PESTLE – A strategic tool for analysing external factors

PESTLE

PESTLE is a fairly simple, classic and helpful strategic decision making tool used to guide consideration of external factors when assessing the strategic direction and projects of an organization.

It basically says that when making decisions about the strategic direction and projects of an organization, you need to consider the wider context the organization operates in by analysing the Political, Economic, Social, Technilogical, Legal and Environmental contexts.

The purpose of establishing this understanding is to identify and manage organizational risks and opportunities by taking strategic actions and making strategic changes in relation to them.

The concept of scanning the wider context that organizations exist within to identify changes that might be strategically significant for the organziation has been around for quite some time. This approach was somewhat formalized in the second half of the 20th century, resulting in the general acceptance of the PESTLE model as a tool for doing this.

Sometimes people just use the first part of this model and refer to doing a PEST analysis, which is how the model was originally formulated. The LE were appended in our own working lifetime, leading to the PESTLE model.

Whatever we end up using, the objective is to come up with a fairly complete understanding of the factors shaping the ecosystems our organization exists within, so that we can change and evolve for the best liklihood of future success.

Political:

When scanning the political context the organization is operating in we should gain insight on the current state and evolution of government policies, regulations, and the overal level of political stability.

Changes in government, tax policies, trade tariffs, and labor laws can significantly affect the ecosystem an organization operates in, and thus how businesses should operate for success. Understanding political trends can help organizations to anticipate change and adjust their strategies accordingly.

Economic:

This is all about the economic aspects of the ecosystem and can include factors such as inflation rates, interest rates, economic growth, exchange rates, employment rates, input costs, yield curves, capital availability, required returns on investment, and so on. These factors play a huge role in determing what organizations need to do to be deemed successful, thus they affect an organizations strategic decision making.

Social:

At this stage of analysis, strategic decision makers need to consider the social and cultural aspects that affect an organization. Ultimately these factors affect potential consumers, employees and other stakeholders, so hugely affect the potential success of an organization. Specific areas that an organization should consider include social trends, changes in social values (or the polarization of a population), demographics, education level, lifestyle changes, key social issues, and so on.

Technological:

They say that the pace of change is always accelerating and changes to our technological landscape can hugely disrupt organizations. Those who adopt new terchnology well can gain material advantages (e.g. Netflix moving to the cloud), those who fail to do so can fail (e.g. Blockbuster sticking with physical video rentals).

Factors to consider here include product specific advances as well as automation, improved back office technologies and things like the rise of Artificial Intelligence. Adapt or die is another phrase that rings true in relation to changing technological landscapes.

Legal:

Legal considerations involve current and impending legislation that affects business operations. These can be things like legislation around emplyment contracts, working hours, data protection, health and safety, emmisions standards, intellectual property, reporting and disclosure requirements, or anything else relevant to the organization in question.

Obviously, these pieces of legislation shape how organizations must opporate to be legally compliant, thus form a key part of strategic decision making.

Environmental Factors:

Lastly, this model considers environmental factors. At this stage decision makers typically consider ecological and environmental aspects like climate change, sustainability practices, environmental regulations and associated changes in consumer expectations and demands.

Aren’t these factors all interconnected?

In reality, there can be a lot of interconnection amongst these factors.

For example, changes to our views on the environment will appear when we consider environmental factors. These underlying factors will also affect social trends and behaviours and many govenments will legislate in relation to them as well as proviuding economic incentives in relation to them to incentivise new and emerging technologies.

In other words, some factors can affect pretty much all the domains of the PESTLE model. This isn’t really a problem though. We just need to be sensible and pragmatic when using the model as an analysis tool. The point is to use the model as a way to check the completeness of our understanding of our eco system, so it is ok for similar points to be raised several times.

There are lots of foundational strategic models like this around, though we don’t really cover them much on our website. Other ones you might want to explore include SWOT, Mission and Vision statements, the VMOSA model, Porters Five Forces, the BCG 2×2 Matrix, SMART goals, the McKinsey 7S framework, and so on. These tools are all really helpful, we just don’t cover them much as we’re more focused on the human side of things.

This is a great little tool to have in your back pocket. It’s great to use in more detailed examinations of an organizations context, or for a quick sense check on a decision that’s being considered.

We use it occassionaly in sessions with clients to help them consider their strategic priorities at a senior level. We also use it as a way to help more junior or disparate members of larger organizations explore the wider context that their organizations are operating in. This can be particularly helpful when people are a bit removed from the strategic centre of an organization, or opearting in a bit of a silo. It sort of helps then look outside the cave and gain a different perspective of what is really happening across the organization and why certain decsions are being made.

We don’t have a reference for this, we’ve just used it a lot. If you are aware of a specific reference that we should use, please let us know.

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