PESTLE analysis (acronym for political, economic, socio-cultural, technological, legal, and environmental, ) analysis is a tool used by marketers and business analysts to monitor the macro-environmental factors, characteristic of external marketing environment and the impact that they have on an organization. It was created by Harvard professor Francis Aguilar in 1967. The PEST analysis is also used in close contrast with other analytical tools, such as the SWOT analysis or Porter’s Five Forces. Upon analyzing these factors, businesses can better take investment decisions and efficiency can be enhanced.
‘P’ – Political:
In PESTLE analysis, ‘P’ stands for the political environment that is prevailing in a country or region; this usually includes government regulations, tax policy or laws that directly impact the business and the industry.
‘E’ – Economic:
‘E’ refers to the economic environment by ascertaining the economic factors in the macro economy such as exchange and inflation rates, economic growth, and interest rates. These better help assess the product demand, the costing aspect, and marketing penetration possibilities as far as business expansion is concerned.
‘S’ – Socio-Cultural:
‘S’ refers to the social/socio-cultural environment of the market through factors ranging from lifestyle, attributes, demographics, culture, education etcetera. The factors help in evaluating the potential size of the market.
‘T’ – Technological:
‘T’ which refers to the technological aspect of a market place assesses the extent of an impact, either negatively or positively that technology can have. The factors in question include the level or lifecycle of technology, the technological advance, the role that internet is playing, and the spend on technological research by the government. Companies need to consider generational shifts and the related technological expectations to ascertain how their end consumers will be affected by using their products and how the product itself is delieverd.
‘L’ – Legal:
Every country has laws that relate to labour and manufacturing which means that a global business not just has to abide by international laws but also the local laws of the country where it operates, for instance, minimum wage rate or zero tolerance policy against child labour.
‘E’ – Environmental:
‘E’ refer to the environmental aspect of the country where the business is operating. There could be laws limiting the use of certain raw materials or chemicals or laws pertaining to industrial waste.
Overall, there could be limitations to the PEST analysis itself. For instance, the Bright Hub Project Management has specified that it only scans the external environment while ignoring the competitive scenario and the internal environment. Also, the factors being discussed under this tool could change in a matter of a day, thus making it difficult to predict the foreseeable future for the business. By this definition, this tool can easily be said to be based on assumptions.
For this very reason, it is advisable to use PEST analysis in conjunction with the other tools mentioned earlier. For instance, the SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis as well the MOST analysis (Mission, Objective, Strategies, Tactics) along with SCRS (Strategy, Current State, Requirements, Solution) would help decipher the prevailing market conditions and help devise necessary immediate steps to come up with a solution.