External analysis and the PESTLE model

July 2024

Teresa Clarke explains how PESTLE can guide accountants and business managers in their strategic decision making.

By analysing the environment that a business works in, we can understand how it works. We can use six areas to help analyse the impact of the business in the macro environment, or external environment. We can use the PESTLE acronym for this.

  • Political
  • Environmental
  • Social
  • Technological
  • Legal
  • Economic

Political factors are government policies and goals. If the government changes a policy for the country, this could affect the business. Such changes could be how much to spend on the National Health Service, immigration rules or policies, plans for renewable energy sources, plans for building new train lines or roads, changes in planning rules for housing, and more.

Environmental factors are things affecting the environment. Protecting trees from being taken down to make way for expansion. Ensuring that sustainability measures are in place to protect the planet, such as sourcing raw materials from sustainable sources.

Social factors are the changes in what society or people want or need. This could be because tastes or fashion are changing, attitudes of people towards sustainability or eco products could be changing, the demographic or the age of the customer market could be changing, or values may be changing towards inclusion of everyone.

Technological factors are the changes in technology. Technology is changing all the time, and a business needs to keep up-to-date with this, so it is not left behind.

Legal factors are laws (not to be confused with policies or goals, which are political). A business needs to keep up-to-date with laws such as health and safety law, employment law, data protection legislation and consumer protection laws.

Economic factors are changes that can affect the economy as a whole, such as foreign exchange rates, interest rates, inflation and recession.

Example task

Michelle runs a hairdressing business. She is in the process of expanding from just one salon to four salons and a mobile unit. She will be offering services for men and women in the salons or in customersā€™ homes.

Unlike other similar businesses, Michelle has not built a website and she does not use a smartphone. All bookings are made by her landline telephone at the main salon, so when no one is there the calls are missed.

Explain at least two PESTLE factors affecting the future of the business.

Suggested answer

(Remember that your answers will be different to mine, but make sure you have justified your choices and explanations.)

Social: People are generally keener to make bookings online or via an app than by telephone.

They often require an immediate response, so the lack of an easy booking system that is available 24 hours a day will put off many customers. Those customers may choose to book elsewhere as a result.

Technological: For that same reason, Michelle needs to keep up-to-date with technology changes to be able to keep competitive with other similar businesses.

Legal: There could be legal factors as Michelle will need to check any laws around visiting customersā€™ homes to carry out her services.

Environmental: Michelle will need to consider the impact on the environment by travelling to customersā€™ homes.

If you like my way of explaining things you might like my workbooks, which are all available from Amazon in both paperback and as eBooks. The links to all my workbooks can be found at https://www.teresaclarke.co.uk/

  • Teresa Clarke FMAAT is a freelance accounting tutor