with new machines may have a higher production rate and a lower error rate, which can increase profit margins. Technology is often a limitation for certain business strategies, as a company may not have the required infrastructure to execute a project.

A company's IT department and research and development teams are generally responsible for handling technological factors. This may involve upgrading databases to increase storage of customer information or creating products to utilise new technology. Technological factors also often involve a company's ability to defend against cyber threats.

Related: What Is IT Security? With Definitions and Career Guidelines

Legal

There are many laws that affect the operations and earnings of companies. Here is a list of different laws that often dictate how a company operates:

  • Health and safety: Health and safety regulations require businesses to follow best practices that ensure the wellbeing of employees and customers. This commonly affects industries that involve manual labour, such as construction and manufacturing.

  • International trade: International trade laws may regulate what businesses can import from and export to other countries.

  • Advertising standards: Advertising laws set standards for how a business can advertise their products or services, such as not allowing false claims.

  • Consumer rights: Consumer rights laws hold businesses accountable for maintaining consumers' rights, such as information and safety.

  • Product labelling: Product labelling laws require businesses to label products accurately and notify consumers of their contents. These laws apply mostly to retail businesses, such as suppliers of food, supplements and medicine.

  • Product safety: Product safety laws require businesses to ensure their products are safe for consumer use and provide warnings as needed.

  • Tax policies: Being up to date with tax policies is crucial to paying thing right amount of tax. It's important to know how to reduce the tax burden by utilising tax-deductible expenses.

  • Employment laws: Regularly monitoring changes to employment laws ensures a company's internal policies, especially relating to human resources, are up to date. It's important to track various figures, such as the minimum wage, annual leave allowance and retirement contributions.

  • Environmental laws: The government may require businesses, especially those involved in manufacturing and chemical use, to adhere to regulations that protect the environment from toxins and pollution. These policies may affect operations by limiting production or requiring expensive treatment of chemical waste.

Related: What Does a Lawyer Do? (With Qualifications and Skills)

Environmental

The environment is often unpredictable and can heavily affect certain industries, such as agriculture, green energy and raw material suppliers. For example, a drought can severely limit the energy production of a hydro-power dam and cause crops to die. Environmental issues often result in raw material scarcities, which can severely affect many industries that rely on regular supplies of different components. Extreme weather can also result in extended logistics disruptions, such as typhoons that may flood roads and cause landslides.

Why is PESTLE analysis used?

Companies often utilise PESTLE as a guide on how to structure different business strategies. Risk management is crucial to ensuring the long-term success of a business. An essential part of risk management is understanding the various factors that could affect a strategy. PESTLE provides a wide view of many common factors and often helps identify more in-depth issues with a strategy. PESTLE can also help a business take advantage of different situations. For example, many clothing companies sell green and red clothing during Christmas.

How to use PESTLE analysis

Here is a guide on how to perform strategy analysis using PESTLE:

1. List out PESTLE

Brainstorming is a crucial first step for analysing strategies. You can use a whiteboard to write out the six components of pestle and list out any factors that may be relevant. This requires an in-depth understanding of a company's operations and may require multiple people from different departments, such as marketing, legal and IT. It's often beneficial to have more people take part in a brainstorming session, as this allows more perspectives to be provided.

2. Identify implications of each factor

After brainstorming the different PESTLE factors, you can start assessing the potential effects of each one. This can help you decide on the priority of each factor, such as the size of the impact and the likelihood of occurring. There are different implications to consider, such as financial, legal and ethical concerns. Grouping issues according to their implications can help you seek the right advice if you're struggling to come up with solutions. For example, you can ask the legal department about any legal implications and the accounting department for any financial issues.

Related: Business Analyst Skills (With Examples and a Guide)

3. Develop solutions

After developing a list of PESTLE factors with each one's potential implications, you can start developing solutions. As there often isn't time to address every issue, resolving them from the highest priority can ensure the mitigation of the largest risk factors, which increases the chance of success for a strategy. It's also important to ensure any solutions don't result in other issues.

Other strategic analysis tools

There are many strategic analysis tools aside from PESTLE, such as:

SWOT

SWOT stands for strengths, weaknesses, opportunities, and threats. SWOT is a framework used to evaluate an organisation's competitive position and develop strategic planning by assessing internal and external factors and current and future potential. A SWOT analysis facilitates a fact-based and data-driven look at the strengths and weaknesses of an organisation, strategy or project.

Five forces analysis

The five forces analysis focuses on analysing the competition of a business. This analysis examines five forces that determine the competitiveness and attractiveness of an industry in terms of profitability. The five forces comprise three horizontal competition factors, which are threats from substitute products or services, established rivals and new entrants, and two vertical competition factors, which are the bargaining powers of customers and suppliers.

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