While a business plan outlines the process of building, running, and maintaining your business, it’s not enough to survive in the market. To make sure that your business stands the test of time, you need to arm yourself with strong and reliable business tools.
This is where business frameworks like PESTLE, SWOT, and Porter’s Five Forces can prove to be useful. They help you understand your business environment and break down long-term goals into bite-sized tasks. This allows you to streamline activities using actionable data.
In this article, we’ll focus on PESTLE analysis. We will see what it is, how it works, how to conduct it, and also see an example to help you get a better idea.
What Is PESTLE Analysis?
PESTLE is an acronym for Political, Economic, Social, Technological, Legal, and Environmental factors. It’s a business framework that focuses on these six external influences on your company. It is often used in conjunction with other business frameworks.
Entrepreneurs use it to gather info about various external factors affecting their company. This helps get a bird’s-eye view of the business landscape which leads to better decision-making and protects against risks.
When Is PESTLE Analysis Conducted?
A PESTLE analysis is conducted:
- Before the launch of new products or services
- Before venturing into a new market
- To find new opportunities in the existing industry
- To analyze the changing environment of your industry
6 Factors of the PESTLE Framework
The PESTLE framework looks at your business environment from six different angles. By analyzing each, you can optimize your business activities according to the changes and trends in your industry.
Let’s understand these factors in detail.
The first factor looks at the political powers affecting your business. This includes tax policies, political stability, environmental regulations, and trade barriers like tariffs, quotas, embargos, etc. These can also include government policies applicable to all business activity or particular to your industry.
For instance, say the government levies a special tax on iron. Manufacturing companies that use iron as a raw material will then see an increase in their COGS(cost of goods sold). As a consequence, this will affect the price of their offerings and net profit.
Economic factors include inflation, the standard of living, the unemployment rate, economic growth/decline, interest rates, the fiscal year followed in the country, foreign exchange rate, and economic stability.
For example, a recession causes unemployment and hence a decrease in people’s purchasing power. This results in reduced production of goods due to low demand and may even cause entrepreneurs to exit their businesses.
Unlike the above two, the social factor focuses on the things that influence your target market. Given the unpredictable changes in the demographics of your audience, social factors often tend to be highly volatile.
Social factors include cultural trends, religious beliefs, literacy rate, population growth, demographics, social classes, etc. These factors influence the buying pattern of your target customers, and hence, the sales of your products or services.Adapting your business operations as per your customers’ beliefs and feedback helps them feel heard. This builds trust and makes them prefer your brand over the competition.
For instance, with the changes in people’s dietary habits, food outlets are expected to offer products accordingly. A person following veganism expects a fast food restaurant to provide diverse vegan options.
In other words, businesses tailor their offerings according to the changing needs and want of their customers.
Technological factors refer to the technological developments impacting your business. This may be the way you manufacture your products or the way you market and sell them. This includes advances in machinery, software, and equipment that can aid or harm your business.
For instance, a store may use gesture recognition to help people with disabilities such as hearing, speaking, or other motor impairments. This can help drive sales with increased inclusivity and convenience for customers with special needs.
Legal factors refer to the laws your company has to abide by. These legal factors include consumer laws, labor laws, copyright laws, import/export laws, etc. If you do business overseas, you must follow the trade laws of your home country as well as the importing country.
These factors influence the development of products and operations of your business. For instance, an automobile company follows the set safety guidelines while manufacturing vehicles. This includes using qualifying materials, adding safety exits, etc.
Environmental factors reflect your business’s surrounding ecological environment. This includes weather conditions, seasonal climate, geographical location, global climate effects, energy consumption, waste disposal, carbon emissions, etc.
These factors influence your sales, customers’ opinions about your brand, and your business operations. For instance, the rise in global warming has led companies to shift to more sustainable energy resources and opt for better waste disposal solutions.
How to Conduct a PESTLE Analysis
STEP 1: Select the objective and scope of analysis
The first step is to determine the purpose of your analysis and its scope. This includes the geographical locations you are targeting, the extent of data you will need, and the relevant factors to your business. Being aware of your goal helps you avoid going off track while researching.
STEP 2: Conduct research for all six factors
Next, research each of the six factors. Gather the information relevant to you. Use reliable sources such as case studies, government reports, and high-authority websites to enhance the quality of your information.Make sure to involve experts in relevant fields to help you in the process. This will improve the quality of the data gathered and make it actionable.
You can also outsource this task to research firms if you can bear the costs. However, doing it yourself can help you understand your business better. If you are unsure of where to begin, you can start by asking these questions:
How and to what extent do national and international politics affect your business operations?
What are the economic trends that may impact your company in the future? How volatile are the economies of the countries you work in?
What are the factors that affect your target customers’ buying behavior? Did you notice any trend among your customers recently?
How old is the machinery and/or equipment in your company? Is there a need to upgrade to newer models to grow?
What are the laws in the country/countries that you operate in? Are you facing any legal issues that can impact your brand image?
Is your product seasonal? Does your product require a certain kind of weather condition to manufacture? What are your initiatives toward sustainability and other environmental issues?
STEP 3: Interpret and organize data into relevant categories
Now it’s time to put all this data together. Start by writing your company’s description i.e. who you are and what you do. Next, write down your findings from the research such as your repeat customer stats, recent impact on market share due to sudden economic change, etc.
Illustrate this information according to the order of the framework. You can represent the six factors in the form of a matrix for simplicity (see the example below). Finally, conclude the report with a summary of the analysis.
STEP 4: Put the data to use
After gathering, organizing, and interpreting all the information from your PESTLE analysis, it’s time to put this data to use by making predictions, changing strategies, reallocating resources, safeguarding investments, etc.
Be sure to communicate these changes to your team to execute a quick and smooth switch. This will help your team stay on the same page and not deviate too far away from the company goals.
Example of PESTLE Analysis
PESTLE analysis of Nestlé
Nestlé is the world’s largest FMCG multinational giant, operating in over 190 countries. The Swiss-based company was founded in 1866 by Henri Nestlé. As of 2021, its net sales amount to USD 93 billion, employing over 273,000 people
As the company works in several countries, it’s affected by the policies and tax regulations of many governments.
Nestlé has been putting money into political parties, like the US Congress. This is an attempt to reduce regulations to push its bottom line upward.
The rising cost of raw materials and the demand for affordable goods influence the company’s product margin and development.
In 2020, the UK withdrew from the European Union. This led to a price increase in raw materials, which impacted the company.
Nestlé entered various new markets, like infant and children’s foods catering to their unique needs.
With the shift in people’s lifestyles and dietary habits, the company started producing ‘green’ and fitness-focused products.
Nestlé partnered with several companies for its ‘SmartLabel Transparency’ initiative. Through this, the brand allows customers to get information such as allergens, nutrition values, and ingredients via a QR code scan.
The company is enhancing its security systems to protect private information from cyber-attacks.
Nestlé has to comply with all the food regulations and safety standards of every country they do business in. This means interruptions in product standardization.
The company’s failure to meet legal standards largely affected market share. This includes the 1974 baby milk scandal in the US, the 2015 ban on Maggi noodles in India, etc.
Nestle is working to replace plastic packaging with other sustainable options, aiming for fully recyclable packaging.
The FMCG giant is also working to reduce greenhouse gas emissions.
Make Better Decisions with a PESTLE analysis
Building a business comes with a great deal of unpredictability. Luckily, tools like the PESTLE analysis can help you navigate unknown waters. Research your external business environment to find valuable facts and gain a macro picture of your industry. Use this info to make better decisions and stay ahead of the game.