We have often heard a businessman say that you need to look at the big picture when it comes to business. What this means is that one must analyze all the elements of the macro environment to understand the factors that affect a business and help in strategic decision making. PESTLE analysis is one such important tool. Let us study this in some detail.
PESTLE analysis is a mnemonic, it stands for – Political, Economic, Sociological, Technological, Legal, and Environmental analysis. It is basically all the elements of the macro environment of a business.
The study of this environment helps us to know the factors that are likely to affect our business in the near future. Therefore, this can help us prepare for the upcoming changes.
PESTLE analysis is a multi-faceted business tool. So, if the study is not focused on an issue but is diluted, then the results are vague and ambiguous.
So it is important that the analysis is done for a specific project, product, or purpose. This will give appropriate results that can be useful in making business decisions. Now let us analyze the individual aspects of the PESTLE analysis.
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If the government interferes with the economy to any degree then this factor becomes important.
Such political factors include government policies and laws, taxation policies, budgets, international trade laws, trade restrictions, and even environmental laws in place. So any changes in these or any new legislation in the future will affect business.
Almost all changes in the economy of a nation have a significant impact on the business. For instance economic factors such as Gross Domestic Product (GDP), average National Income, inflation rate, the growth rate of the economy, prevailing interest rates of the market, etc. have a direct effect on the profit of a business.
These economic factors are inclusive of both micro and macroeconomic factors. Macroeconomic factors like the market demand, interest rate, taxation policies, total expenditure, etc relate to the economy as a whole. Microeconomics focus on single households – disposable income, customer choices, and preferences, etc.
Social Factors like age, gender ratio, population growth, urban-rural divide, employment rates, health statistics, preferences, etc of a given population affect the sale of the product or service and hence the profit of a business. These are the social and cultural factors of a demographic.
This is actually one of the most important factors of the PESTLE analysis. It involves the presence and innovation of technology and the growth of technology in a market.
This advancement of technology can apply in three basic ways – improvement or the advent of technology in producing the goods, distributing the goods, or in marketing the goods. So the business must keep up with the evolving technology to stay with the times.
These factors include any changes in laws and legislation, health and safety guidelines, guidelines for equality and safety of women, consumer rights, ethical standards for advertisement, etc.
In the last two decades or so, these environmental factors have gained a lot of importance. For instance, businesses are now more conscious about the pollution they may cause and their carbon footprint.
They wish for growth but it must be sustainable growth, not at the cost of the environment. So new environmental laws, Eco-friendly practices, technology to control pollution, etc are all factors they need to be mindful of.
PESTLE Analysis Example:
Suppose there is a famous beverage company named XYZ. Let us do a PESTLE analysis for that company:
- It must follow FDA rules so that the right quality is provided to customers.
- Internal marketing laws, labor laws, accounting laws must be followed.
- Should focus on understanding customer’s preferences and tastes.
- Variations are a must in order to facilitate the different needs of customers. For instance, different flavors of the beverage.
- Must launch healthy beverages to attract more sales.
- Stability in launching products to every possible country with same advantageous approach.
- They should use latest technologies to produce quality products in lesser times.
- Should also have access to technical media in order to promote their products.
- They should all the rights of their business. For example, A patent for their brand.
- Since its a beverage company they should always look for areas to set up their unit where there is no shortage of water.
Solved Question on PESTLE Analysis
Q: The stability of a government is a factor in PESTLE. True or False?
Ans: The statement above is true. The stability and the type of government both at the centre and state level are political factors that will affect the business. The type of government will decide the kind of policies that will be adopted. And the stability of the government is an important factor in the commodity and shares market that affects the economy in a big way.