PESTLE analysis
SECTION 2 OF 4
One tool for helping an organisation understand the external environment is a
PESTLE analysis.
A PESTLE analysis looks at six external factors and provides a structured method to
consider each factor’s impact on an organisation.
Political factors
This includes the policies of the government in the country or countries an
organisation operates in and could be things like how much tax an organisation
pays, employment laws, and regulations around how you trade with organisations in
other countries.
There may also be environmental regulations to consider, and some trades may be
restricted, requiring government permission.
The policies of a government have far reaching impact on all aspects of society
including education, infrastructure (roads and rail links), and health services.
Organisations need to be aware of how government policies, and potential changes
to them, impact on their activities.
Other considerations are how politically stable the government is, and how
bureaucratic the government is.
Economic factors
Economic factors include things that affect an economy. Is the economy growing or
in decline?
For example, interest rates, currency exchange rates, and inflation rates are all
economic factors that an organisation can’t control but is affected by.
Unemployment rates, wage rates, including minimum wage rates, and changes in
disposable income also fall under economic factors. Disposable income is the
income that an individual has remaining after paying all their necessary bills, for
example, rent/mortgage, power and food.
The availability of credit and the local cost of living also affect the purchasing power
of individuals which has an effect on supply and demand and has far-reaching
consequences.
In the short term, this might affect how an organisation sets its prices, and in the long
term it can change the strategic direction of an organisation entirely.
Social factors
The demographics of a country change over time as a result of many factors
including population growth rates and changes to life expectancy. Birth rate changes,
levels of migration and a younger people who are moving from rural to urban centres
affect the population’s age distribution and attitudes.
As a result, a society’s cultural attitudes and expectations will change over time – for
example, their attitude to health or work/careers.
This all affects the products and services they buy, and the expectations they have
of organisations and what they provide to the wider community.
Technological factors
New technologies are constantly emerging and at an increasing pace.
Emerging technologies can provide new ways of working for organisations but can
also lead to some organisations becoming obsolete.
Organisations that are aware of emerging technologies and their application in their
own industry can gain a competitive advantage by understanding how to implement
new technologies into their activities.
Legal factors
Legal factors have some overlap with political factors, but an organisation should
consider the laws and regulations that it needs to be specifically aware of due to the
nature of its activities.
For example, employment laws, insurance legislation, data protection laws, copyright
laws, consumer protection laws, and health and safety laws. There will be rules on
imports and exports including taxation, quotas and other restrictions that may affect
access to materials.
If an organisation operates in more than one country, it needs to consider the laws
applicable in each country. It can become complex and costly for an organisation to
monitor legislation in different countries and ensure it is maintaining compliance at all
times.
Question to ask: What changes in legislation could impact the organisation?
Environmental factors
Environmental factors are becoming increasingly prominent due to the scarcity of
resources, pollution targets, and commitments by governments to address climate
change.
Consumers are also increasingly expecting organisations to adhere to ethical
sourcing and sustainability principles. This expectation extends to the supply chains
of organisations from whom they buy.
Question to ask: What ecological aspects influence the business environment?