January 25, 2016 Last updated September 18th, 2018 7,869 Reads share

Why Every Business Needs a PESTLE Analysis

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Every business encounters internal and external factors that may either have a positive impact or a negative impact on it. On one hand, these factors could boost the growth of the company; on the other hand, some of these factors could accelerate the decline of the company. Consequently, being aware of these factors is not an option, but rather a necessity for all businesses out there.

While internal factors that may affect a business could be controlled to some extent, most external forces cannot be controlled or avoided all together. But, having knowledge about them beforehand could help a business minimize the impact such factors could cause or find ways to avoid it as competently as possible.

This is where a PESTLE analysis would come in handy. It would help you understand and assess all the external marketing factors affecting your business. With the insight it provides, you can make smart and prudent business decisions in the future.

What is a PESTLE analysis and what it stands for?

A PESTLE “PEST” analysis is a useful technique that is commonly used to examine and identify the macro-environmental factors which may affect your business. These factors could have an impact on the position, potential and the direction of your company today or in five years from today; in either case, having a clear idea of the external forces that may influence the market growth or the decline of your business, is essential.

A PEST analysis, much like the SWOT analysis, is usually presented as a grid comprising four sections to represent the four main headings (Political, Economical, Social and Technological).

A PEST analysis focuses on 4 main factors;

  • P – Political factors – Political factors are based on the political situation of the country, especially on the impact of politics on the country’s economy. Here, the attention would be focused on all the policies, laws and regulations (tax policies, labor laws, employment laws, consumer protection laws etc.) a government would impose on a trade.
  • E – Economical factors – Here the focus falls on the economical determinants, such as the interest rates, the fiscal policies, inflation rate, the foreign exchange rates etc., of a country. Such factors will decide the direction of a country’s economy and how it may affect the business.
  • S – Social factors – Society is an external force that will always have an impact on a business. Being aware of social factors such as individual lifestyles, cultural implications, domestic structures etc. will help a business better understand its market as well as its customers.
  • T – Technological factors – Technology is evolving at a fast pace and no business can avoid it or survive without it. Keeping close tabs on all technological factors such as new innovations, automation, R&D activity etc. will help a business become tech savvy and keep ahead of their competitors.

PESTLE is the more elaborate version of PEST. In that case;

  • L – Legal factors – Businesses are not free from all the legislative changes that occur within a country. For an instant, say a legislative body passes a new legislation which may affect all businesses. If a business had prior knowledge about the legislation, it could have prepared itself to face whatever changes that would occur as a result.
  • E – Environmental factors – Environmental factors such as the weather, geographical location, climate etc. would affect the trades, consumer demands and even product development in some industries.

How Business Can Benefit from a PEST analysis

At least some of the factors above affect any business. And for some businesses are affected by all of the above factors.

What a PEST analysis does is force you to list down these factors and visualize them in one place. When you can visually see all the factors in one place its much easier to identify patterns and connections between those external factors.

Additionally you might not be aware of or at least have full knowledge of all the factors. For example understanding various complex laws regarding taxes can be confusing for a business owner. So you can invite an external party like a lawyer to optimize the legal section of the PEST analysis for you.

Some of these factors are prone to change as well. By maintaining a PEST analysis document and constantly updating it you can be aware of these changes and make full use of the opportunities arising from these changes.

Its wise to revise your PEST analysis monthly or at least quarterly to identify these changes. Once you have the initial document setup revising shouldn’t take long and the opportunities you find from them can give a huge boost to your business.

How a PESTLE analysis is useful in doing a SWOT analysis

While a SWOT analysis evaluates both external and internal factors that may have an effect on an organization, a PESTLE analysis evaluates only the external factors that may have an influence on an organization and its growth.

A SWOT analysis, which tends to be an assessment of a business or a proposition, focuses on the Strengths, Weaknesses, Opportunities and Threats of the organization. It is extremely useful for a business in coming up with and building new business strategies, especially by playing on its strengths and taking advantages of its opportunities while minimizing its weaknesses and avoiding the threats.

A PESTLE analysis, on the other hand, helps a business identify and understand the changes and trends (external factors) in the market and the industry it belongs to. So doing a PESTLE analysis prior to a SWOT analysis could be extremely useful.

Analyzing the PESTLE factors will help you when it comes to identifying and figuring out the SWOT factors of your business. For example, listing down all the political, economical, social, technological, legal and environmental factors that may affect your business will, in turn, help you identify the opportunities and the threats to your business rather easily. Hence, a PESTLE analysis could be useful in producing a more comprehensive SWOT analysis.

A PESTLE analysis is the one of the best tool you can use to gain a comprehensive understanding of the macro-environment in which your business is operating. Since it can be incorporated within a SWOT analysis as well, both analyses together would help you get a complete picture of the situation, potential and the direction of your business.

Images “Hand drawn PEST Analysis flow chart, business concept  /  Shutterstock.com


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Nishadha Silva

Nishadha Silva

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