Understanding what is PESTLE Analysis? (Explanation & Example): Hello readers! We are back with another interesting article on PESTLE Analysis that will help to enlighten your knowledge horizon regarding the nitty-gritty of strategic management for running a prosperous business.
Are you someone who is planning to take the road of entrepreneurship and set up a new business by quitting your 9 to 5? Then, this article is most definitely for you! Well, to start off, there are a lot of factors that are needed to take into consideration for establishing a start-up business. Interestingly, it is not only the startups but also the Blue Chip Companies who need to constantly gauge strategies for sustaining their businesses and make a prominence.
Today, we are going to discuss a strategic management framework known as PESTLE (Political, Economic, Social, Technological, Legal, Environmental) Analysis which has emerged to be an important apparatus for scanning the internal and external factors impacting a business. Let us first learn the definition to understand the concept of PESTLE Analysis.
What is PESTLE Analysis?
A PESTLE Analysis is a hypothesis under the category of marketing principles ensuring business growth and profitability.
Francis J. Aguilar, a professor at Harvard Business School is considered to be the founder of the PESTLE Analysis in 1964. However, it didn’t commence as PESTLE but started as ETPS and covered four broad factors namely Economic, Technical, Political and Social aspects.
Initially, it was known as PEST Analysis. It is anatomy and a strategic management tool that helps to scrutinize the macro-environmental factors that may have a resonating influence on an organization’s accomplishments. The acronym PESTLE is the shortened form of Political, Economic, Social, Technological, Legal factors and Environmental factors. The concept largely helps companies to acquire a transparent insight into the intramural and extramural factors affecting their organization. It also provides a general overview of the environment from multifarious points before launching a new project, new product, new service, etc.
PESTLE Analysis is contemplated as the backbone of strategic management that interprets the approach of a company and defines an organization’s strategies and intertwined futuristic goals. The theory can be applied to different industries in divergent scenarios because of its analytical flexibility. In order to conduct the PESTLE Analysis, it is utterly important to understand each letter of the “PESTLE” in depth.
— Political Factors
Political factors usually indicate the authoritative powers that a government possesses in the economy or, in case of a certain industry. Such factors consist of policies of the government, extent of political stability, foreign trade policy, fiscal policy, trade tariffs, labor law, health regulations, education system, environmental law, infrastructure, corruption, and etcetera. All these aspects need to be taken into account when evaluating the lucrativeness of a potential market.
Example: A government may levy a new tax policy or fiscal policy or trade tariffs in a new financial year which can affect the revenue generation of organizations to a large extent. Recently, the Government Of India has reduced corporate tax rates to 22% from 30%. Consequently, this move will help the top-notch companies to revive their profitability and would be a good catalyst for luring investment from foreign investors. The announcement also arrives at a perfect time because major American organizations are involved in a trade war with China and are finding alternative global manufacturing pedestals.
— Economic Factors
Economic factors are crucial determinants and plays an important role in the performance of an economy. Such factors generally end up becoming a key decision-maker in the success or, failure of a company. A surge in the rate of inflation of any economy can affect the pricing pattern of a companies’ products and services. In addition, it also impacts the purchasing power parity of the consumers and brings about a change in the forces of demand and supply in the economy. The economic factors include inflation rates, exchange rates, interest rates, economic growth, gross domestic product, unemployment rates, economic growth and disposable income of consumers.
EXAMPLE: In India, in the past few weeks, vegetable prices have skyrocketed and as a result, there is a rise in the rate of inflation. Consequently, due to the hike in prices, the purchasing power of people has gone down which ultimately indicates that there will be a fall in consumer demand.
— Social Factors
Social factors pin-point the social environment in relation to the industries and constitute the demographic features, customs, norms, and values of the population within the operating periphery of the organization. Social factors consider the population trends such as age distribution, cultural barriers, income distribution, the growth rate of population, lifestyle attitudes, career inclinations, and health consciousness.
All the above-mentioned aspects are very significant for marketing strategists when earmarking the customer bases. Apart from that, the factors also reveal information about the local workforce and their compliance to work under certain conditions.
EXAMPLE: In today’s era, the demand for junk foods like Pizza and Burgers has gone up extensively, especially amongst the younger generation. Thus, companies like Dominos, Pizza Hut, Burger King and KFC are churning out huge profits because of the consumers’ behavior. On the contrary, the same doesn’t hold true for the people in rural areas. This is how social factors affect companies’ revenue structure.
— Technological Factors
Technological Factors have relevance to modernization in technology which influences the performance of an industry. Such factors include a level of innovation, research, and development (R&D) activity, amount of technological awareness, technology incentives and automation. Technological Factors highly affect the decisions regarding entry/exit in an industry, launching of a new product and outsourcing production-related activities. Possessing a sound knowledge regarding technology helps companies from spending a lump sum amount of money on obtaining a technology that would become obsolete in the near future due to the innovation of newer technologies globally.
EXAMPLE: The business space is filled with cautionary sagas of large scale companies that became failures due to their inability to keep up with the dynamic technological innovation. One such prominent example is Kodak, a technology company that used to produce camera-centric products and hegemonized the photographic film market during most of the 20th century. The breakthrough in digital photography contributed to the catastrophic misfortune of their film-based business model.
— Legal Factors
Legal factors include laws such as health and safety laws, discrimination laws, safety standards, employment laws, consumer protection laws, copyright and patent laws and antitrust laws. Every company is bound to have awareness regarding the laws for the purpose of conducting ethical business. In addition, a business owner also needs to be aware of any possible alteration in legislation which may have an impact on the business in the long term. Interestingly, the set of rules and regulations varies from country to country. Analysis of legal factors figures out strategies based on the backdrop of the legislations. However, it is always advised to have an appointed lawyer or an attorney to guide through the complexities.
EXAMPLE: Nestle had to take away the packets of Maggi from the stores’ shelves after the Food Safety and Standards Authority of India (FSSAAI) summoned Nestle because of their negligence to adhere with the laws of food safety. Regulators found lead content beyond the permissible limit in its instant noodle product.
— Environmental Factors
Environmental factors have appeared to become a pivotal character recently. They have become utterly valuable due to carbon footprint targets, scarcity of raw materials and pollution targets fixed by governments. Environmental factors include ecological facets like climate change, weather conditions, environmental offsets which highly govern tourism, agriculture, and farming industries.
Especially, large-scale campaigns regarding the burning issue of climate change are leading to the change in operation and products of the companies. Therefore, practices of Corporate Social Responsibility (CSR) and Sustainability forms an integral part of the companies and is taking new shapes with each passing day.
EXAMPLE: Due to the imposition of government rules as a measure to curb global warming, regulations on fossil fuel industries have increased considerably and as a result, this move has started threatening the thriving coal, oil, and gas industries.
PESTLE Analysis Example — SONY
SONY is a Japanese MNC and has abruptly metamorphosed into one of the dominant entertainment organizations in the world. Its versatile business products consist of electronics, entertainment gaming, and financial services. The company is the owner of the largest music entertainment business around the globe and also a chief player in the film and television entertainment industry.
— Political Factors
SONY is a world-class brand and has a prominent presence in several countries around the world. The political scenario in different countries largely impacts the SONY’s success. As we know, political Stability ignites growth and political instability, on the other hand, paralyzes the rules and regulations of an economy. In Sony’s context, its supply chain is located in China. Thus, any kind of political disturbance in China will have a heavy influence on Sony’s generation of profits.
— Economic Factors
SONY products fall under the category of luxury goods. Such goods are not items of necessity but are usually purchased when people want to splurge on themselves. In a nutshell, if you living paycheck to paycheck, a SONY product would not be a priority in your list of necessities. In another instance, economic instability and the high rate of unemployment in a country will never attract buyers for the high-end SONY products. Consequently, the profits will touch a rock bottom. Therefore, it is crystal clear that a big giant like SONY extensively depends on stable and emerging economies to merchandise their entertainment products.
— Social Factors
Traditions, culture, age distribution, taste, and preferences vary from nation to nation. SONY offers entertainment products beginning with movies to music which basically acts as an escape to reality. It is to be kept in mind that not every nation has the same pattern of entertainment. Therefore, it is extremely important for SONY to keep up to date regarding the buying trends of the consumers and consequently tailor the products and services fitting the requirements of the customers.
— Technological Factors
SONY is a true blue technology company because every other product is correlated with the usage of technology in some way. The company’s Video Game Consoles are nothing but computer devices that produces video signal or, optical image to exhibit a video game for multiple players. On the other hand, laptops help users to stay connected to social media and other websites on the world wide web.
In today’s era, the availability of the internet has removed all the possible obstacles of communication and SONY has bagged this opportunity to market their products online. It has become convenient for the company to announce any new launch of products via the medium of the internet.
— Legal Factors
Since SONY is an international company and sells its products across many countries, it also has to abide by the diversified legal regulations of different countries. Any failure to adhere to the legalization like labor laws to tax policies, the company might end up in serious legal trouble or lawsuits which can further affect their prosperous business.
— Environmental Factors
Sony believes that their corporate pursuits will be possible when there is a practice of sustainable development and thus they are so full of conviction regarding climate change, conservation of biodiversity, renewability of resources and other valuable measures to save the environment. SONY has taken up initiatives regarding environmental activities since the 1990s. In April’10, a new environmental plan was introduced by SONY to set up a sustainable community by accomplishing a zero carbon footprint by the year 2050.
We will now elaborate on the major pros and cons of PESTLE Analysis.
Advantages And Disadvantages of PESTLE Analysis
— Advantages of PESTLE Analysis
- PESTLE Analysis has a basic framework and follows a simple process for conducting an assessment.
- It furnishes a mechanism that allows an organization to pinpoint and cash in on golden opportunities and utilize them to reinforce a firm’s business model.
- It helps to diminish the impact and consequences of possible threats to an organization.
- It sanctions a company to examine the process of entering untapped markets both nationally and internationally.
- It helps to build a custom of strategic thinking for strengthening the company’s position.
- It is absolutely cost-effective and the cost to do any level of the assessment isn’t exposed to oscillations.
— Disadvantages of PESTLE Analysis
- PESTLE analysis cannot showcase the full picture because it only focuses on six factors that are external in nature. In strategic planning, one needs to go beyond these six factors which can provide internal insights as well.
- The Political, Economic, Social, Technological, Legal and Environmental factors are very dynamic in nature. Any shift in any of these factors can change the result of PESTLE Analysis drastically.
- PESTLE Analysis is time-consuming in general and requires loads of data. Each of the factors needs to be thoroughly examined to come to a conclusion and thus, takes up a lot of time.
PESTLE Analysis provides a basic framework and follows a simple process for conducting an assessment. It is a hypothesis under the category of marketing principles ensuring business growth and profitability.
In order to conduct the PESTLE Analysis, it is utterly important to understand each letter of the “PESTLE” in-depth i.e. Political Factors, Economic Factors, Social Factors, Technological Factors, Legal Factors & Environmental Factors.
Start Your Financial Learning Journey
Want to learn Stock Market and other Financial Products? Make sure to check out, FinGrad, the learning initiative by Trade Brains. Click here to Register today to Start your 3-Day FREE Trail. And do not miss out on the Introductory Offer!!