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 the factor that is likely to affect our business in the near future. And 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, vertical, product or purpose. This will give appropriate results that can be useful in taking business decisions. Now let us analyze the individual aspects of the PESTLE analysis.
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This is actually the degree of government involvement in the economy. If the government interferes with the economy to any degree then these factors become of importance.
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. 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 relate to the economy as a whole like the market demand, interest rate, taxation policies, total expenditure etc. Microeconomics focus on single households – disposable income, customer choices, and preferences etc.
These are the social and cultural factors of a demographic. They include the age, gender ratio, population growth, urban-rural divide, employment rates, health statistics, preferences etc of a given population. These are all factors that affect the sale of the product or service and hence the profit of a business.
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.
In the last two decades or so, these environmental factors have gained a lot of importance. 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 mindful of.
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.
Solved Question on PESTLE Analysis
Q: The stability of a government is a factor in PESTLE. True or False?
Ans: The statement above is Tue. 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.