PESTLE analysis is a strategic management technique that can be used to evaluate and assess the risks outside the firm. Let us see a PESTLE analysis example to learn how to do this analysis.
PESTLE Meaning
The word PESTLE is an acronym consisting of the different aspects of this analysis. PESTLE analysis is a strategic planning tool where we look at external factors like political, economic, social, technological, legal, and environmental. Now, let us look at the different factors within the PESTLE analysis:
Political
These factors determine the impact of the government or the regulatory body that governs the country of operation for the form. Any changes that are brought about by the government can have an impact on the profitability of the firm. These changes could be related. The fiscal policy as well as the monetary policy of the government can impact businesses. Additionally, there could be some changes in the form of taxation that is levied on the organization. At the same time, there are certain other political benefits to some of the companies that can benefit by setting up their forms in special economic zones. Also, there are other political benefits for new startups like deferred tax liabilities.
Economic
The economic factors are those factors that are related to the macroeconomic aspects of a country. Any changes in economic growth, inflation, interest rates, etc would have an impact on the supply and demand for the products. This would in turn have an impact on the profitability of the firm. Generally, there are methods to counteract these changes. The finance department has the responsibility of monitoring for risk exposure due to Forex and interest rates. They also plan and mitigate these risks.
Social
Another critical aspect to consider is the social aspect that surrounds a firm. A firm does not work in isolation. The firm works in tandem with the social logical fabric around it. It is a two-way relationship between the firm and society. The sociological aspects are the cultural trends, the population changes, as well as general demographics. These have an impact on the functioning of the firms. For instance, if a firm operates in a western country, the business model would be different. On the other hand, the business model would change in another country.
Additionally, there are some other inseparable parts of the socio-cultural environment. Namely, the belief system, religion, societal norms, and values. These cultural aspects will shape how you communicate and deliver value to the customers.
Technological
Technology is something that converts into two outputs for the firm. Just like any other factor technological aspects can have a positive or negative impact on the firm. For instance, contemporary technologies like industry 4.0, artificial intelligence, machine learning, and automation would shake things up.
Certainly, new technologies or breakthroughs in technologies can help increase efficiency. Consequently, this would impact the bottom line of the firm. At the same time, there is also a threat to technology becoming obsolete. Moreover, obsolete technology can threaten the market share for the firm.
Legal
These are certain legal aspects that are important to the firm. So we must critically think about this. Secondly, we must introspect the entire legal framework in the places of business. Every company has to abide by certain laws of the land. Also, company laws need to be followed very strictly. At the same time that are certain policies that are established by the local bodies. So we need to follow them too. When we devise a strategy for the firm, we should change sure that we fall within the legal framework.
Apart from The company laws, there are other kinds of laws. We must consider these too. For instance, the laws that are related to consumer rights. Also, the laws that are related to the safety standards as well as a certain type of labor laws.
Environmental
Finally, we come to the fifth of the PESTLE analysis. The environmental factors are embedded in the physical space around the firm. These facts Or not just related to the ecological aspects but also to the geological ones. The changes in geographical location and the changes in the availability of natural resources could be threats or opportunities. These changes could be either due to internal or external factors.
More often than not the company’s are predominantly focused on the economic benefits. At the same time, they overlook the environmental aspects. On the other hand, the sustainable development goal directs the form of environmentally friendly business policies.
PESTLE Model
This technique is quite popular among strategy management professionals. The genesis of this tool can be traced to the book ‘Scanning the external environment.’ However, the original model only included four of these aspects namely the economic technological political and social. It can be done along with other analysis such as the SWOT analysis.
The basic necessity of PESTLE analysis arises because of the uncontrollability of the external factors. This model can help businesses achieve higher performance. Additionally, it can also be used to design the marketing mix and the firm’s strategy. Let us look at a PESTLE Analysis example to illustrate this model. We have taken the case for Tesla motors for this PESTLE Analysis example. Tesla is currently one of the most valued automotive brands in the world.
PESTLE Analysis example for Tesla
Let us do the PESTLE analysis example for Tesla motors. Tesla is one of the pioneers in electric mobility. This company has been striving towards the creation of cars that have a minimal environmental impact. However, just being green isn’t enough the company has revolutionized how we look at the electric vehicles by providing performance-focused cars.
Now let’s do PESTLE analysis for this firm and analyze how the external environment shapes the strategy for the firm.
Political factors
The political factor around electric vehicles is quite conducive right now. there is a positive charge from the government towards the adoption of renewable energy. This also gets manifested towards the government initiatives and incentives towards zero-emission vehicles. There are subsidies offered to customers who buy electric vehicles. Countries like Germany have pledged to replace all internal combustion engines by 2030.
However, there are also a lot of negative political factors. Firstly there is an ongoing trade war between the US and China. This is a potential threat for American companies that plan to sell their products in China. Similarly, a shift towards nationalistic policies across the world has increased the tariffs on American products.
Economic factors
The contemporary economic downturn due to Covid19 seems to be overpowering for the companies. Moreover, the automotive industry is one of the most impacted by a recession. Additionally, it seems that Covid19 may lead to economic depression worldwide. That could be bad news for Tesla.
Meanwhile, the uncertainties in the international economic landscape also add a burden to the financial management of a firm. Tesla plans to be a global leader in the world of the new age of automobiles. This could be threatened by global volatility.
Social factors
One of the good news for Tesla is that there is upward social mobility across the world. Countries like China India and Brazil could be one of the biggest markets for companies like Tesla. Also, there is an increase in the aspirational value for luxury cars. Meanwhile, there is an increasing acceptance of environmentally friendly products in society.
That being said there are also some social factors that could threaten the business of this firm. Firstly there is a growing fear against artificial intelligence. People are skeptical of technologies that they don’t understand. Media and newspapers have done their own bit of damage to this fear. They have provided fuel to this fire by publishing negative content against AI and AI-based technologies.
Technological factors
Some of the biggest advantages for Tesla are embedded in technological dependencies. The development of high-efficiency batteries would make Tesla more viable in the future. Another benefit of Tesla is that it learns through the driving behavior of all its consumers. The machine-learning algorithm then gets better and better. which means that they would be few are accidents of self-driving cars.
Tesla holds proprietary technologies machine learning algorithms. Additionally, there is organizational learning that is happening. Tesla is building capabilities around these novel technologies. It creates a barrier for new firms entering this industry.
However, Tesla could also face competition from companies that have very deep pockets to spend on R & D.
Legal aspects
As we have already discussed there are a lot of legal aspects that could help Tesla in running their businesses. The legal framework in the United States is conducive to the company. However, in the age of globalization, things are different. International legislation may be much more important than a local one.
There are also certain industry-specific aspects that could impact businesses. In the case of Tesla, this could also play a major role. Tesla wanted to enter the solar panel business. They had an excellent business plan. However, competing business lobbies ruthlessly derailed the entire business plan.
Secondly, we also need to look at the consumer side of the story. Tesla stands on very slippery ground here. There are very strong consumer protection laws in the United States. We have read and seen in numerous negative cases. Cases where self-driving cars from Tesla caught fire. Cases where these cars had major accidents. These accidents have drawn expensive suits against this company.
Environmental factors
Tesla’s environmental approach is quite positive. Especially, when we compare it to other automotive firms. It gives benefit due to its zero-emission. Tesla could be the answer to global ecological problems. It has the potential to reduce air pollution. For instance, automotive accounts for around 20% of the total air pollution. In this PESTLE Analysis example of Tesla, environmental factors are quite positive overall.
On the other hand, this company also needs to take care of the sustainability triad: people, profit and planet. However, they have not focused on their own people. This form has faced criticism because of the mistreatment of its employees. Employees have a complaint about overworking burnout and fatigue. A responsible company takes care of its staff moral. Secondly, good companies pay attention to all aspects of corporate social responsibility.
PESTLE Analysis template
Finally, let us enlist the step by step process. This is an easy to follow PESTLE analysis template. You can use any word processing application like MS Word or LibreOffice to create the PESTLE report. Alternatively, you can also use presentation software like Powerpoint or Keynote. You can even try out any other company or project using this PESTLE Analysis example.
How to do a PESTLE analyis?
- Call for a brainstorming session with the team
The members need to be briefed with the objectives of the session. You can also check out 3 ways to do brainstorming effectively.
- Assess all the six aspects individually
Ask the participants to list all the factors that could negatively or positively impact the firm.
- Prepare the PESTLE report
Enlist the most important points after voting from the team members.
- Risk Assessment and Opportunity planning
Ask the participants to evaluate the urgency and importance of the risks. Also, develop a proactive strategy to make use of the changes in the external environment.
Important questions
Evaluating external risks is extremely important because these are the risks that are beyond the control of a company. Also, we have fewer data about the external environment compared to the internal environment of a company. A failure to assess and respond to an external threat can lead to losses for the company.
PESTLE analysis can be done with SWOT analysis. We can use this analysis to fill out the quadrants in the SWOT matrix.
The PESTLE analysis is a fairly straightforward tool. It is easy to use and it is well understood by a lot of people.
This tool can also be used in tandem with other strategic tools like brainstorming and SWOT analysis. Overall this tool helps the firm brace itself against the threats. Additionally, it also helps the firm increase its profitability.
One of the limitations of pestle analysis is that the results are highly dependent on the rigor of the analysis.
The external landscape of a firm is a dynamic picture. Often times, the managers do not take this changing perspective into account. Finally, people may fall prey to the thinking that they can fully understand the external factors.
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