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PESTLE analysis: Protect your biz from external risks

by | Human Resource Advisor | Houston, Texas
Strategy and planning | 7 minute read
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Conducting a PESTLE analysis can help reduce the chances you’ll be caught unaware by a crisis or other adverse situation facing your business. It should become part of your larger toolkit for risk management, scenario planning and stakeholder engagement.

A PESTLE analysis gives employers a framework for examining certain factors out in the broader world – conditions over which they exert no control – and how they impact their business so that they can better prepare.

Here is what PESTLE stands for along with examples of the external factors included in this analysis:

Political

  • Laws that are currently being debated and passed
  • Government policies
  • Instability
  • Trade restrictions
  • Corruption

Economic

  • Growth or recession
  • Unemployment trends
  • Interest rates
  • Inflation rates
  • Discretionary income
  • Exchange rate

Social

  • Lifestyle attitudes and trends
  • Demographics
  • Population changes
  • Cultural barriers
  • Career attitudes and trends
  • Shared values
  • Effects of political issues on society, such as boycotts, protests or riots
  • Widespread health and societal issues, such as pandemics

Technological

  • New developments or major disruptions in technology, resulting in shifts in how businesses operate or changes in consumer demand
  • Rise of automation and artificial intelligence
  • Incentives
  • Resources dedicated to research and development

Environmental

  • How businesses impact the environment
    • Pollution
    • Emissions
    • Development of infrastructure
  • How the environment impacts businesses

PESTLE vs. SWOT

If you’re familiar with a strength, weaknesses, opportunities and threats (SWOT) analysis, some of what’s included in a PESTLE analysis may, at first glance, feel familiar and perhaps even a bit repetitive. Admittedly, there is overlap.

The main differences between a PESTLE analysis and a SWOT analysis are:

  • A SWOT analysis assesses external threats and opportunities as well as internal strengths and weaknesses. Meanwhile, a PESTLE analysis is 100% externally focused. So, the PESTLE analysis could replace a SWOT analysis if a company wants to explore only external conditions and in more depth.
  • Because it can help to identify and put into context the opportunities and threats that will be discussed in a SWOT analysis, a PESTLE analysis can be conducted prior to a SWOT analysis for a more effective and thorough outcome.
  • A PESTLE analysis can be performed in the event that a SWOT analysis fails to produce the desired results.

As these scenarios indicate, PESTLE and SWOT analyses could either serve as alternatives to each other or complement each other.

How a PESTLE analysis works

Much of how this process plays out depends on the complexity of your business and industry, and the working style of your company leadership.

A PESTLE analysis could take place in person or online.

The length is open ended. It could take a few hours or it could be a day-long exercise.

Generally, this is what you’ll do:

  1. Identify and list the relevant PESTLE factors for your business.
  2. Determine the implications of each PESTLE factor on your business.
  3. Assess the likelihood that these impacts will be felt as anticipated.
  4. Decide which actions to take to leverage opportunities and mitigate threats.

When should it happen?

Ideally, the factors included within a PESTLE analysis should always be in the back of business leaders’ minds as they go about their daily work and as they meet with key influencers and stakeholders.

Leaders should make it a regular practice to keep a pulse on opportunities and threats, as well as the PESTLE factors that have the greatest influence on their business.

It’s smart to conduct a formal PESTLE analysis:

  • At a minimum annually usually during the budgeting process
  • With increased frequency dependent upon how sensitive core products, services or expansion strategies are to changes in critical externalities.
  • Or while mapping the business strategy for the next 18 months to five years

It serves as a great checkpoint on the company’s current status and a foundation for planning for the future.

However, during a crisis, a PESTLE review becomes an absolute must.

PESTLE analyses should happen during the first phase of crisis recovery – the reaction phase – as business leaders evaluate what’s happened and how the crisis impacted their business.

In a crisis, everything you do depends your perspective of the effects and expectations of the externalities your industry and company will face into the future. 

Who should participate?

A PESTLE analysis is usually reserved for those occupying the upper echelons of a company – both the C-suite and executive leadership. You may also consider including experts on relevant PESTLE factors both within and outside your organization to provide a summary of current conditions and talk through the impacts on your business.

This is different from a SWOT analysis, which typically includes a greater variety of stakeholders throughout a company, at different organizational levels, and even customers, vendors, industry partners and providers of professional services.

What do you do with this information?

With the insight it generates, a PESTLE analysis can help business leaders:

  • Gain alignment on business conditions.
  • Apply what they’ve learned toward a SWOT analysis.
  • Build business scenarios for the future, as part of regular risk management and strategic planning, or as part of tactical crisis response.
  • Optimize business operations and processes.
  • Allocate resources.
  • Assist with human capital management.
  • Make other critical decisions.

Benefits of performing a PESTLE analysis

A PESTLE analysis can be a powerful tool with far-reaching impacts.

In general, you can:

  • Get out of your day-to-day routine, pause and examine the drivers behind the current situations your business faces.
  • Gain a clear understanding of where your organization stands within the larger community.
  • Be better prepared for unanticipated changes to minimize the impacts of unpleasant surprises.
  • Identify organizational shortcomings and opportunities for new investments.

It’s also a useful exercise for aligning leadership:

  • Ensure that everyone in a decision-making capacity views the organization through the same lens and can coalesce around a common plan of action.
  • Enable leadership to select priorities going forward.

Either during regular planning sessions or in the aftermath of a crisis, a PESTLE analysis is instrumental in deciding what to do next. For various business scenarios:

  • How can your organization prepare? Planning.
  • How do you know when a change of course is called for? Metrics.
  • What actions should you then take? Execution.

Additionally, a PESTLE analysis can help you better manage your people.

  • Uncover gaps between capabilities of existing talent and desired organizational capabilities.
  • Know when to adjust roles and responsibilities.
  • Inform hiring or outsourcing decisions.
  • Promote stability during crises and, as a result, boost employees’ mindset of resilience.
  • Communicate more transparently with employees about the company’s position and boost engagement.

Summing it all up

Alongside or in place of a SWOT analysis, a PESTLE analysis forces you to take a simultaneously broad and granular view of all relevant externalities impacting your business. With the valuable intelligence uncovered by a PESTLE analysis, you can improve your:

  • Competitive market position
  • Financial position
  • Reputation
  • Risk and liability exposure
  • Future planning and strategizing
  • Decision-making about resource allocation, investments, operational changes and hiring
  • Stakeholder relations

A PESTLE analysis is an important activity to engage in regularly – and especially so during the initial stage of a crisis when your response can make or break the long-term recovery of your business. To learn more about successfully navigating crises, download our free magazine: The Insperity guide to crisis management.

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