PESTLE Analysis

What is a PESTLE analysis?

PESTLE analysis is a framework used as a strategic tool used to consider the external environment of a business or project. The framework breaks down the external environment into six categories, namely political, economic, social, technological, legal and environment (Ansoff et al, 2018). The idea of this analysis is the better positioned a project is within the external environment and the better placed versus competitors the better it can respond to changes and succeed within a dynamic environment.

References to this type of analysis was first noted in 1967 by Aguilar’s book Scanning the Business Environment who cited ETPS analysis which stood for Economic, Technical, Political and Social. This was morphed into STEP analysis by Arnold Brown which stood for Strategic Trend Evaluation Process before being modified further into PESTLE analysis which has created variations such as PEST and STEEPLE analysis (Parnell, 2013).

When and why should you use a PESTLE analysis?

PESTLE analysis is considered within business/ project management subjects as a way to access the external environment either for a business, specific market or project. It can be used as a way to help prioritise the use of resources for the most effective business or project strategy. Resources are finite, being labour or capital (Rothaermel, 2016). Thus, a business seeking effective strategic management would use PESTLE analysis and other tools to focus their resources where needed. For example, if a business identifies growing stakeholder demand for carbon-neutral products due to a combination of social and environmental factors then it would be worthwhile the focus their resources into developing future products/ services which are carbon neutral.

PESTLE Components

Politics

– Each business or project would face both internal and external political issues. External political issues refer to factors which cannot be controlled by the business/ project team and thus must have mitigation policies in place if they represent a threat. These usually include national legislation such as trade policies, minimum wage regulation and tax policies among others (Eden & Ackerman, 2013).

Economic

– This section would include all factors which could either impact micro or macro-economic environment. Macroeconomics would include factors such as economic growth, unemployment, inflation etc. Microeconomics is concerned with factors than impact on individual choices within the economy and may include competition or access to finance.

Social

– This considers community or wider societal factors which could influence the business/ project. This may include changes to consumer behaviour, population demographics and cultural expectations. For instance, the increasingly consumer norm to shop online would act as a social factor which would provide an opportunity for many projects aimed at boosting e-commerce (Hunger, 2020)

Technological

– Consider all the technological factors which could be an opportunity/ threat. Technology can become outdated in a matter of years and thus the business must consider this. For instance, the threat to 4G products would have been the introduction of superior 5G products. On the opposite the opportunity to electric vehicles is the development of batteries with longer ranges per charge which means these vehicles can match the performance of petrol/ diesel vehicles.

Legal

– The business/ project must ensure that it meets all legal requirements within trade, employment, production among other areas. This category can be extremely important when PESTLE analysis is used for an international project given the stark differences which may be seen in legal structures between two countries (Ansoff et al, 2018)

Environmental

– This factor takes into account the ecological and environmental aspects which in turn can be interlinked with economic and social factors mentioned above. For instance, global warming/ climate change could present threats to investments in certain geographical locations, while climate change could also create social change which acts as an opportunity for some sectors (i.e. wind power generation, electric vehicles).

What are the benefits / advantages of using a PESTLE analysis?

The main benefit of PESTLE is that the categorisation of the environment makes it easy for users to understand. There is a set structure to PESTLE with all factors put into one of the six categories. There is this focus on making use of the opportunities and boosting the preparedness for threats (Hill et al, 2014). It promotes forward looking strategic thinking in the organisation which enables them to plan ahead: either through the mitigation of risk or the exploitation of opportunities. It allows the organisation to be proactive rather than reactive. Finally, it provides a basic model to help understand the business environment better. The structure of PESTLE also makes it easy to present to others in the organisation; be that management or other stakeholders.

Disadvantages of PESTLE analysis

The main disadvantage is that PESTLE analysis is static in that it provides the outlook for the external environment at the time of completion (Ansoff et al, 2018). However, the environment is dynamic and the expectation is that the environment can change rapidly, be that the political landscape or economic growth. The Covid-19 crisis and constant changes to government policies (i.e. lockdowns) shows how dynamic markets could be. So, to take full advantage of PESTLE there needs to be constant updating and this creates another disadvantage of PESTLE being that it can become resource intensive for any business to keep updated. There is also the argument that while PESTLE showcases the opportunities and threats in the external environment it doesn’t provide an indication into how the business should react. Furthermore, PESTLE does not provide any indication over the businesses/ projects ability to react to these external influences. For instance, for retailer Harrods the PESTLE would reveal this increase in e-commerce as an opportunity driven by economic and social factors. Though it does not say how Harrods should take this opportunity and what strategy should be employed. Furthermore, it provides no indication into whether Harrods has the internal resources available to be able to benefit from this opportunity, or vice-versa to mitigate a potential risk. This would require further analysis using tools such as SWOT to cover the internal capabilities of the business plus Porter’s Five Forces which would consider the competitive environment. Because of this there is also the risk that the quality of PESTLE analysis can suffer is the person charged with completing this analysis does not have access to all the data sources needed to make a valid judgement. For certain factors such as economic there is a large amount of publicly available data available from sources such as the Office of National Statistics or IMF however for political factors there isn’t perfect access to information and thus the PESTLE analysis can miss some information.

Another disadvantage is PESTLE can be subjective. The example below provides PESTLE analysis for Tesla Inc. If the same analysis was run by another analyst/ researcher there is no guarantee that the same factors would be mentioned. Thus, to have an effective PESTLE process there is the need for a wide array of people to be considered to gain different viewpoints (i.e. from different parts of the business). One risk could be that if PESTLE analysis was completed by a financial professional in the business the results would be biased towards financial issues (Hunger, 2020).

Given that PESTLE analysis seeks to be a forward looking there is also the disadvantage that much of the data being used is based on assumptions: i.e. GDP growth for 2021. This is the nature of forward-looking analysis however it does again showcase the importance of having a PESTLE process which is constantly updated with new information given that factors can soon become outdated.

Finally, it must also be mentioned that PESTLE provides an oversimplistic view of the factor. For instance, Brexit could have been cited as a political risk for a project. However, this is a simple view of a complex issue. Further work needs to stem from this to determine what specific parts of Brexit would impact on the business/ project and how this could be mitigated. This would then spur more work into risk management whereby the business may have to use tools such as a Risk Matrix and Risk Register to centralise all these risks (both internal and external) and prioritise the use of finite resources to mitigate them (Hill et al, 2014).

PESTLE Example - Tesla

The example below considers Tesla Inc., and provides an example of the template and proposed structure of a PESTLE analysis. It shows that for each factor mentioned there needs to be some description into how this would impact Tesla Inc., in this case and whether it should be classed as an opportunity of threat. It showcases how the PESTLE structure makes it easy to categorise and understand the external factors to the business which can then inform further analysis (Harrison and John, 2013). However, this example also highlights some of the disadvantages of PESTLE being that factors can be oversimplified and it can be said that issues such as legal requirements related to employment law in China and Germany would require further analysis to determine the direct threats and how such can be mitigated. It is also clear from the example that multiple sources have been considered showing the need for PESTLE analysis to be conducted without bias, including multiple sources and multiple departmental input.

What is clear that this that PESTLE analysis alone cannot be used to create business strategy and acts as one stage to the process which then requires further analysis and work to be undertaken.

Political

Government net-zero legislation – The UK now has a legal obligation to achieve “net zero” by 2050 which links in with the Paris Climate Agreement (Brewis, 2019). To achieve this decarbonisation of the transport sector is key and thus the UK government has also announced the phase-out of petrol/ diesel vehicles by 2030. This represents an opportunity for future sales growth at Tesla.

Trade Issues – Trade concerns are rising globally leading to an increase in protectionist policies (Tovey, 2019). Tariffs between Europe and the U.S., and the U.S. – China could raise the costs of trade for businesses including Tesla. This is a threat.

Economic

Global Incomes – Global consumer incomes will continue to rise in markets making Electric Vehicles more accessible on price for consumers (Sloman and Jones, 2019). Opportunity.

Covid-19 – Forecasts from the IMF expected global growth to fall by -4.9% in 2020 and only partly recover in 2021 with all major economies experiencing a recession and only China growing out of the G20 (IMF, 2020). Threat to sales growth.

Social

Sustainable Shopping - Consumers are increasingly demanding sustainable practices in businesses to reduce their impact on the environment. Electric vehicles are in demanded due to it being carbon-free for of transport however there are growing worries over the environmental impact of the materials needed for the production of electric vehicles such as Lithium (Elkind, 2020). Opportunity and Threat.

Technological

Improved Battery Technology – Increased battery range for EV’s will make them attractive to more consumers and thus boost demand with the latest development in Tesla’s Model S having a 400 miles range per single charge (Goodwin, 2020). Opportunity.

E-commerce Vehicle Sales - Consumers are increasingly accepting of purchasing a vehicle online which for sellers has multiple benefits including reduce selling costs (no need for showrooms) and the ability to held less inventory allowing for just-in-time manufacturing (Kolodny, 2019). Opportunity.

Legal


Workplace Regulation – Expansion of production facilities into China and Germany means Tesla must obey by local workplace and employee regulation. Localised HR and legal teams will need to be established for compliance added business costs onto Tesla, though any non-compliance could lead to fines and negative PR in the country which will impact on brand power and sales. Threat.

Environmental

Climate Change – Due to growing concerns of global warming and ecosystem destruction consumers are choosing electric vehicles over petrol/ diesel (Woodward et al, 2020). Opportunity.

Wastage – Wastage remains a threat to ecosystems and sustainability. Hyman (2019) worries that growing sales of electric vehicles will create 250,000 tonnes of waste in the UK alone. This could create future liabilities for Tesla related to clean-up costs and thus is a threat.

References

Ansoff, H. I., Kipley, D., Lewis, A. O., Helm-Stevens, R., & Ansoff, R. (2018). Implanting strategic management. London: Springer.

Brewis, M. (2019). UK passes law to bring greenhouse gas emissions to 'net zero' by 2050 [online], Available at https://www.standard.co.uk/news/uk/uk-passes-law-to-bring-greenhouse-gas-emissions-to-net-zero-by-2050-a4176931.html.

Eden, C., & Ackermann, F. (2013). Making strategy: The journey of strategic management. London: Sage.

Elkind, E. (2020). How Sustainable is the Electric Vehicle Battery Supply Chain? New “FAQ” Released Today [online], Available at https://blogs.berkeley.edu/2020/04/15/how-sustainable-is-the-electric-vehicle-battery-supply-chain-new-faq-released-today/.

Goodwin, J. (2020). Tesla says Model S is the first EV to get 400 miles on a single charge [online], Available at https://edition.cnn.com/2020/06/15/cars/tesla-model-s-first-ev-400-miles/index.html.

Harrison, J. S., & John, C. H. S. (2013). Foundations in strategic management. London: Nelson Education.

Hill, C. W., Jones, G. R., & Schilling, M. A. (2014). Strategic management: Theory & cases: An integrated approach. London: Cengage Learning.

Hunger, J. D. (2020). Essentials of strategic management. London: Pearson.

Hymas, C. (2019). Britain faces 'waste battery mountain' as electric car use surges [online], Available at https://www.telegraph.co.uk/environment/2019/11/08/britain-faces-waste-battery-mountain-electric-car-use-surges/.

IMF. (2020). World Economic Outlook Update, June 2020 [online], Available at https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020

Kolodny, L. (2021). Tesla reports 499,550 vehicle deliveries for 2020, slightly missing target [online], Available at https://www.cnbc.com/2021/01/02/tesla-tsla-q4-2020-vehicle-delivery-and-production-numbers.html.

Parnell, J. A. (2013). Strategic management. London: Sage.

Rothaermel, F. T. (2016). Strategic management: concepts (Vol. 2). London: McGraw-Hill Education.

Sloman, J., & Jones, E. (2019). Essential economics for business. London: Pearson Higher Ed.

Tovey, A. (2019). Why Germany beat the UK to Tesla's European Gigafactory [online], Available at https://www.telegraph.co.uk/technology/2019/11/13/elon-musk-picked-germany-not-uk-teslas-europe-gigafactory/.

Woodward, M., Walton, B., Hamilton, J., Alberts, G., Fullerton-Smith, S., Day, E., & Ringrow, J. (2020). Electric Vehicles: Setting a Course for 2030. London: Deloitte Publications.

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