What is PESTLE analysis?
I’m really pleased to share with you that our blog post in October 2015 on SWOT analysis generated a lot of interest, plenty of hugely insightful comments (140 at time of writing) and discussions in the LinkedIn Strategy Consulting group. There were several other associated topics that were raised by members of the group, and as a result we are delighted that Jim Whitney has offered to do a guest post on ‘What is PESTLE analysis?’ for us.
Jim is a senior consultant with Desai Management Consulting, LLC, in Vermont, USA. He has over 30 years’ experience in the corporate, nonprofit and government sectors, and has taught undergraduate- and graduate-level courses in strategy for many years.
Jim’s contributions to the discussion were invaluable, so we hope that you enjoy his post.
What is PESTLE analysis?
PESTLE is an analytical tool for strategic business planning. It provides a strategic framework for understanding external influences on a business.
Scanning Political, Economic, Societal, Technological, Legal, and Environmental trends and events prompts strategists to continually examine the external business environment, consider what may (or may not) be changing, emerging or fading, and determine whether those changes represent opportunities, threats, or uncertainties. Whereas SWOT is sometimes criticized for only providing a snapshot of the present, PESTLE looks at the past, present and future, recognizing that organizations operate in a Darwinian ecosphere, and only the adaptable survive.
Where to start with PESTLE analysis
Let’s take a look at how to get started with PESTLE analysis:
- Look at each of the PESTLE stimuli one by one
- Ask what is new or changed – new actors entering the scene, known actors leaving or changing roles, new or changing trends, new data about previous observations?
- Has anything not changed, contrary to expectations?
- Draft a “laundry list” of items of interest,
- Borrow a concept from wave physics and look for constructive or destructive interference. Interference occurs when trends or events interact to reinforce or counteract each other’s impact. An organization gains a competitive edge when it acts on potential interference, anticipating the effect of a future interaction before competitors have an opportunity either to influence inputs, or prepare for a potential outcome.
Trends or events in the external business environment can span multiple PESTLE categories. Don’t waste time struggling with which PESTLE category best fits an observation; the category labels are intended as stimuli for strategic analysis, such that no category is overlooked. Evaluate, weigh and categorize observations based on what most influences a trend or event; some will be insignificant at present, tabled for the present without further consideration.
Act on observations
Significant observations merit a plan to exploit attractive opportunities, mitigate potential threats and track anything presenting too little data to characterize with confidence. Note that trends and events classified as unworthy of immediate attention should remain on the radar for possible re-evaluation – environmental scanning is a process of continuous observation and evaluation – a confluence of later events may radically alter the trajectory of a trend or the significance of an event, reversing prior judgment of its importance.
Some observations may have sufficient potential to demand a direct response, even before considering possible interactions. PESTLE analysis is pointless, unless an organization is prepared to act on what it reveals.
Stimuli broken down
The potential impact of political change is often obvious, but the effective strategist doesn’t wait for change to occur, whether on the local, state, federal, or international stage. Rather, the strategist anticipates what could happen, determines if or how the organization can (legally) influence the outcomes, and plans what can be done to defend against adverse outcomes. Alternately, one may prepare to exploit favorable circumstances before the competition recognizes that an opportunity is about to appear.
Economic change is notoriously difficult to predict, although PESTLE analysis can enable an organization to catch warning signs as early as possible. Demographic trends already underway suggest a variety of economic impacts , positive or negative depending on the industry, with ripple effects in virtually all the other PESTLE domains.
Societal change tends to move slowly, absent a crisis, but is frequently ignored due to ideological prejudices, simple denial, or a lack of observation. Such an example is the increasing acceptance of same sex relationships in American society, which is anathema to some interest groups, but in Vermont, where I live at present, the local tourism industry has been welcoming and growth in the sector has remained strong.
Technological change can seem to burst onto the scene with little apparent warning, but hindsight often reveals the signs of change were in place, had anyone looked. Patent applications and changes in hiring or layoffs are obvious considerations (not only quantitative changes; also look at which skill sets are added); unusual equipment purchases by competitors can also be telling.
A subtle and dangerous technology-driven threat is present when a disruptive technology gains ground – organizations focused on their traditional competitors may fail to see the threat from new entrants, who satisfy consumer demand with unconventional products. Many in the Millennial or later generations do not and never will own a watch – their omnipresent cell phones provide time digitally, accurately and conveniently, automatically adjusting for daylight savings time and not requiring tedious adjustment to fix the date when the previous month had fewer than 31 days.
Theodore Levitt’s classic 1960 Harvard Business Review article, “Marketing Myopia,” describes how failing to expand or redefine organizational identity in the face of emerging technologies, with their ripple effect on other areas, can blind organizations to opportunities and threats alike.
Legal (and regulatory) changes frequently have long trajectories, with comment periods and multiple drafts available in advance of final passage. The challenge lies in discovering what new laws or regulations are being introduced, so one can influence the authors and other sponsors early in the process. This subject area is further complicated by parties simultaneously acting at the local, state and federal levels (or their political equivalents outside the U.S.), often with conflicting agendas. “Copetition,” a term coined by Yale professor Barry J. Nalebuff and Harvard professor Adam M. Brandenburger, denoting cooperation on shared interests among competitors, is a modern take on Kautilya’s 2400 year-old observation that “the enemy of my enemy is my friend.” It is as pertinent today as it was two centuries ago, and is particularly applicable in the legal and regulatory environment. Membership and participation in special interest groups such as NGOs or trade associations can leverage these common interests, as these groups often have the resources to research and/or lobby on behalf of members, spreading the cost across many parties.
As with societal changes, change in the natural environment is often slow paced and ignored due to ideological influences – witness the ongoing debate over climate change. Using another Vermont tourism example, fall foliage and skiing are major economic drivers, both threatened by climate change. The leaves still turn and the snow still falls, but many tourism-related businesses are introducing new services, offering a variety of new attractions and services in other seasons, defending against a future that may see less snow and duller foliage.
Great examples of who acted and who didn’t
Verizon foresaw the potential impact of cellular phones, introduced cell service (examine uncertainties), built a cell network (exploitation) and divested itself of landline assets (mitigation). AT&T failed to see the future, clung to its core strength, and was ultimately bought for the value of its name recognition, rather than its physical assets.
Energy giant Shell’s use of PESTLE and scenario planning, a powerful tool well suited to leveraging the outputs of PESTLE, allowed it to mitigate the impact of the oil crisis of the 70s, saving it billions of dollars. Others saw the same trends (political), but failed to project their potential impact (economic, social, technological, legal, and environmental) or prepare for those eventualities.
Fear of cannibalizing current product technologies is a common pitfall among industry leaders, prompting organizations to ignore or deny observed signals – IBM sacrificed its advantage in the PC market to clones, choosing to defend “big iron” rather than fully embrace personal computing. Kodak had an early lead in digital photography, but did not exploit it, fearing its impact on film.
PESTLE, in short, is a tool to enhance the strategist’s perception and prepare contingency plans for the future. It does not, of itself, create strategy – it highlights areas where an effective current strategy may falter as the business environment evolves, missing opportunities and falling victim to threats. Recall Charles Darwin’s quote, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one most adaptable to change.” Use PESTLE, adapt faster than the competition, and survive.
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