PESTLE analysis is one of the most commonly used environmental analysis methods in the business industry. The environment is one key aspect of any organization’s success or failure. The organizational environment can be divided into two main components namely, internal environment and external environment. The internal business environment is about the organizational activities and the external environment is about the outside impact to the organization from various environmental aspects. Several analysis methods are used in analyzing the internal and external business environment.
While SWOT analysis is used to analyze both internal and external business environments, PESTLE analysis can be used to analyze the external business environment more specifically. The PESTLE environment contains six key elements that can impact organizational activities. PESTLE analysis explains about Political, Economic, Sociological, Technological, Legal and Environmental factors and their impact to the business organizations. These elements are non-controllable to the organization. All they can do is changing their business strategies to take the maximum advantage from the external environmental differences.
01. Political Factors
Political factors are about the status of government intervention in the business. The government can encourage business activities or discourage business activities. This can be done through government policies, tax policies, foreign trade policies, export and import policies, and labor law policies. These mentioned policies implemented by the government can encourage business activities as well as discourage business businesses and move them out of the industry. Organizations have to change their business activities and accounting activities to comply with political environmental changes.
02. Economic Factors
The economic environment consists of the changes happening in the economy in the country as well as the world. Factors such as Inflation, economic growth, exchange rates, interest rates, and disposable income can be identified as a few major components of the economic environment. Organizations have no control over these factors and they have to adjust their strategic decisions to survive the changing economic environment. The economic environment can be subdivided further as Micro Economic factors and Macroeconomic factors.
03. Social Factors
Social Factors play a huge role in shaping organizational culture. These are the social and cultural factors that affect the organizations’ growth or failure. The age distribution, gender availability, population growth, cultural beliefs and career, and living patterns are few components in the social environment. These factors can change from one geographical location to another. It is the organization’s responsibility to carry out a proper study on the social environment of the relevant geographic area and the expected target market before entering into the market. Apart from that, studies should be conducted occasionally to identify the changes in the social environment and to change the organizational plans and objectives according to the changing social environment.
04. Technological Factors
Technology is a vast industry that creates miraculous changes in the modern business industry. Technological factors introduce new ways of doing things, better ways of achieving better product quality and modern communication and distribution methods which can help the organizations to achieve better and high-quality outputs in their business processes.
The organizations have to adopt the new technological advancements to survive the growing competition and to provide a better product or service to the customer. They have to continuously face the challenge of facing the changing technologies as the changes in the technological factors are changing rapidly in the external environment.
05. Legal Factors
Legal factors are the regulations and the policies placed by the law to maintain a certain minimum standard when it comes to business activities. Health and safety requirements, employee laws, Consumer laws and rights, production safety laws and equal opportunity laws are the few most commonly seen laws and regulations in the legal environment. The organizations must aware of the legal perspective of their activities to make sure the necessary legal compliance in the business.
06. Environmental Factors
With the increase of the environmental concerns and the popularity of the triple bottom line concept, the interest in environmental factors of organizations has increased over the last few decades. Environmental factors can make a huge impact on businesses. Scarcity of the natural resources, an increase of pollution and sustainability are few elements that can create a huge impact on organizational activities. Organizations should be keen on preserving the environmental factors and concerned about saving a better environment for future generations.
The six PESTLE analysis factors mentioned above explains the external environment of any business. Businesses should have a proper strategic plan to face these environmental factors and achieve growth through them.