Introduction
Environmental analysis is a strategic tool. It is a method to make out all the external and internal elements that can shape the organization’s performance. The analysis entails assessing the level of threat or opportunity the factors might present. These evaluations are later translated into the decision-making process. The analysis helps line up strategies with the firm’s environment.
There are many strategic analysis tools that a firm can use, but some are more common. Preparing a marketing environmental analysis is an essential step in understanding the external local, national, or international forces that might have an effect on your small business. These factors are mainly outside your direct control, but you can adjust your business and marketing strategy to take advantage of the opportunities. A PESTLE analysis is the most universal way of undertaking such a review; PESTLE stands for the political, economic, social, technological, legal, and environmental factors you need to consider.
What is a PESTLE analysis?
Originally known as PEST Analysis, this is a macro-environmental structure used to understand the impact of external factors on the organization and is used as a strategic systematic technique. PEST stands for “political, economic, social, and technological” factors.
Francis Aguilar is referred to as the originator of this tool. He talked about ETPS—economic, technological, political, and social—as the four significant factors for scanning the business environment. Later, legal and environmental factors were also added by some analysts, thus evolving the term PESTLE analysis.
Let us examine these factors in a bit more detail.
Political
For each foreign country, Bulger says, examining the current regulations of a particular country or market environment governing an industry may reveal what restrictions may be placed on a market, a company, and its ability to produce viable products and services for that market now and in the future. It’s also worth looking at each foreign country’s tax laws and structure, as well as its import and export policies. A market such as Brazil, which imposes high import duties to protect its domestic economy, may be less attractive to a U.S. business than a country.
Political factors affect organizations in terms of government regulations and legal issues and describe both formal and informal rules under which the firm must operate. Examples are:
- Political stability
- Tax policy
- Employment and labour law
- Environmental regulations
- Trade restrictions
- Tariffs etc
Economic
Economic factors shape the business operations and decision-making of the organization. For example, the predicted decline is preventing organizations from increasing their workforce. Other examples are:
- Economic growth
- Interest rates
- Inflation rate
- Exchange rate
- Unemployment
Social/Cultural
Social factors are often attached to demographics, Lyke-Ho-Gland explains. For instance, a business entering a country with a large millennial population will want to reach these consumers through the mobile phones or social networks they use for a wide range of activities.
Environmental considerations are a growing characteristic of this category. Bulger notes that the Netherlands, for example, heavily relies on wind power, and its consumers are focused on sustainability, so business owners entering this market should prepare for scrutiny of its environmental policies. Social factors refer to the cultural and demographic aspects of the environment. For example, an increase in health consciousness may affect the demand for the company’s product. Other factor include:
- Age distribution
- Population growth rate
- Emphasis on safety
- Trend
- Fashion
Technological
Technological change is troublesome to every industry in every market. “Buying a house anywhere in the world is now easy with Skype, a digital camera and the Internet. Just think—you can now view and buy an apartment in Hong Kong from Chicago, all through the Internet,” says Babette Bensoussan, co-author of Analysis Without Paralysis: 12 Tools to Make Better Strategic Decisions and managing director of The MindShifts Group, a Sydney-based consulting firm that specializes in competitive intelligence.
Look at changes in both products and infrastructure, such as new technology in business that could make an operating plant more efficient, Lyke-Ho-Gland suggests.
A PEST analysis can help a small international business move more lightly than its giant competitors in order to capitalize on an opportunity. “PEST gives small companies big company advantage because they focus on targeted areas of importance as they monitor environments,” Bulger says. Technological factors affect the cost and quality of the outputs. These also determine the barriers to entry and minimum efficient production level. Factors include:
- Automation
- Technology incentives
- Old Technology
- New Technology
- Trends and relevant Technology
Legal Factors
Governmental changes take place from time to time. Many of these changes influence the business environment. If an authoritarian body sets up a regulation for industries, for example, that law would force industries and business in that economy. So, businesses should also analyze the legal developments in respective environments.
There are some legal factors you need to be aware of:
- Product regulations
- Employment regulations
- Competitive regulations
- Patent infringements
- Health and safety regulations
Environmental Factors
The location influences business transactions. Changes in climatic conditions can affect trade. The consumer’s reactions to particular offering can also be an issue. This most often affects agri-businesses.
Some environmental factors are:
- Geographical location
- The climate and weather
- Waste dumping laws
- Energy consumption parameter
- People’s approach towards the environment
PESTLE analysis is used to inspect the current and future state of the industry an organization belongs to. This helps in the planning process and gives us an aggressive edge over the other firms in that industry. This testing can not only be used for an organization as a whole but various departments can also be inspected under this framework. For example, it takes more intelligence for a company with diversified product range to analyze its departments individually than the organization as a whole.
