Introduction to PESTLE Analysis: Why a Systemic Approach is Best

‍Political factors include: tax policy, regulations, government stability, rule of law, levels of political corruption or bureaucratic red tape, and possible major changes via new legislation or disruptions in the political environment. 

Economic factors include the overall stage of the business cycle, potential for economic growth or contraction, interest rates and inflation, labor costs and labor supply, unemployment rate, impact of new technology on the economy, impact of globalization on the economy, levels of disposable income and income distribution. 

Social factors include the demographic characteristics and attitudes of the population. Questions to ask regarding social factors include: is the population aging or youthful, growing or stagnant or shrinking? How healthy, educated and socially mobile are people? How do people feel about their job prospects and the condition of their society? What are some of the big new/emerging lifestyle trends? 

Technology factors include: emerging technologies, R&D activity, job automation, the rate of technological change, and the impact of technology on how people live and work – such as an increase in remote working, reduced communication costs, rising demand for new technology products, and more. 

Legal factors include: the laws and legal framework that affect the organization’s environment – such as health & safety laws, employment law, consumer law, and antitrust law.  

Environmental factors are any of the trends or impacts of the literal “environment” itself – ranging from natural disasters to climate change, from environmental regulations to rising demand for eco-friendly “green” products.

These factors provide a useful structure to think about all the elements that make up the external environment where an organization operates. 

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Why PESTLE Analysis Matters

All of these PESTLE factors can have a profound impact on an organization’s strategic options and market position, and all of them are typically beyond the organization’s control. 

This is an important difference from a SWOT analysis, because unlike organizational Strengths and Weaknesses, none of the PESTLE factors are directly or inherently related to the organization’s operations or culture; at its best, PESTLE analysis is a more in-depth and thorough way of thinking about the “big picture” of the external environment – in the short-term and long-term – affecting the organization and setting the possible parameters for the organization’s success. Ideally, PESTLE analysis should provide a supplemental foundation for SWOT analysis, as leadership teams identify key drivers of change that affect their organization and industry – first evaluate the external environmental factors and general industry trends that are beyond your control (PESTLE), and then focus on the external and internal elements that are specific to your organization and more likely to be within your control (SWOT). 

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Shortcomings of Traditional PESTLE Analysis 

Many business school students and business world leaders make a mistake when utilizing PESTLE analysis: they treat it more as just a categorical listing of factors. But it’s more than that! If you are using PESTLE analysis, you need to think broadly and deeply about “big picture” issues. You need to see the forest, not just the trees. You should not examine each PESTLE factor as a separate phenomenon or its own little “box;” instead, you need to integrate all of the PESTLE factors with systems-oriented thinking.

Because the truth is: none of these PESTLE factors operate in isolation – all of them are inter-related! For example, Political developments can often affect Economic performance (the government announces new tariffs or changes in trade policy); Social trends both inform and are influenced by Technology (people love sharing selfies on their smartphones!), and Legal and Environmental factors can be reflected in any or all of the other factors mentioned, such as lobbying organizations demanding a higher minimum wage or bringing litigation related to health and safety regulations, or rising demand for wind and solar power, or the growing cultural cachet of bike commuting and eco-tourism, or environmental groups lobbying the government for stricter fuel efficiency standards for auto manufacturers.  

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Call for a Systemic Approach

For this reason, PESTLE factors cannot be put into narrow categories or isolated boxes. We believe that PESTLE factors exist within broader systems of integration and inter-connectedness that create a more complex picture of the biggest forces affecting an organization’s performance and driving strategic options. For these reasons, we believe that a systemic approach to PESTLE analysis is the optimal method to utilize this strategic tool. 

Instead of writing out a PESTLE analysis with a simple table format with lists of factors, we recommend mapping out the PESTLE factors in a more expansive “web” of an inter-connected diagram. The “web” image is useful because it can help you visualize your organization’s external environment more vividly, by seeing the connections between the various factors, and by generating new ideas and greater clarity.

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BONUS: Five Forces Framework

One of the most effective ways to think about the external environment in union with PESTLE is using Michael Porter’s “Five Forces Framework,” which encourages strategists to use a broad perspective on their competitors, industry economics, and other external actors and influences that affect the competitive landscape. 

Porter’s Five Forces are: 

1. Threat of new entrants
2. Bargaining power of suppliers 
3. Jockeying for position among current competitors
4. Bargaining power of customers 
5. Threat of substitute products or services 

How can you find a comfortable, profitable, sustainable strategic position for your organization among these five forces? Porter writes: “stake out a position that is less vulnerable to attack from head-to-head opponents, whether established or new, and less vulnerable to erosion from the direction of buyers, suppliers, and substitute goods.” 

Possible strategies include: build stronger relationships with profitable customers, differentiate your product (with marketing or product redesign), integrate your operations, or gain technical leadership.   

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Conclusion

Every organization operates in a complex, dynamic environment affected by multiple simultaneous and ever-shifting forces, trends and influences. A mere “list” of factors or categories cannot capture this reality. PESTLE analysis can be one of the most worthwhile tools for strategic analysis – but it should be done with an attitude of systems-oriented thinking. Keep in mind that every PESTLE factor is interconnected to the others. Don’t just make a list; map out a diagram of PESTLE factors that accounts for the complexity and interwoven fabric of your operating environment. By thinking broadly and deeply about the systemic nature of PESTLE factors, your organization will benefit from a more thorough understanding of your challenges and opportunities – and you’ll be ready to move forward with better-informed, more focused strategic planning.

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Download the full publication and free PESTLE worksheet:

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