PESTLE Analysis – A strategic tool for analysing external factors

PESTLE Analysis Definition

PESTLE Analysis is a fairly simple, classic and helpful strategic decision making tool used to guide consideration of external factors when assessing the strategic direction and projects of an organisation.

It basically says that when making decisions about the strategic direction and projects of an organisation, you need to consider the wider context the organisation operates in by analysing the Political, Economic, Social, Technological, Legal and Environmental contexts.

The purpose of establishing this understanding is to identify and manage organisational risks and opportunities by taking strategic actions and making strategic changes in relation to them.

The concept of scanning the wider context that organisations exist within to identify changes that might be strategically significant for the organisation has been around for quite some time. This approach was somewhat formalized in the second half of the 20th century, resulting in the general acceptance of the PESTLE model as a tool for doing this.

Sometimes people just use the first part of this model and refer to doing a PEST analysis, which is how the model was originally formulated. The LE were appended in our own working lifetime, leading to the PESTLE Analysis model. Others refer to the model as the PESTEL Analysis model.

Whatever we end up using, the objective is to come up with a fairly complete understanding of the factors shaping the ecosystems our organisation exists within, so that we can change and evolve for the best likelihood of future success.

PESTLE Analysis Factors

Political Factors:

When scanning the political context the organisation is operating in we should gain insight on the current state and evolution of government policies, regulations, and the overall level of political stability.

Changes in government, tax policies, trade tariffs, and labor laws can significantly affect the ecosystem an organisation operates in, and thus how businesses should operate for success. Understanding political trends can help organisations to anticipate change and adjust their strategies accordingly.

Economic Factors:

This is all about the economic aspects of the ecosystem and can include factors such as inflation rates, interest rates, economic growth, exchange rates, employment rates, input costs, yield curves, capital availability, required returns on investment, and so on. These factors play a huge role in determining what organisations need to do to be deemed successful, thus they affect an organisations strategic decision making.

Social Factors:

At this stage of analysis, strategic decision makers need to consider the social and cultural aspects that affect an organisation. Ultimately these factors affect potential consumers, employees and other stakeholders, so hugely affect the potential success of an organisation. Specific areas that an organisation should consider include social trends, changes in social values (or the polarization of a population), demographics, education level, lifestyle changes, key social issues, and so on.

Technological Factors:

They say that the pace of change is always accelerating and changes to our technological landscape can hugely disrupt organisations. Those who adopt new technology well can gain material advantages (e.g. Netflix moving to the cloud), those who fail to do so can fail (e.g. Blockbuster sticking with physical video rentals).

Factors to consider here include product specific advances as well as automation, improved back office technologies and things like the rise of Artificial Intelligence. Adapt or die is another phrase that rings true in relation to changing technological landscapes.

Legal Factors:

Legal considerations involve current and impending legislation that affects business operations. These can be things like legislation around employment contracts, working hours, data protection, health and safety, emissions standards, intellectual property, reporting and disclosure requirements, or anything else relevant to the organisation in question.

Obviously, these pieces of legislation shape how organisations must operate to be legally compliant, thus form a key part of strategic decision making.

Environmental Factors:

Lastly, this model considers environmental factors. At this stage decision makers typically consider ecological and environmental aspects like climate change, sustainability practices, environmental regulations and associated changes in consumer expectations and demands.

Aren’t these factors all interconnected?

In reality, there can be a lot of interconnection amongst these factors.

For example, changes to our views on the environment will appear when we consider environmental factors. These underlying factors will also affect social trends and behaviours and many governments will legislate in relation to them as well as providing economic incentives in relation to them to incentivise new and emerging technologies.

In other words, some factors can affect pretty much all the domains of the PESTLE Analysis model. This isn’t really a problem though. We just need to be sensible and pragmatic when using the model as an analysis tool. The point is to use the model as a way to check the completeness of our understanding of our eco system, so it is ok for similar points to be raised several times.

Advantages & Disadvantages of PESTLE Analysis

Advantages

• Straightforward and easy to grasp, even for those new to strategic planning
• Provides a broad overview, encouraging consideration of the wider context
• Helps identify potential opportunities and threats for proactive planning
• Adaptable for both quick decision checks and in-depth strategic reviews

Disadvantages

• Offers a snapshot of the current situation, not a prediction of the future
• Can lead to information overload if not focused on key factors
• The interconnectedness of factors can complicate analysis
• Subjectivity can influence the analysis, despite striving for objectivity

What is PESTLE Analysis used for?

Strategic Planning

It helps you navigate tricky external factors like a sudden economic downturn or shift in consumer preferences. PESTLE also helps you assess the viability of your current offerings and identify opportunities for new products or services that align with the evolving landscape.

Risk Management

By identifying risks early on, you can develop proactive strategies to mitigate their impact and protect your business.

Marketing Research

It helps you fine-tune your messaging, target the right audience, and choose the most effective channels. By analyzing social trends, economic conditions, and technological advancements, you can gain valuable insights into consumer behavior and market dynamics, maximizing your impact.

Product Development

PESTLE helps you assess market viability, identify potential roadblocks, and ensure your product meets the evolving needs of your customers, ultimately leading to a more successful product launch.

Learning More

There are lots of foundational strategic models like this around, though we don’t really cover them much on our website. Other ones you might want to explore include SWOT, Mission and Vision statements, the VMOSA model, Porters Five Forces, the BCG 2×2 Matrix, SMART goals, the McKinsey 7S framework, and so on. These tools are all really helpful, we just don’t cover them much as we’re more focused on the more people oriented side of things.

This is a great little tool to have in your back pocket. It’s great to use in more detailed examinations of an organisations context, or for a quick sense check on a decision that’s being considered.

We use it occasionally in sessions with clients to help them consider their strategic priorities at a senior level. We also use it as a way to help more junior or disparate members of larger organisations explore the wider context that their organisations are operating in. This can be particularly helpful when people are a bit removed from the strategic centre of an organisation, or operating in a bit of a silo. It sort of helps then look outside the cave and gain a different perspective of what is really happening across the organisation and why certain decisions are being made.