What is a PESTLE Analysis? Understanding Macro-Environmental Factors

Every business is subject to its macro-environmental factors. That is to say, external factors outside of a business’s control (think the economy, environment, politics, etc.).

This is because a business can’t operate within a vacuum. The total addressable market will always impact it in some way, shape, or form.

And it’s a crazy old world we live in!

So, to mitigate its exposure to these external factors a business must be able to analyze its position and identify potential risks. This will help it better adapt to the uncertain changes that characterize the economy.

Now, there are several tried and tested tools for conducting an external analysis. Most of which, you’ve probably come across before:

• SWOT Analysis

• Porter’s Five Forces

• Scenario Planning

• Global Competitiveness Index

But perhaps the most important of them all is the PESTLE Analysis Framework.

What is PESTLE Analysis?

A PESTLE analysis, or sometimes referred to as a PEST or PESTEL analysis, is a business framework used to analyze the macro-environmental factors that impact a company’s overall performance.

The framework is broken down into 6 key external factors:

• Political

• Environmental

• Social

• Technological

• Legal

• Economic

Analyzing each factor is especially useful when entering an unknown market (especially abroad) or starting a new business.

As mentioned before, successful companies often use PESTLE analysis in conjunction with other macro-environment analysis tools such as SWOT and Porter’s Five Forces.

This gives businesses a thorough understanding of their position and a better ability to assess the risks specific to their industry.

With that wrapped up, let’s explore each external factor in more detail.

Political Factors

Political factors explore to what degree a government can influence, change, and impact your industry.

This could be through:

• Foreign trade policy

• Political stability

• Labor laws

• Trade restrictions

• Environmental laws

• Corruption

• Tariffs

Government policy also impacts areas such as healthcare, and education so will also need to be taken into consideration if related to your industry.

Economic Factors

These are factors that directly impact the economy’s performance (and indirectly, your business).

Some examples are:

• Inflation rates

• Interest rates

• Economic growth

• Unemployment rates

• GDPR

• Median household income

• Stock market trends

• Budget deficit

Changs or fluctuations to any one of these factors could impact a company’s purchasing power, product pricing, and market supply and demand.

Social Factors

Social factors focus on the cultural norms, customs, and values of a specific demographic where a company operates.

Potential social factors include:

• Education standard

• Cultural trends

• Lifestyle

• Age distribution

• Population growth rates

• Health and safety policies

• Buying habits

• Religion

• Racial equality

Fully understanding the social environment within which you operate helps you identify both risks and opportunities perhaps missed by your competitors.

Technological Factors

Technological factors determine the level of innovation, research, and development within an industry and the potential impact it could have.

This could be identified by changes in:

• Mobile technology

• R&D capacity

• Digital technology

• Internet and communication infrastructure

• Manufacturing technology

• Distribution methods

• Levels of automation

Most businesses tend to focus heavily on the impact of digital technology. However, while clearly important, development in heavy industry, manufacturing, and distribution networks shouldn’t be overlooked either.

Legal Factors

Clearly, businesses must be aware of the “laws of the land” where they operate. It’s also vital to remain abreast of any upcoming legislation changes and whether or not it impacts your business.

Some potential legal factors include:

• Antitrust laws

• Taxation laws

• Consumer protection laws

• Health and safety regulations

• Employment laws

• Copyright and patent laws

• Labor laws

• Data protection laws

  
  

Environmental Factors

Finally, you’ll need to look at the potential impact environmental factors could have on your business.

With consumers increasingly judging brands against their CSR (corporate sustainability responsibility) and the rise of global warming, these factors are typically ecological, and can include:

• Climate

• Weather

• Ethical product sourcing

• Regional NGO (non-profit organization) pressure

• Environmental offsets

• Renewable energy availability

• Natural resources

   

What is the difference between PESTEL and PESTLE Analysis?

There is none.

PESTEL and PESTLE analysis are the same things. They’re both acronyms for a macro-environmental business analysis framework.

The only difference is someone, somewhere, decided to swap the two last letters around causing utter chaos in business circles.

🤷

PESTLE is:
P: Political
E: Economic
S: Social
T: Technological
L: Legal
E: Environmental

...and PESTEL is:
P: Political
E: Economic
S: Social
T: Technological
E: Environmental
L: Legal

How to do a PESTLE Analysis

Undertaking a PESTLE analysis audit is simple. There’s a 4-step process for using the analysis framework and identifying specific external risks and how they affect your industry or business.

Step 1 - Brainstorm External Factors

The first thing to do is use the PESTLE framework to brainstorm all the external factors (from each of the 6 areas) in your industry. The key here is specificity. You’ll get value from the audit if it’s tailored to your business.

You might find using a PESTLE analysis template like the one below useful for your brainstorming session:

Step 2 - Identify Threats

The next thing to do is identify how these external factors could undermine or impact your business.

For example, if you’re in the oil and gas industry, any changes to consumer protection laws, local NGO pressure, and environmental concerns would heavily impact your business.

Just as the age distribution would impact your decision to open a toy store in a small town. 

Step 3 - Take Action

If identified early, strategies can be put in place to minimize risk or enhance impact if the outcome is positive.

Step 4 - Review and Revise

To be effective, a PESTLE analysis should be conducted on an ongoing basis. Businesses that keep on top of macro-environmental factors, their changes, and the potential impact they have to give themselves a serious edge over their competitors.

PESTLE Analysis of Apple

To give you a better understanding of how the PESTLE analysis model works, I want to run through a real-life example of a well-known brand. And frankly, I can’t think of a better example than Apple!

So, let’s take a look. 

Political Factors

Apple is an American technology company (we all know that) so what does that mean for the external political factors it faces?

Well, Apple Inc. just posted its highest quarterly revenue (a whopping $100-billion quarter) meaning it’s subject to higher corporate taxation in the U.S.

Another political factor it has to consider is souring relations between the U.S. and China. In 2018, President Trump began adding tariffs to Chinese imports, sparking a trade war between the two countries.

This had a knock-on effect on Apple.

They source a lot of their parts from Chinese manufacturers meaning:

• Parts might have to be sourced outside of China

• Become a target for Chinese nationalist anti-American rhetoric

• See a reduction in popularity of their products in countries such as Japan

With this knowledge, Apple can begin to draw up contingency plans to minimize its risk exposure.

Economic Factors

There’s both good and bad news on the economic front for China.

Apple’s products are largely sold in developed countries with typically strong, stable economies. There’s little risk of their target market weakening economically.

Furthermore, the economic growth rates of developing nations, particularly in Asia, means there are a host of new opportunities for Apple to expand its presence in previously inaccessible markets.

However, the “China” problem expands into the economic arena. Increased labor costs elsewhere could weaken the cost advantage of certain Apple products. 

Social Factors

Society dictates that almost everyone needs a mobile phone these days. This is due to the increasing popularity of mobile-first social media platforms such as Whatsapp, TikTok, and Instagram

While it’s rather sad to see families sitting around the dinner table with eyes glued to screens, it’s good news for Apple.

People, at least for the time being, are socially mandated to buy smartphones.

However, China’s going to crop up again due to external social factors.

There are ethical concerns from many consumers about the purchase of products made in China. Their treatment of the Uighurs and imposition of strict new laws in Hong Kong has seen their public opinion just fall through the floor.

As tensions continue to rise, Apple might be forced to review its policy of working closely with the giant Asian superpower.

Technological Factors

One growing external technological factor that’s of definite interest to Apple is the increasing use of mobile devices in business and education.

In fact, our students frequently attest to our business program’s online mobile accessibility as one of its standout features. It allows them to self-educate around their busy schedules, as and when it suits them.

Also, many businesses are turning to mobile devices to help their workforce. An example of this would be field sales reps using iPads to access their CRM data.

However, Apple isn't the only one with skin in the technology game.

Their primary competitors Samsung and Google are hot on their heels. Google, for example, was able to roll out Android Pay less than a year after Apple Pay.

Legal Factors

Increasing public concern about privacy and the invasive nature of modern digital advertising, governments are applying more pressure to software companies to be more open with their data usage.

This legal threat could potentially be problematic for iPads to access their CRM data.

It’s also no secret that Apple is planning on entering the automotive industry. This is another highly-regulated industry with potential insurance and litigation costs to cover.

Environment Factors

As a software company, Apple will always be susceptible to increased rates of electricity.

Not just because of the maintenance of data centers, but the number of manufacturing facilities it relies on to mass-produce its products.

Also, China.

There are still concerns about the handling of their manufacturing facilities regarding pollution and lack of investment in renewable energy sources.

If this external pressure increases, Apple may be forced to seek out new, expensive, alternative production facilities

Applying PESTLE Analysis To Your Business

Right, now it’s over to you!

Use the PESTLE analysis template provided in Step #1 to assess the macro-environmental factors affecting your business.

Remember, while the PESTLE analysis is a great tool, it should be used in conjunction with other analysis techniques such as SWOT and Porter’s Five Forces.

Also, don’t forget to conduct your analysis on a bi-monthly basis. The world’s moving fast and things are changing at an unprecedented rate. Falling behind competitors could be devastating for your business!