Difference between revisions of "PESTLE Analysis"

The PESTLE analysis is a tool that helps a new or established company understand its environment in order to anticipate challenges and opportunities it will have to face. Accordingly, it will be able to make informed decisions and establish strategies to ensure risks reduction and optimize chances of success. It is a more comprehensive version of SWOT analysis as it tackles every aspect of an existing market.

This analysis tool takes into account 6 factors, forming its acronyms, which are external to the company:

Political

Economical

Socio-Cultural

Technological

Legislative

Environmental^[1]

Why use PESTLE analysis?:

Although these factors are usually out of our control, their identification helps the company see the big picture of its environment; thus allowing it to map the current state of risks and opportunities, whether it is from a political, economic, socio-cultural, technological, legal or environmental standpoint. This approach reduces risks of failures, and allows taking advantage of opportunities that arises. As such, the company can expect to start off on the right foot.

PESTLE Analysis is important for three reasons:

1. By using PESTLE efficiently, the company ensures that its actions are in tune with the trends. This way, it will have a much better chance of succeeding.

2. A good use of PESTLE analysis will avoid the company lethal mistakes.

3. PESTLE is particularly useful when the company decides to enter into a new market sector or in a new country. Indeed the PESTLE analysis can free the company from prejudices and can allow it to adapt quickly to a new environment.

How to use PESTLE: ^[2]

The most efficient way to use PESTLE is divided into three steps ^[3]:

1. Firstly, you need to brainstorm the situation. Put everything that comes into your mind on a piece of paper about the relation of your company and its environment.

Brainstorm example:

2. Once the brainstorm session is carried out, identify issues that correspond to the 6 PESTLE factors previously discussed. See below:

3. This is the most important step of the PESTLE analysis, as it isn't merely a description of the identified factors, but rather a construction of their meaning in accordance with an entrepreneurship project. Therefore, we strongly suggest adopting a critical approach and not underestimate this phase.

By now, thanks to the table above you may see a bigger picture and ask yourself the tough questions. You should know where to look and what to focus your research on. The objective is to formulate hypotheses and elaborate future scenarios in terms of risks and opportunities. By the end of this step, you shall be able to establish a conclusion and a strategic plan for the company.

The advantages of using the PESTLE tool are:

• The tool is simple and easy to understand and use.

• The tool helps understand the business environment better.

• The tool encourages the development of strategic thinking.

• The tool helps reduce the effect of future business threats.

• The tool enables projects to spot new opportunities and exploit them effectively.

The disadvantages of using the PESTLE tool are:

• The tool allows users to over-simplify the data that is used. It is easily possible to miss important data.

• The tool needs to be updated regularly to be effective.

• The tool is most effective when users come from different perspectives and departments.

• The tool requires users to have access to data sources which could be time consuming and expensive.

• Much of the data used by the tool is on an assumption basis.

• The business environment is changing drastically. Thus, it is becoming increasingly difficult for projects to anticipate developments.^[4]

1. Political: analyses the extent to which the government leverages the economy through tax policies, fiscal policies, trade tariffs and so on having thus an impact on the company’s business.

2. Economic: analyses the overall performance of the economy, which determines the way that companies will prise their products and services. The economic factors are: inflation rate, interest rate, foreign exchange rate, economic growth patterns, foreign direct investment, etc.

3. Social: analyses social factors like culture, population analytics, demographics and so on, which can determine the buying trends of the companies’ products.

4. Technological: considers the existent technological innovation and its impact on the market.

5. Legal: examines the legal aspect of a market from two different perspective: one related to the laws within the business environment of a specific country and the other related to the policies of the companies. According to these two perspectives and their matching degree, companies choose certain strategies over others.