No business operates in a vacuum. It has to contend with its environment in many ways. According to the most common type of analysis, the PESTLE analysis, there are six such elements that a business must be aware of: political, economic, social, technological, legal and environmental. Economic and legal factors are sometimes grouped together, giving five broad elements of the business environment.
The six elements in the business environment are political, economic, social, technological, legal and environmental.
The PESTLE analysis is a concept born out of marketing principles and acts as a tool for companies to be able to track the environment in which they’re operating. It is especially important when a company intends to launch a new product or service or expand to a new area. PESTLE itself is a mnemonic where the letters stand, individually, for the following:
- Political: What is the political state of the area in which the business is operating?
- Economic: What are the economic factors at play in the market in which the business is operating?
- Social: What are the socio-cultural factors to be taken into consideration in the environment in which the business is operating?
- Technological: What technological trends are likely to be dominant in the business’s environment for the foreseeable future?
- Legal: What is the legal environment like? Is there any legislation the business should take into account?
- Environmental: Does the area have any particular environmental concerns the business should consider?
These six factors of the business environment give a sort of general view of the business landscape, helping a business to analyze the situation before making a major decision. Of course, there are many different variants of the PESTLE framework, and many marketing gurus have added their own factors to the list. The mnemonic above, however, is the original one.
This analysis is concerned with the kind of influence a local government might have on the business environment. Is there a new tax or duty to worry about? The fiscal policy of the government is also important as it will determine which industries receive the most government support. Other issues include any tariffs the government may impose on certain industries.
This factor looks at the performance of the economy in the area in which a company operates. Is there a rise in inflation that the company should worry about when they consider future running costs of the business? Who is the competition? What models can they adapt to analyze the demand and supply? Other things to consider include interest rates, the purchasing power of the consumers and foreign exchange rates.
For social factors, the business analyzes aspects of the social environment such as the demographics, the population size and dominant cultural trends that might affect business strategy.
Technological factors have always been important for businesses to consider, but have gained even more importance recently. They represent the prevalent technological trends in an area and how they can be either beneficial or detrimental to the success of the business. They include such things as the devices owned, the internet and cellular connectivity and any emerging trends in technology that might affect the business’s activities in the future.
The business analyzes the specific laws that affect the businesses operating in that area. There are also internal policies that the company may already have adopted for itself, and they will have to be analyzed in relation to the environment they consider operating in.
Environmental factors are vital in an increasingly environmentally conscious world. The company has to determine how its practices and location will affect the surrounding environment and take mitigating measures to ensure the environment is preserved.