Business Strategy Basics: PESTLE Analysis
By Max Grinold
PESTLE Analysis is a great framework for analyzing how external factors can influence a business. This framework is applicable in all fields of business from finance to marketing, and is a great method of breaking down what outside forces shape its operations. Let’s break down each component together with hypothetical examples:
Political: various government policies and regulations influence the capabilities of a business. This can include tax laws, minimum wage requirements, government subsidies, and much more. For example, suppose you own a company that manufactures solar panels. In that case, if the government subsidizes or creates tax incentives for renewable energy, this may introduce cost advantages that can accelerate the growth of your business.
Economic: certain economic conditions and trends can affect the growth of a business or industry. This can include foreign exchange rates, inflation, interest rates, and much more. For example, suppose foreign exchange rates cause the US dollar to depreciate against the Euro. In that case, it will be more expensive to import goods from European countries, as your business's purchasing power will decrease and it will become more expensive to import foreign goods.
Social: various lifestyle and cultural trends can influence the demand for certain products or services. For example, during the Olympics, media coverage and social interest in sports might increase demand for athletic clothing and equipment.
Technological: the rapidly changing technology space can vastly change the business operations in various industries, and sometimes eliminate entire business functions. For example, with the growth of AI chatbots, some businesses may no longer need large customer service representative teams, as most issues and requests can be dealt with online.
Legal: every business operates within specific regulations and legal guidelines. This can range from anti-trust laws blocking acquisitions to intellectual property laws allowing companies to maintain a competitive edge. For example, if the U.S. Food and Drug Administration introduces new regulations on what ingredients and preservatives can be included in food products, it can completely reshape the processing and manufacturing operations of a food and beverage company that produces potato chips and sodas.
Environment: whether direct or indirect, almost every business is reliant on climate conditions and natural resources. Increasing temperatures, weather events, or environmental regulations can change how businesses interact with natural resources, which can affect supply chains, manufacturing, and costs of operations. For example, if a major drought or extreme weather event causes a major drop in corn production, this can affect businesses in agricultural, food and beverage, and even transportation industries.
Mapping out how various external factors can affect a business is a key component of business analysis and strategy. Many of these factors can overlap with or influence each other, and understanding how these impact a business is very important in examining a company's strategic position and planning for future scenarios. Using a PESTLE analysis is useful for uncovering new risks and opportunities, and it enables organizations to predict changes, adapt their strategies, and make informed decisions that align with the evolving market landscape.
Sources:
https://www.investopedia.com/ask/answers/041015/whats-difference-between-porters-5-forces-and-pestle-analysis.asp
