PESTLE is an analytical tool which considers external factors and helps you to think about their impacts. It is a useful tool for understanding the “big picture” of the environment in which you are operating. By understanding your environment, you can take advantage of the opportunities and minimize the treats. This provides the context within which more detailed planning can take place to take full advantage of the opportunities that present themselves.
The factors in a PESTLE analysis are:
1. POLITICAL FACTORS:
- Tax policy
- Employment laws
- Environmental regulations
- Trade restrictions and tariffs
- Political stability
- Government type and stability
- Freedom of press, rule of law and levels of bureaucracy and corruption
- Regulations and de-regulation trends
- Environmental and consumer protection legislation
2. ECONOMIC FACTORS:
- Current and projected economic growth, inflation and interest rates
- Exchange rates
- Stage of business cycle
- Unemployment and labour supply
- Labour cost
- Levels of disposable income and income distribution
- Impact of globalization
- Impact of technological or other change in the economy
3. SOCIAL FACTORS:
- Health awareness
- Population growth rate
- Age distribution
- Career attitude
- Emphasis on safety
- Population health, education and social mobility, and attitudes
- Population employment patterns, job market freedom and attitudes top work
- Press attitudes, public opinion, social attitudes and social taboos
- Lifestyle choices and attitudes.
4. TECHNICAL FACTORS:
- R & D activity
- Impact on emerging technologies and research and development activities
- Impact of internet, reduction in communication costs and increased remote working
- Impact of technology transfer
5. LEGAL FACTORS:
- Licensing framework
- Employment laws
- Competition laws
- Foreign transaction laws
- Taxation laws
6. ENVIRONMENTAL FACTORS:
- Environmental impact
- Environmental legislation
- Energy availability and costs
- Waste disposal.
This checklist of the factors is inclusive in nature. Other related aspects that have a bearing in respective factor may also be considered based on the stance of the idea that is being converted into business.
PESTLE analysis is in fact, an audit of environmental influence on the business ideas with the purpose of using this information to pre ascertain the factors affecting the likely project and thereby guide strategic decision making in accordance. The assumption is that if any entrepreneur is able to audit his influencing environment and assess potential threats to his project, it will be better placed in the market, and be able to accommodate the influencing factors. The term PESTLE has been in regular use for the past 10 years.
FACTORS TO BE CONSIDERED FOR ENVIRONMENTAL SCANNING
The external environment in which an organisation exists consists of a bewildering variety of factors (could also be termed as influences) are events, trends, issues and expectations of different interested groups. Events are important and specific occurrences taking place in different environmental sectors. Trends are the general tendencies or the courses of action along with which events take place. Issues are the current concerns that arise in response to events and trends. Expectations are the demands made by interested groups in the light of their concern for issues. For example, the gas leakage accident at the Union Carbide factory in Bhopal and the resulting holocaust was an event. The trend that has arisen is a general tendency on the part of the regulatory authorities and organisations to be conscious about safety from hazardous exposure to chemicals. The issue is of a rising concern about environmental pollution. The expectation of the general public from the government is of legislating changes in the rules and regulations pertaining to safety measures and stricter enforcement through various mechanisms. By monitoring the environment through environmental scanning, an organisation can consider the impact of the different events, trends, issues and expectations on its strategic management process. Since the environment facing any organisation is complex and its scanning absolutely essential, strategists have to deal cautiously with the process of environmental scanning. The effort has to be to deal with it in such a manner that unnecessary time and effort is not expended, while important factors are not ignored. For this to take place, it is important to devise an approach or a combination of different approaches, to environmental scanning.
Business firms undertake SWOT analysis to understand the external and internal environments. SWOT which is the acronym for strength, weakness, opportunities and threats, is also known as WOTS-UP or TOWS analysis. Through such analysis, the strengths and weaknesses existing within an organisation can be matched with the opportunities and threats operating in the environment so that an effective strategy can be formulated. An effective organisational strategy, therefore is one that capitalises on the opportunities through the use of strengths and neutralises the threats by minimising the impact of weaknesses.
External and Internal Environment
The external environment includes all the factors outside the organisation which provides opportunities or poses threat to the organisation. The internal environment refers to all the factors within an organisation which impact strengths or cause weaknesses of strategic nature.
The environment in which an organisation exists can, therefore be described in terms of the opportunities and threats operating in the external environment apart from the strengths and weaknesses existing in the internal environment. The four environmental influences could be described as follows:
1) An opportunity is a favourable condition in the organisation’s environment which enables it to consolidate and strengthen its position. An example of an opportunity is the growing demand for the products or services that the company provides.
2) A threat is an unfavourable condition in the organisation’s environment which creates a risk for, or cause damage to, the organisation. An example of a threat is the emergence of strong new competitors who are likely to offer stiff competition to the existing companies in an industry.
3) A strength is an inherent capacity which an organisation can use to gain strategic advantage. An example of a strength is superior research and development skills which can be used for new product development so that the company gain a strategic advantage.
4) A weakness is an inherent limitation or constraint which creates strategic disadvantage. An example of a weakness is overdependence on a single product line, which is potentially risky for company in times of crisis.
An understanding of an external environment, in terms of opportunities and threats, and the internal environment, in terms of strengths and weaknesses, is crucial for the existence, growth and profitability of any organisation. A systematic approach to understanding the environment is the SWOT analysis