Every company operates in some specific business environment that impacts the company, and the company itself impacts the same environment. So, if you want to succeed, you must know how this impacts your business, and the best way to analyze your environment is to use the PESTLE (political, economic, social, technological, legal, and environmental) forces framework.

Here, we will discuss the PESTLE analysis framework, which can help you conduct a comprehensive analysis of your company’s external environment.

What is PESTLE Analysis?

Before twenty or more years, we used the same tool, but then it was PEST or STEP analysis. Today, we have a PESTLE analysis and six forces instead of four.

This analysis name comes from the acronym of Political, Economic, Sociocultural, Technological, Legal, and Environmental factors.

PESTLE is simply an analytical tool that identifies how various external factors affect your company and is the acronym for all environmental factors.

One of the most effective ways to think about your external environment is to mix PESTLE with Michael Porter’s Five Forces Framework, which examines the five forces that make a company competitive while helping identify its strengths and weaknesses.

The PESTLE Framework

Understanding your wider business environment and how everyday circumstances of your organization’s environment can potentially affect your company is really important to achieve business success.

PESTLE analysis, as a strategic planning tool, gives a clear view of the closer and wider business environment from many different angles. For example, the regulatory environment is a part of the operating environment of your company, and each local, regional, national, and supranational law or legal regulation will impact your company. Economic conditions, in conjunction with possible regulated markets or industries, will also impact the level of competitiveness.

So, this is one of the most important tools with SWOT analysis that will help you develop a winning business strategy based on data from analysis.

How to Analyze PESTLE External Factors

To conduct a PESTLE analysis, you must first collect all necessary information about the external factors that may impact your company. These include:

1. Political Factors

The political environment is defined as that part of the macroenvir­onment that is under either the direct control or influence of the government and/or the state. For example, changes in tax policy or trade agreements can greatly affect a company’s profitability.

So, the political environment determines how much a government, regardless of the level, can impact the economy or a specific industry. Governments in all countries are responsible for:

• Economic or fiscal policy that will regulate the levels of taxation and spending.
• Legislation and regulation are the employment laws, consumer protection laws, health and safety regulations, tax laws, monopolies, etc.
• Government-owned businesses are companies where the government have the control. For example, some oil companies are government controlled key strategic industries in many countries. So, how they are controlled can have huge impact on other industries.
• Government international policy can influence on exchange rates, customs duties for supply imported, the level of international trade, etc.
• Government stability and political climate can also impact the overall business environment, including foreign investment, trade relations, and consumer confidence.

To analyze political factors as a part of PESTLE analysis, you must understand how political factors and government actions affect the economy as a whole, specific industries, and businesses.

2. Economic Factors

Analysis of the economic environment in PESTLE analysis put the main focus on changes in the macroeconomy or determinants of an economy’s performance that directly impact a company and have long-term effects.

These economic factors that can affect your company are the following:

• economic growth rates
• inflation rate,
• interest rates,
• productivity rates,
• Minimum wage rates and how they increase over time,
• foreign exchange rates,
• economic growth patterns,
• Labor costs, unemployment rate, labor supply,
• FDI (foreign direct investment),
• balance of payments (BOP)

As you can see all of these economic factors can affect how your company price the products and services, as well as consumer purchasing power and demand and supply trends.

3. Social Factors

Social environment analysis in PESTLE is related to understanding the potential impacts of society as a whole and possible social changes on a company, its industry, and markets.

To conduct PESTLE analysis for these elements, you must analyze social

• culture,
• demography,
• structure (population), and
• buying trends in society.

Social culture

Social culture is crucial in analysis social trends that impact your company’s operations. This is because they will influence on customer preferences, work ethics, education attitudes, etc.

Remember that when you analyze a specific market, there will be variations even among similar countries or regions. For example, social culture in rural areas will differ from that in urban areas.

Understanding social culture is important in terms of power and demand because it can influence behavior and buying patterns of customers. For example, in some cultures, there may be a higher demand for sustainable products, while in others, there may be a greater emphasis on luxury goods.

Demography

Demographic trends are also important in PESTLE factors analysis. Social demography refers to the research of population characteristics such as age, gender, income levels, education levels, etc. This information can provide valuable insights into consumer spending and behavior and their needs and wants. For example, an aging population may have different demands than a younger demographic.

Or, the size of the population will obviously be a determinant of the size of the workforce and the potential size of markets.

Social Structure

The structure of a society is strongly related to demography and includes elements such as social classes, family structures, and cultural norms. Understanding these dynamics is crucial in identifying potential.

You can define social structure by age, sex, family status, location, population density, etc.

Buying trends in society

Buying trends is most important thisng you can learn about analysing PESTLE factors because they are usually influenced by social structures.

For example, a society with an aging population may experience a shift towards products and services such as healthcare and retirement planning that are more appropriate for older individuals. Conversely, a society with a younger demographic will demand more technology and innovative products.

4. Technology factors

Technological factors are PESTLE factors related to technological advancements that can impact the industry and market positively or negatively. Examples of technology factors are automation, research and development, and technological awareness in a market.

For example, AI is available to everyone and has changed how we learn, find answers to questions, market our products and services, etc.

You need to pay extra attention when it comes to technological factors in PESTLE analysis to:

Automation

Technology has made automation a key factor in almost every industry. It increases efficiency and reduces business costs. This can impact the market as it may lead to job losses and changes in consumer behavior.

Research and Development (R&D)

The level of investment in R&D by companies determines their competitiveness in the market. Technology is always evolving, and companies that invest in R&D will be ahead of their competitors.

Technology Adoption Rate

Consumers’ technology adoption rate can also impact an industry’s success. For example, with the rise of smartphones, e-commerce platforms have become super popular as people prefer online shopping over physical stores.

Transportation Technology

Evolutions in transportation technology, such as electric and autonomous vehicles, can impact industries that are heavily reliant on transportation, such as logistics, automotive, and food delivery.

Cyber security

Living and operating in a connected world doesn’t bring only benefits, but also threats like security threats. These trend require companies to pay attention to their cyber vulnerability and ensure their data are protected appropriately.

5. Legal Factors

Legal factors in PESTLE analysis are related to laws, regulations, and legal issues that can impact a business. These factors can include changes in tax laws, labor regulation trend, de-regulation trends intellectual property laws, and consumer protection policies.

You must also consider legal implications when expanding into new markets or offering products and services globally. Each country has its own unique set of laws and regulations that companies must abide by, which can greatly influence the success of their expansion efforts.

6. Environmental Factors

Environmental factors are all those that impact or are impacted by the environment, which is important for some industries. This part of PESTLE looks at factors related to our physical environment, from geographical location and natural disasters to climate change, from environmental regulations to the growing demand for green products.

Do you remember the COVID crisis and how many businesses were hit?

In recent years, there has been a big shift in social attitudes towards environmental impact. Previously, consumers didn’t care about the long-term effects of climate change, or carbon emissions, environmental offsets, and other factors. However, now, there is a growing awareness of the importance of environmental protection. Governments are introducing environmental regulations to reduce pollution. Businesses are seeing profit in green products and processes, so they are investing in research and development of green solutions.

Don’t forget the PESTLE analysis is a tool to help with analysis and keep things structured for your macro-environmental assessment. The main aim is to identify the issues for the organization and the industry. Categorizing them into the factors is less important than spotting the impact.

How to use PESTLE analysis?

Now that you know what PESTLE elements are and how they are connected, you can start using this strategic tool through 4 steps:

1. Scan the PESTLE elements

First, you must scan the environment for actual or potential political, economic, social, technological, legal, and environmental changes. These could include government policies and regulations, economic data, social and cultural shifts, technological advancements, legal developments, and environmental issues.

2. What are they?

Once you have enough information about the environment, identify the most relevant PESTLE elements that will impact your organization or industry. This is important as it helps to focus on the most important issues.

3. What does it mean for you?

After you have identified the PESTLE elements, you must analyze each one. How will they impact your organization or industry, and what are the opportunities or threats? When you analyze each one, analyze it through:

• your industry,
• the market where your products and services are or where you want to be in the future, and
• internal elements of your company, including resources, processes, competencies, etc.

This will give you a better understanding of what each factor means.

4. What to do?

Based on your analysis of each one, you must develop strategies to mitigate threats or capitalize on opportunities. These must be aligned with your organization’s goals and objectives.

For example, if you identify a political factor that will challenge your company in the future, you can develop a strategy to reduce or eliminate that challenge through advocacy or building relationships with key stakeholders.

Similarly, if you identify an economic opportunity in a new market, you can develop a strategy to enter and capitalize on that market.

5. Review and adjust

This is not a one-off process—it should be reviewed and adjusted as the external environment changes over time. So, keep track of any changes in the external environment that will impact your organization and adjust your strategies accordingly.