When it comes to starting a new business enterprise, there is no such thing as "too much preparation". A business in its early stages is just like an infant – fragile and vulnerable to many threats from the environment.
Therefore, to successfully guide it through these critical early phases of growth, you have to be aware of the surrounding environment. These threats are not just restricted to the field of business, the market, or the economy as a whole.
This is because business organisations do not exist in a vacuum, separated from the world we live in. Instead, they are an integral part of the economic, political, social, and other assorted spheres that exist in the world today.
Each of these can exert significant influence on a business, both positive and negative, of short and long duration. PESTLE analysis is an integral tool that is available to business owners and managers who want to assess the current business environment for opportunities as well as potential threats.
What Is PESTLE Analysis?
PESTLE is a handy acronym for the various aforementioned external factors. It stands for Political, Economic, Social, Technological, Legal, and Environment. Though useful at all stages of an enterprise's life cycle, it is most important when you are about to start a new business or venture into new markets or segments.
The primary utility of PESTLE is to give you a clear idea about your surrounding environment from the perspective of a business organisation. Are there any key opportunities that you can exploit for rapid growth? Alternatively, should you be focusing on any threats or hurdles that exist, or have a potential for materialising in future?
These are all questions for which you can find answers using this tool. The advantages are pretty self-explanatory, too – the lower the level of uncertainty in your business, the lower your risk. PESTLE analysis helps you plan for future contingencies.
It can be broken down into the following sections:
1. Political Factors
Politics can have a massive impact on business. Just take a look at what is happening in the United States or the United Kingdom at the moment. The ongoing trade war initiated by the US President has had a massive impact on US businesses with deep ties in China, while a hard Brexit in 2019 would be an enormous blow to any UK firm engaged in business within the European Union (and vice versa).
Political factors that could affect your business include elections, government formation, and their impact on issues such as taxes and trade. Political instability is yet another factor, with war, civil unrest and ongoing protests (such as those seen recently in France, Hong Kong and Venezuela) all capable of having a profound negative impact on your organisation's ability to operate effectively.
2. Economic Factors
The health of a country's economy is determined by a variety of elements, including political and social; these are all interconnected systems, after all. From a business perspective, factors such as inflation rates, current rates of interest set by the Central Bank, other fiscal policies of the government, and foreign exchange rate can all have massive implications.
Long-term economic trends can also determine the future trajectory of your business; therefore, effective planning requires a clear insight into the present economic climate. The future cannot be predicted with precision, of course, but you can still glean broad trends if you have enough information about the presence. For instance, some experts around the world consider another recession a likely event within the next 2-3 years.
3. Social Factors
Individuals exist as active members of a society and are shaped by their culture, customs, and conventions. However, these aspects do not remain static and can change with time. Business organisations need individuals in multiple capacities – as consumers, as employees/staff, and as representatives of other firms (vendors, clients).
Your business needs to be respectful towards the social and religious norms of your target market, too. Take dietary laws, for instance - in certain communities, specific food items such as beef or pork are forbidden. A company like McDonalds or KFC has to respect these social norms when crafting products for these markets.
4. Technological Factors
We are at a stage in history where technology is having an unprecedented impact on all aspects of life, including business. The capabilities enabled by the growth of the internet have revolutionised the way business organisations interact with their target demographics.
If you want to stay relevant in today's market, then you have to be aware of these technological changes, which, given the furious pace of development in IT and other allied fields, can admittedly feel like a tall order. Modern technologies are undoubtedly worth the investment, though, given the growth and productivity they facilitate.
5. Legal Factors
Businesses are bound by the laws of the land as well as any international treaties and agreements wherever applicable; statutory factors are closely related to the political environment. However, the legislature framed by the government is only a part of the legal challenges that your business will encounter.
Legal changes can also include landmark decisions made in courts, as well as new regulations framed by administrative and regulatory bodies appointed by the government. Ignorance of the law is no excuse if you get hauled into the courts for violations, either, particularly in common cases such as copyright infringement. It the responsibility of you, as the business owner, to keep abreast with any changes in the legal environment.
6. Environmental Factors
This refers to the physical environment in which we humans reside. Concerns about issues such as global warming and environmental degradation have reached unprecedented levels in recent years, with the climate strike undertaken by millions of schoolchildren, and the awareness efforts of Greta Thunberg, putting corporate responsibility firmly in the spotlight.
Consumers are getting increasingly concerned about the environmental impact of their actions, including any purchases they make in the market. They want sustainable and environmentally friendly products, from companies that are willing to do more to offset their carbon footprint.
The Significance of PESTLE and SWOT
PESTLE is an essential tool in your arsenal for future planning and management in business and is often used alongside SWOT analysis to present a complete picture of the current and future state of your business.
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. This analytical tool focuses on the internal aspects of your business organisation, while PESTLE is almost exclusively concerned with the external elements.
To get the maximum benefits from either tool, you need the other; this is why most businesses use them in conjunction with each other. In reality, though, you don't have a choice when it comes to PESTLE and SWOT. They are indispensable tools for the continued survival and success of any enterprise, irrespective of its size, nature, or location.
Do you apply PESTLE analysis to your business? How useful is it? Let us know your experiences in the comments below.