May 2022
Nick Craggs explains PESTLE analysis, a subject that is being introduced in Q22 in the new Level 3.
Business Awareness paper
AAT’s new qualification, Qualifications 2022, is the biggest change to AAT in all the time I have been involved with the association,
I also am a massive fan of the changes, it has been brought bang up-to-date and there is a lot of new content in the qualification, such as blockchain, AI and economics, all topics that I love. Qualifications 2022 takes the AAT firmly beyond a clerical, transactional certification to being a relevant professional finance qualification.
As well as continuing to deliver the fundamental bookkeeping, accounting, and costing knowledge that AAT is renowned for, learners will gain wider business skills and acumen including an understanding of how economics, technology and sustainability affect organisations. It’s a genuinely exciting and interesting qualification fit for the modern business environment.
One of the new concepts is PESTLE analysis in the new Level 3 Business Awareness paper. I studied this as part of ICAEW but this is a new addition for AAT.
PESTLE analysis looks at the external environment that a business operates in and looks at the factors that could impact on the business. It helps a business to identify any potential issues that a business may need to deal with and helps them to focus their responses.
It categorises these factors into six different groups: Political, Economic, Social, Technological, Legal and Environmental, which is where PESTLE analysis gets its name from.
In the exam students could be given a scenario and be asked to identify a threat in some or all these aspects, and then potentially an action to reduce the threat.
So, what could come up?
Political
This looks at things that the government could potentially do that will affect the business. These can be both positive and negative. A simple example of this is taxation, the government might give tax allowances on environmental equipment, and the business might benefit from this. It could also be negative, and a potential cut in government spending might negatively affect a business that picks up government contracts. Therefore, you may want to suggest that the company might want to look for nongovernment contracts to reduce the risk.
Economic
There are a number of economic factors that can affect a business in a good or bad way. One that is in the news at the moment is disposable income. If people’s disposable income falls, they may look at things that they are spending money on, and reassess where there money is going.
If you are a business that people can choose to live without, for example luxury fashion, you might be a bit concerned. You may feel that launching a budget brand might be a way to reduce your exposure to a fall in disposable income.
Social
These are influences that affect and define lifestyle, and thus people’s behaviours. These include elements such as family, community, socio-economic status. This takes it further than just looking at demographics, – it is not only just the people but their behaviour, and how the business interacts with them. People’s behaviours may change in regards to fashions or trends. People are generally more interested in how their behaviour affects the environment, and a carbon neutral company may be perceived as more attractive than one of its competitors.
Technological
This does vary on the industry, but if we look at our own industry, accountancy, there have been massive advancements in technology.
Accountants that don’t keep up with advances in technology may be left behind, and they are unable to match their competitors in terms of efficiency or service levels. Technology is one of four themes running through the new qualification, so I see this one as key.
Legal
You assume that most businesses try to operate within the law (mostly), so any changes to the law may well affect the business and how it operates. This can be as simple as employment law, when employers had to enrol their employees into a pension, to as big as you are not allowed to operate in a certain country.
Environmental
Environmental factors affect all businesses.
Some are motivated by simply wanting to save energy to save money, whereas others are more motivated by being a better member of society.
Some businesses may be very conscious that their behaviour will influence their customers and prospective customers’ behaviour.
However, it isn’t just about how a company can influence the environment, it also considers how the environment can influence the company. This can vary from a tanning salon struggling when there is a heat wave, to when a volcano in Iceland shut Europe’s airlines down!
I think that this is a great addition to the syllabus, and it is yet another example of AAT transitioning towards producing students with a great level of business acumen and the ability to inform and advise businesses and organisations.
• Nick Craggs, First Intuition
