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What is PESTLE Analysis?

Submitted by AbhaPandey on Mon, 2011-09-26 08:33
sxc.hu

Originally known as PEST Analysis, this is a macro environmental framework used to understand the impact of the external factors on the organization and is used as strategic analytical technique. PEST stands for "Political, Economic, Social, and Technological” factors.

Francis Aguilar is referred to as the originator of this tool. He talked about ETPS – Economic, Technological, Political, and Social– as the four important factors for Scanning the Business Environment. Later Legal and Environmental factors were also added by some analysts and thus evolved the term PESTLE Analysis.
 
Let us examine these factor in a bit more detail.
 
Political Factors affects the organizations in terms of government regulations and legal issues and define both formal and informal rules under which the firm must operate. Examples are:

  • Political stability
  • Tax policy
  • Employment and labor law
  • Environmental regulations
  • Trade restrictions
  • Tariffs etc

 
Economic factors affect the business operations and decision making of the organization. For example the predicted recession is preventing the organizations from increasing the workforce . Other examples are:

  • Economic growth
  • Interest rates
  • Inflation rate

 
Social factors refer to the cultural and demographic aspects of the environment. For example increase in the health consciousness may affect the demand of the company’s product. Other factor includes:

  • Age distribution
  • Population growth rate
  • Emphasis on safety
  • Career attitudes

 
Technological factors affect the cost and quality of the outputs. These also determine the barriers to entry and minimum efficient production level. Factors include:

  • Automation
  • Technology incentives
  • Rate of technological change
  • R&D activity

Legal factors influence the company’s operation, its costs, and the demand for its products. Factors include:

  • Consumer law
  • Antitrust law
  • Employment law
  • Discrimination law
  •  Health and safety law

Environmental factors refer to ecological and environmental aspects such as weather, climate, and climate change. Climate change is a hot topic these days and organizations are restructuring their operations thus giving space to innovation and concept of Green Business.
 
Use

PESTLE Analysis is used to examine the current and future state of the industry an organization belongs to. This helps in the strategic planning and gaining the competitive edge over the other firms in that industry.  This analysis can not only be used for an organization as a whole but various departments can also be inspected under this framework. For example, it makes more sense for a company with diversified product range to analyze its departments separately than the organization as a whole.
 
Importance of the factors varies depending on the nature of the industry and company. For example environmental factors are more important to tourism sector where as economic and plotical factors are more important for the Banking sector.
 
Let us see how the HR department can be analyzed using this technique:
 
Political Factors

  • The HR Policies of the organization
  • How are the HR function viewed by share holders and other functions?
  • Who are the political champions of HR?

Economic Factors

  • Financial position of the organization
  • Approved budget for HR Dept
  • Customer’s willingness to spend money on the services offered
  • Inflation
  • Salary trends in the sector

Sociological Factors

  • Other departmental attitudes to HR
  • Age profile
  • Education and Attitudes to career
  • Diversity
  • Health

Technological Factors


Abha Pandey
Business Analyst, with experience in Requirement Gatherings and Business Process Consulting
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