PESTLE analysis

PESTLE stands for - Political, Economic, Sociological, Technological, Legal, Environmental. It is a process to audit the impact of (uncontrollable) external factors on an organisation and so provide a guide to strategic decision-making. The assumption is that if the organisation is able to audit its current environment and assess potential changes, it will be better placed than its competitors to respond to changes.

The earliest known reference to tools and techniques for ‘scanning the business environment’ was made by Francis Aguilar who discussed ‘ETPS’, ‘PEST’ or ‘STEP”- a mnemonic for the four sectors of his taxonomy of the environment: Economic, Technical, Political, and Social. Then, through a number of researchers, the acronym grew to STEPE (adding ‘Ecological’) and then in the 1980s, to PESTLE (adding ‘Legal’).

While PESTLE looks at the outside, it can highlight factors inside an organisation, such as:

• Political: who is in what position, their power, vision, goals and directions etc.
• Economic: financial implications, productivity etc.
• Socially: what is and is not acceptable within the culture.
• Technological: new computer systems or other new technology.
• Legal: changes to employment law, recruitment, visas etc.
• Environmental: the space available, what can or cannot be moved where etc.

PESTLE analysis can be used for planning changes and should be undertaken on a regular basis. Organisations that do analyses regularly and systematically often spot trends before others thus providing competitive advantage.

Business planning: A PESTLE analysis is a useful document to have available at the start of a business planning process. It can provide the management team with background and context information about targets towards growth, new product development and brand positioning. The opportunities and threats identified can be fed into a SWOT (Strengths, Weaknesses, Opportunities, Threats) process and strategies identified to avoid or minimise the impact of the threats, and equally strategies employed to build on the opportunities presented.

Marketing planning: As with business planning, a PESTLE analysis provides the essential element of ‘climate’ within a situation analysis phase of the marketing planning process.

Product development: It is often said that there are few ‘bad products’ but lots of wrong time and wrong places. As a PESTLE analysis provides a view of what is occurring in the external world, this will help when making the decision to enter or leave an area of product development. For example, portable tape recorders are excellent devices, but a PESTLE analysis might show that that, socially and technologically, MP3 technology is more acceptable. Equally from an environmental point of view the manufacture of tapes requires the use of heavy chemicals and would be increasingly taxed and rejected by society.

Organisational change: When looking at changing one function or department a PESTLE analysis can be a powerful tool for understanding the context in which the change is occurring and the potential areas of focus. Best used in association with a SWOT analysis, a PESTLE will provide information about potential opportunities and threats around, for example, labour changes.

Research reports: A PESTLE analysis can also be used to hypothesise what may or may not happen. It is a useful framework to use to ensure that some of the basic factors are not overlooked or ignored. Used in a similar way to that of business planning – but the application of the data is different.

Advantages and Disadvantages

As a tool for scanning businesses are exposed to external changes, PESTLE has many advantages:

• Simple framework.
• Facilitates an understanding of the wider business environment.
• Encourages the development of external and strategic thinking.
• Can enable an organisation to anticipate future business threats and take action to avoid or minimise their impact.
• Can enable an organisation to spot business opportunities and exploit them fully

This technique has disadvantages too:

• Some users over simplify the amount of data used for decisions – it is easy to use scant data.
• To be effective this process needs to be undertaken on a regular basis.
• The best reviews require different people being involved each having a different perspective.
• Access to quality external data sources, this can be time consuming and costly.
• The pace of change makes it increasingly difficult to anticipate developments that may affect an organisation in the future.
• The risk of capturing too much data is that it may make it difficult to see the wood for the trees and lead to ‘paralysis by analysis’.
• The data used in the analysis may be based on assumptions that subsequently prove to be unfounded (good and bad).

PESTLE analysis dos and don’ts:

• DO get other people involved.
• DO exploit any expertise and resources that are already available within the organisation.
• DO use PESTLE analysis in conjunction with other techniques, such as SWOT analysis, PRIMO-F analysis (see our SWOT analysis factsheet linked to above for more information), Porter's five forces (see Useful links and Further reading below), competitor analysis or scenario planning etc.
• DO incorporate your analysis within an ongoing process for monitoring changes in the business environment.
• DON’T try to do this on your own.
• DON’T jump to conclusions about the future based on the past or the present.
• DON’T get bogged down in collecting vast amounts of detailed information without analysing your findings appropriately.

Adapted from an Article by Mike Morrison
Chartered Institute of Personnel & Development
March 2008