PESTLE analysis is a strategic management tool/concept to analyse an organization’s external environment. PESTLE stands for Political, Economic, Social, Technological, Legal, Environmental. Depending on the source, the PESTLE model may also be called PESTEL or STEEPLE Model. In this article, we will explain what a PESTLE Analysis is. At the end of the article you’ll find a free PESTLE PowerPoint Template!
The PESTLE framework can be used to investigate which factors influence an organization from the outside. It helps to understand an organization’s market position. The model is useful to help making strategic business decisions based on what the outside environment looks like.
PESTLE ANALYSIS – External Factors that influence organizations
Let us dive into each of the PESTLE factors in more detail.
Politics can have a major impact on organizations, positive as well as negative. It is important to not only look at the current political situation. Instead also try to make a prediction of the future state based on current developments in a country, region or city.
A characteristic of the political factor is that it is subject to change. For example, there were many changes in regulations when President Donald Trump (Republican) replaced Barack Obama (Democrat). These kinds of changes have a major impact on businesses.
Examples of political factors:
- Government regulations (or deregulation)
- The level of bureaucracy
- Labor laws
- Elections that change the political regime
The economics in a country, continent, region or city affects organizations in many different ways. If the economy is in a bad state, usually this has a negative influence on companies. For instance, because the disposable income of businesses and consumers tends to be lower.
Example of economic factors are prosperity, the cost of capital, interest rates, taxes and exchange rates.
Within the field of economics, there is a division between two main branches. These branches also provide a logical categorization of economic factors in the PESTLE Analysis:
Macroeconomics: macroeconomics is the field of economics that researches the behavior of an economy as a whole. It concerns topics that apply to the entire economy, such as gross domestic product (GDP) or the inflation rate.
Microeconomics: while Macroeconomic factors are applicable to the economy as a whole, microeconomic factors focus on the behavior of individuals and businesses within an economy. It includes factors related to the level of supply and demand. Factors that influence the price level of products or services.
Examples of microeconomic factors:
- the availability of skilled labor
- Consumer needs & perceptions
- The level of competition in a market.
The Social pillar of the PESTLE Analysis focuses on social & cultural factors and trends that influence your organization. As a business, it is of great importance to know your target audience. Social factors affect customer behavior. Which region would be most likely to be an attractive market for selling mobility scooters & reading glasses: a region with a high average age or a low average age?
Examples of social factors are the following:
- Religion & beliefs
- The level of education
- Demographics (e.g. age, ethnicity)
To analyze the cultural factors that influence business in a certain environment, the cultural dimensions from Geert Hofstede could provide some guidance. His model, based on extensive research, uses five dimensions to analyses a cultural environment:
- Power Distance: the level and willingness to accept power distance, between people in power positions and people in positions without power;
- Individualism vs. Collectivism: the extent to which people are connected in groups. The sense of community, but also that of privacy.
- Masculinity vs. Femininity: the extent to which traditional male/female roles exist within a society.
- Uncertainty Avoidance: the level of acceptance for situations with a high degree of uncertainty. This also refers to the use of rules, standards and regulation. Law and order.
- Long-Term Orientation vs. short term orientation: this dimension entails the level to which a society is focused on the present or the future. Societies that focus on the long term future tend to plan more and be focused on adaptation, while short-term oriented societies value traditions more.
Later, a sixth dimension was added:
- Indulgence vs. restraint: the level of freedom vs. resistance towards individual human desires.
For more information on these dimensions and the research done, I highly recommend the website from the one and only Geert Hofstede himself.
Technology affects the way you develop, distribute and communicate your products and services. Technological developments can be an opportunity as well as a threat. Automation leads to more efficiency, but technology could also require a significant investment while the returns may not be certain.
Technology could also become outdated quickly. There are many examples of technologies that were state of the art, but were replaced by better technologies. A recent example of this are DVD’s, which were replaced rapidly by streaming services such as Netflix.
Examples of technological factors:
- Manufacturing automation, robotics
- Access to internet
- Emerging technologies, such as block chain, 5G, Internet of Things (IoT)
Legal requirements & developments are another factor that affects organizations. Legislations differ from region to region, from country to country. Organizations must be aware of the rules and laws within their target market, and be alert to changes in legislations.
Within the legal field, there are laws that influence the market (e.g. trading laws), as well as factors that influence the formation and organization of a business itself, such as labor laws.
If we look specifically at business or corporate law,
Specific examples of legal factors are the following:
- Intellectual property
- data protection
- labor laws
- safety standards
- Consumer protection laws
The second E in PESTLE stands for Environmental, an emerging topic in the 21st century. The environment can have a direct impact on organizations (e.g. natural disasters), as well as indirect (e.g. global warming changes customer views, forcing organizations to change). Environmental have become to play a bigger role than 20 years ago, with a larger focus on Corporate Sustainable Responsibility (CSR).
To be more specific about environmental factors, they can be classified into direct and indirect factors:
Direct environmental factors are factors over which an organization has a direct influence, such as emissions, used materials for packaging, and waste management.
Indirect environmental factors are factors over which an organization has no direct control. Examples of indirect factors are climate change, but also the environmental decisions of other parties in the supply chain. If a partner supplier makes environmentally questionable decisions, do you still want them to be your partner? What if their products are much cheaper than their more ‘sustainable’ competitors?
Some clear examples of environmental aspects:
- Natural disasters (earthquakes, floods)
- Fairtrade products
- Considerate product packaging
- Carbon footprint
PESTLE vs. SWOT analysis
Similar to the “O”(Opportunities) and “T”(Threats) in the SWOT analysis, the PESTLE analysis examines the external factors that might influence an organization. The PESTLE analysis is a more detailed approach of investigating external factors, and could be used as input for a SWOT analysis. Read more about the SWOT analysis here.
Generally speaking, a PESTLE analysis focuses more on the big picture, while a SWOT analysis is focused more on organizational or product level.
Free PESTLE Analysis PowerPoint Template
If you want to create a PESTLE Analysis for your own business, employer or for a school project, below I placed a download link towards a simple free PESTLE Template in PowerPoint. Now you can create your own PESTLE Analysis!