PESTLE - Macro Environmental Analysis

Last Update December 2020 by Edmund Bradford

Table of contents:

  1. Definition
  2. Why it is important
  3. Common mistakes
  4. How to do it properly and show a completed example
  5. Analysis outputs

PESTLE (or PESTEL) is a standard marketing tool that has been around for decades. However, like many tools, it is also commonly misused and misunderstood. Used properly, it can be a powerful weapon to understand the post-pandemic world of the 2020s and help you pivot to take advantage of the future. This article will explain what it is, why it is necessary, the common mistakes in using it, how to do it properly, and show a completed example at the end.

What is it?

PESTLE is a tool for understanding the key forces acting upon an organization. If the organization is like a sailboat, then these external forces act like the wind, the waves, and the currents on the boat, making it easier or harder for the boat to reach its goal.

Therefore, it is a critical navigational aid for organizations to think about their future and plan how to get there.

The forces are categorized into six types: Political, Economic, Socio-demographic, Technological, Legal, and Environmental, hence PESTLE.

Why is it important?

The tool helps us to do some beneficial things, namely, to:

  • uncover all the key influences on the organization
  • peer into the future
  • get a better understanding of our strengths and weaknesses
  • find new growth opportunities
  • identify the key threats
  • set the right objectives
  • decide the right strategy, timing, and resources to achieve them

What are the common mistakes?

Like many tools of marketing, it is often poorly done (even by senior marketers!).

Here are the top seven sins to avoid:

Sin #1: Box filling

Writing a list of the forces in each of the six areas will not get you very far. The idea is not to complete all the boxes and then move on. In other words, do not treat this as a tax form to be filled in as quickly as possible.


Sin #2: Ivory Tower

Working alone, in an ivory tower, will lead to a biased, sub-optimal result. Try to work with other people on it. Get their views and insights. Debate what forces are out there, when they will happen, which are the most important, and why.


Sin #3: Assume all forces are created equal

As any physicist will tell you, some forces are, of course, more important than others. Some will be more likely to happen and will have a more significant impact on the organization if they occur. Do not only list them with no emphasis.


Sin #4: Vagueness

Do not be vague about the force. "Changing Exchange Rates" often appears in the 'Economic' category but, as written here, is just a pointless term. Similarly, "Global Warming" usually occurs in the 'Environmental' variety, but its use here is vague, timeless, and useless.

Sin #5: Zero impact

Each force will have either a positive, neutral, or negative impact on the organization. We cannot merely list the forces in black ink on white paper without reference to their effect.

Sin #6: Premature completion

The tool is not finished when the six PESTLE categories are completed. We need to know the answer to the CEO's question of "So what?"


Sin #7: Separation

The PESTLE is not a standalone piece of analysis. It should be integrated with other vital tools being used.

How to do it properly?


Step 1: Define the scope and inputs.


First, you need to clarify what is in scope and what is out of your analysis area:

  1. Are you doing this on the whole organization globally or just part of the organization locally?
  2. What market are you analyzing – your immediate customers or (in B2B) their customers as well?
  3. What products and services are you focusing on?
  4. Are you researching your market or your industry, including all of your supply chain?
  5. How far out and how far back are you going to look to find trends and upcoming shocks?


Secondly, you can think about who knows about the market/industry under question.

Who are the key and accessible people that might contribute to the analysis?


Third, decide what existing research and other information can you and the team tap into.


Finally, decide how you will show the PESTLE analysis.

You can either use an open mind map approach (see Diagram A) or, my preference, a closed spreadsheet approach (see Diagram B). We review a completed PESTLE Analysis later in this article.


Diagram A: PESTLE Analysis - Mind-Map Approach


PESTLE Diagram

Diagram B: PESTLE Analysis – Spreadsheet Approach




Step 2: Capture the key forces and their impact.


Identify the forces and allocate them to the relevant PESTLE areas.

Make sure that you:
emphasize the most important ones (e.g., in larger, bold font). For example, you can use different font sizes to bring out the relative importance of each force.


Show whether each force will positively impact (e.g., in green font/arrow) or a negative impact (e.g., in red font/arrow). Neutral or marginal effects can be kept in black font. You can use different shades or different arrow sizes to show the strengths of the impact on the organization
define the force clearly, e.g. "20%+ increase in the cost of a US Dollar bought in British Pounds…"
determine when the force will occur, e.g., "…in Year 2" of the forecast.

Look for cross-influences. For example, a new Political government in America will mean a boost to the Environmental market.

Step 3: Prioritize the conclusions


Once you have done a good analysis of the forces, you should draw some key conclusions. These should result from (mainly) external forces acting on the organization and should not be confused with strategies or actions you are taking. They should include:


  1. Key strengths that we will gain in the future
  2. Key weaknesses that will be exposed in the future
  3. Key opportunities that will open up for us to exploit
  4. Key threats that we need to deal with (in ranked order
  5. Finally, you should then be able to list the critical conclusions from the analysis then. My preference is to document these as extremely well-defined questions, in ranked order of importance, that the strategy needs to answer. A worked example for the UK Legal Services Market is shown below.

Step 4: Integrate with other tools

  1. 5 Forces Analysis
  2. Risk Assessment
  3. Assumptions
  4. Any forecasts
  5. Marketing Plan
  6. Business Plan

Example: A PESTLE Analysis of the UK Legal Services Market for a UK Law Firm

PESTLE - UK LAW FIRM EXAMPLE


Key Outputs


Our Future Strengths:
Our higher capacity means we can service the extra demand next year
Our expertise in commercial law will be more important as the economy bounces back
Our flexibility in moving staff to high demand areas will be crucial

Our Future Weaknesses:
We will not have sufficient capacity in sustainability litigation
We will not have enough experience in Covid litigation
We will be insufficiently automated

Opportunities:
Growth of the green sector and sustainability litigation
Growth in Covid litigation
Reduce fixed costs through technology


Threats:
Competitors seize market share quickly through more focus on the green sector, and Covid
Vaccines do not work effectively, leading to further shut down of the UK Law Courts.
New software firms setup offering smart, automated legal services


Key Issues:

How do we pivot to a new business without large city offices?
How do we reinforce our operational flexibility to rise to a spike in demand next year?
How do we mitigate the threat of the UK Law Courts being shut down again?
How do we develop new areas of expertise in sustainability and Covid?
How do we protect our business from automated lawyers?

As you can see, this can be a very powerful tool in capturing the key forces acting upon an organization and their impacts. As such it helps to assess our current position, where the prevailing conditions will take us and where the best waters lie in the future. Very useful in our changing world and not bad for a deceptively simple tool.