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What is PESTLE Analysis? A Tool for Business Analysis

What is PESTLE Analysis? PESTLE analysis, which is sometimes referred as PEST analysis, is a concept in marketing principles. Moreover, this concept is used as a tool by companies to track the environment they’re operating in or are planning to launch a new project/product/service etc.

PESTLE is a mnemonic which in its expanded form denotes P for Political, E for Economic, S for Social, T for Technological, L for Legal and E for Environmental. It gives a bird’s eye view of the whole environment from many different angles that one wants to check and keep a track of while contemplating on a certain idea/plan.

The framework has undergone certain alterations, as gurus of Marketing have added certain things like an E for Ethics to instill the element of demographics while utilizing the framework while researching the market.

How to write a PESTLE analysis from scratch : There are certain questions that one needs to ask while conducting this analysis, which give them an idea of what things to keep in mind. They are:

· What is the political situation of the country and how can it affect the industry?

· What are the prevalent economic factors?

· How much importance does culture has in the market and what are its determinants?

· What technological innovations are likely to pop up and affect the market structure?

· Are there any current legislations that regulate the industry or can there be any change in the legislations for the industry?

· What are the environmental concerns for the industry?

All the aspects of this technique are crucial for any industry a business might be in. More than just understanding the market, this framework represents one of the vertebras of the backbone of strategic management that not only defines what a company should do, but also accounts for an organization’s goals and the strategies stringed to them.

It may be so, that the importance of each of the factors may be different to different kinds of industries, but it is imperative to any strategy a company wants to develop that they conduct the PESTLE analysis as it forms a much more comprehensive version of the SWOT analysis. Here’s  how to write your first SWOT analysis .

It is very critical for one to understand the complete depth of each of the letters of the PESTLE. It is as below:

1. Political factors

These factors determine the extent to which a government may influence the economy or a certain industry. For example, a government may impose a new tax or duty due to which entire revenue generating structures of organizations might change.  Political factors  include tax policies, Fiscal policy, trade tariffs etc. that a government may levy around the fiscal year and it may affect the business environment (economic environment) to a great extent.

2. Economic factors

These factors are determinants of an economy’s performance that directly impacts a company and have resonating long term effects. For example, a rise in the inflation rate of any economy would affect the way companies’ price their products and services. Adding to that, it would affect the purchasing power of a consumer and change demand/supply models for that economy.  Economic factors  include inflation rate, interest rates, foreign exchange rates, economic growth patterns etc. It also accounts for the FDI (foreign direct investment) depending on certain specific industries who’re undergoing this analysis.

3. Social factors

These factors scrutinize  the social environment of the market , and gauge determinants like cultural trends, demographics, population analytics etc. An example for this can be buying trends for Western countries like the US where there is high demand during the Holiday season.

4. Technological factors

These factors pertain to  innovations in technology  that may affect the operations of the industry and the market favorably or unfavorably. This refers to automation, research and development and the amount of technological awareness that a market possesses.

5. Legal factors

These factors have both external and internal sides. There are certain laws that affect the business environment in a certain country while there are certain policies that companies maintain for themselves.  Legal analysis  takes into account both of these angles and then charts out the strategies in light of these legislations. For example, consumer laws, safety standards, labor laws etc.

6. Environmental factors

These factors include all those that influence or are determined by the surrounding environment. This aspect of the PESTLE is crucial for certain industries particularly for example tourism, farming, agriculture etc. Factors of a  business environmental analysis  include but are not limited to climate, weather, geographical location, global changes in climate, environmental offsets etc.

There are many  templates  available for companies to conduct PESTLE analysis. Many organizations have provided information regarding their PESTLE analysis as  case studies available  on the Internet.

Example:

PESTLE Analysis of Walmart

 Kiesha Frue Apr 2, 2020

Walmart is a popular department store and online retailer. It’s so popular, you likely have at least one store twenty minutes (or less) away. Founded in 1962, Walmart now has thousands of stores located within the United States and worldwide.

Walmart’s aims offer discounted products — everything from yarn to beer is available down its many aisles. Or you can find even more exclusive products on the online store.

In this PESTLE analysis of Walmart, you’ll see how corporations face many challenges, particularly related to the six primary macro-environmental factors, including politics, technology, and legal factors.

Read also: PESTLE analysis of the Retail industry

Political factors: Political (in)stability impacts Walmart’s operations

Walmart is a globally recognized department store. The company serves over 250 million customers globally every week. But because it operates all over the world, Walmart has many policies it must follow. It’s a tall order, but something it can’t ignore.

Policies can directly influence Walmart’s manufacturers and suppliers. If Walmart doesn’t operate in politically stable locations, any interruption could impede operations. For instance, Walmart suffered profit loss in Chongqing, China. One store sold prohibited products to the Chinese public, and the government was quick to not only stop the selling of the product but all products sold by Walmart (temporarily). Governments can be quick to intervene when a company fails to follow policies.

Additionally, governments can pass bills that threaten the revenue of corporations. Walmart and its eCommerce rival, Amazon, were affected by a bill to raise the minimum wage of workers to $15 an hour. It’s a positive move for workers but cuts into the bottom line for Walmart. If it didn’t follow the bill, stores in the state would be shut down quickly.

Economic factors: A volatile economy leaves Walmart with little option

Walmart, like any other corporation, is affected by economic stability. Walmart is known for low prices of goods. However, if the economy hits, it may require production to go up. If it does, Walmart will have to raise the price of goods. Customers won’t be happy.

If Walmart doesn’t raise its costs, it won’t be able to compete with other brands. These brands can likely raise prices and maintain good margins in ways that Walmart can’t. What’s more, customers are only buying the necessities when the economy tanks, so many of the products offered by Walmart will stay on the shelf indefinitely.

Since the economy can change based on the country, Walmart needs to be aware of the economic landscape in each location where stores operate. Some locations may have higher interest rates or taxes, which will also affect potential revenue.

Sociocultural factors: Failing to position itself to global audiences

Despite Walmart’s global recognition, it’s not necessarily a popular place to shop. For instance, Germany’s lack of interest cost Walmart over $1 billion. This was more an issue from Walmart, as they failed to properly market to the German audience. Walmart is an American brand, but by not adjusting its marketing to fit the German market, it led to heavy revenue loss.

Global brands can only be successful if they understand how to supply specific products to customers. For instance, providing healthy food to the health-conscious crowd. Walmart now provides organic and healthy foods for this demographic. It’s a smart move, and many businesses are currently or already have done.

To cater to more people easily, Walmart has put more focus on the user interface of its eCommerce store. Customers can order products to their home or the closest store. They can also have workers pick up groceries in the store and deliver it to customers in their vehicles. Although it’s used regularly, Walmart still isn’t close to beating out its eCommerce competitor, Amazon.

It’s beneficial though, especially for customers who can’t make it into the store, like the elderly.

Technological factors: Automation, robotics, and digital transformation

For more efficiency behind the scenes, Walmart has adopted automation and robotics. The technology can fulfill orders, streamline production, and help with keeping the store clean.

Adopting automation is a form of digital transformation, which uses automated technology to create more efficient business processes. With a brand as big as Walmart, automation is an expected step for the business to take. By allowing robots to handle menial tasks, employees can focus on selling products without distraction.

Additionally, the online shipping aspect reaches more people. Most people are either using a laptop, mobile devices, and tablets. It also means it can set up paid online ads to direct customers to the website from search engines.

Legal factors: Failure leads to $65 million loss

Walmart must abide by the laws and regulations of the world. The most common of these laws include employment regulations, data protection laws, labor laws, and health and safety laws.

Despite needing to abide by these rules, Walmart has failed in California. The company agreed to pay $65 million to 1000 current and past employees who say Walmart didn’t provide seating accommodation to employees. Rather than suffering through a lengthy trial, many corporations of Walmart’s size will agree to settle out of court.

Environmental factors: A sewage fiasco

Walmart receives backlash for improperly dumping pesticide and hazardous fertilizers, which found itself into the sewage pipes. After being caught, the company initiated Project Gigaton — the premise is about preventing a gigaton of emissions over the next ten years. Several companies, like Target, have made similar eco-friendly promises.

Bottom line:

Now a household name around the world, Walmart is one of the most successful stores in economic history. It’s expanded rapidly, with one available in nearly every country. Such rapid expansion and popularity means Walmart needs to stay up-to-date with the latest legal and political regulations. Otherwise, it risks shutting down, as one store did in China after failing to follow Chinese government policies.

Walmart must focus on providing the right products to specific — what Americans need may differ from what Germans in Germany desire. By failing to offer the right product, the company will likely lose profits. It also needs to continue with Project Gigaton — cutting a gigaton of emissions by 2030 — as the company has made a promise to the public. Eco-friendly customers won’t stick around if Walmart fails on this front.

Read also: SWOT analysis of Walmart