PESTLE Analysis: Painting a “Big Picture” of the Business Environment
PESTLE is one of a well-known series of acronyms used in business and marketing planning. It summarises how the broader forces, sometimes known as the ‘macro-environment’, can shape a business.
More than just understanding the market, this framework represents the backbone of strategic management. It not only defines what a company should do, but also accounts for an organisation’s goals, and the strategies required.
The framework paints a bird’s eye view of the whole environment and the forces of change a company is exposed to. This enables informed planning and decision-making.
What does PESTLE stand for?
It is very critical for one to understand the complete depth of each of the letters of the PESTLE — Political, Economic, Social, Technological, Legal and Environmental.
This section delves into each factor in the PESTLE analysis, with Spotify, the world’s biggest music streaming platform as an example.
Political or politically motivated factors that could affect the business.
Questions to ask: What government policies or groups could be beneficial or detrimental to the company’s success? Is the political environment stable or likely to change?
In 2018, President Donald Trump signed the Music Modernization Act (MMA) into law that is a music copyright law for the digital era. This act ensures that artists and songwriters receive royalties on their songs, yet Spotify’s Cost of Revenue (COR) — which consists predominantly of royalties — gobbled up 74.6% of its total revenues. New laws or policies may potentially threaten the profitability of music streaming companies, putting them in a vulnerable position.
Determinants of an economy’s performance that directly impacts a company and have resonating long term effects.
Questions to ask: How stable is the current economy? Is it growing, stagnating or declining? Does the current economic performance affect us? How does each economic factor impact our pricing, revenue and costs?
The UK is Spotify’s biggest market, accounting for 37% of the number of monthly active users. Unemployment rate in the UK dropped from a peak of 8.1% in 2011 to its lowest at 4.4% in 2017. With a low unemployment rate, consumers have high spending power and confidence to subscribe for Spotify’s premium services. This gives Spotify an opportunity to improve its profit margins by increasing its number of subscribers. As such, customers’ willingness to purchase believed to be highly motivated by the economic outlook.
Social aspects, attitudes and trends that influence the business and target market.
Questions to ask: How do consumer’s values and beliefs impact their buying habits? How does human behaviour or cultural trends play a role in the business?
Growth of smartphones saw countries like India and China embrace streaming services. When the company launched in these countries, Spotify decided to cater to locals’ needs by adding local songs, options for language changes and algorithms for playlist recommendations. Social trends are of particular interest as they have a direct effect on how marketers understand customers and what drives them.
Technology that can affect the way you make, distribute, and communicate your products and services.
Questions to ask: What innovations and technological advancements are available or on the horizon? How might they affect business operations?
Spotify is planning to debut its own smart speaker which will be the first ever hardware device by the music streaming giant which may put Amazon, Apple and Google in direct competition. An increase in the number of people using smart speakers will facilitate an increase in the number of people using Spotify, giving Spotify an opportunity to increase its number of subscribers resulting in high revenues. Given the fast technological landscape changes, it impacts the way businesses produce and market goods and services.
Current and future legal regulatory requirements impacting the business.
Questions to ask: What regulations and laws apply to the business? Do they help or hinder the business? Do we understand the laws across all markets?
To increase tax revenues, some states in the US like Virginia have proposed a 5% tax on streaming services. If this tax is implemented, a premium subscription for Spotify would rise, which threatens the profitability of Spotify as people may opt for free streaming apps like YouTube. It is hence important to be aware of any potential changes in legislation and the impact it may have on businesses in the future.
Environmental forces impacting businesses and/or customers’ geographical location, the surrounding environment, and natural resources used by the organisation.
Questions to ask: How does the physical environment affect the business and vice versa? What are the effects of climate, weather or geographical location? Are businesses prepared for future environmental targets?
Spotify is ranked among the worst sustainable companies by Greenpeace because there is no clear evidence that it cares about the environment and has not worked to reduce energy use in its data centers. As a step towards the usage of sustainable energy, Spotify adopted Google’s servers which is one of the world’s highly sustainable companies which is committed to using 100% renewable energy. The growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer.
Exploit opportunities, and Eliminate risks
Where you have identified potential opportunities, build the actions you’ll take to exploit them into your business plan. Where you’ve identified significant risks that could undermine your business, take appropriate action to manage or eliminate them.
A PESTLE analysis helps a team to understand the organisation’s market and business position better, plan strategically, and conduct market research in new and existing markets. The framework:
- Helps to spot business or personal opportunities, and gives a company advanced warning of significant threats.
- Reveals the direction of change within a business environment. This shapes where the organization is heading, so that people work with change, rather than against it.
- Prevents starting projects that are likely to fail, for reasons beyond the organisation’s control.
- Enable organisations to break free of unconscious assumptions, especially when entering a new country, region, or market; because it creates an objective view of the new environment.
PESTLE Analysis is often linked to SWOT Analysis, however, the two tools have different areas of focus. While the PESTLE analysis looks at “big picture” factors that might influence a decision, a market, or a potential new business, the SWOT analysis explores these factors at a business, product-line or product level. These tools complement one another and are often used together.
Every organisation operates in a complex, dynamic environment affected by multiple simultaneous and ever-shifting forces, trends and influences. A mere “list” of factors or categories cannot capture this reality.
PESTLE analysis can be one of the most worthwhile tools for strategic analysis. By thinking broadly and deeply about each factor of PESTLE, an organisation will benefit from a more thorough understanding of its challenges and opportunities — and the organisation be ready to move forward with better-informed, more focused strategic planning.
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