Karen Groves explains PESTLE analysis, used to assess macro- environmental factors that can impact a business.
For a business to succeed, it is important that they understand the environment they are operating in and identify any opportunities or threats.
There are three levels in a business’ environment including the macro environment, the industry environment, and the internal environment.
The PESTLE model is used for analysing the businesses macro environment as follows:
Political
The political environment includes:
- Government policy – which will change when a new government is elected. Each will have their own objectives on matters such as climate change.
- Taxation – which can impact on consumer spending.
- Imports and exports – the government can use import quotas and tariffs to make it challenging for foreign companies to trade in the UK.
- Public spending – for example, on housing, education, and healthcare.
Economic
The economic environment includes:
- Interest rates – how much it costs to borrow money, the higher the interest rate the higher the mortgage and loan payments will cost.
- Exchange rates – a change in rate will impact what has to be paid to international suppliers and received from international customers.
- Changes in disposable income – the higher the level of disposable income, the higher the spending will be on non-essential items.
- General state of the economy – for example, entering or emerging from a recession.
- Business cycles – the economy will go in cycles, for example from recession to a boom period. During a boom period, companies selling non-essential items will achieve higher profits than when in recession, when people do not have as much money to spend on these items.
- Demand-pull and cost-push inflation – demand-pull inflation is caused by demand being higher than supply, which in turn increases prices. Cost-push inflation is caused by a shortage of a product, for example gas, pushing the prices up.
Social
The social environment includes demographic changes for example how the population is made up, including age, household structures, cultures, education and trends, for example changes in tastes and lifestyles and unemployment.
Technological
The technological environment includes changes in technology and impact on structure (for example internet sales). This is influenced by government spending on research and development.
Legal
The legal environment includes trade regulations and changes in law and regulations.
Environmental
The environmental environment includes environmental changes and sustainability, for example, a business will need to adhere to environmental legislation and consider environmentally friendly substitutes for materials.
Example
A magazine company would monitor the following factors:
Political: VAT on magazines which is currently zero rated. If this changed it could impact on sales.
Economic: If in a recession, disposable income would change and therefore impact on sales. If paper for printing is imported, exchange rates would also be monitored as this would impact on the costs.
Social: Current trends as this would impact sales if the magazines were not up-to-date.
Technological: For a magazine printing business, they would need to also provide electronic copies to keep up-to-date with technology.
Legal: Consideration on data protection regulations depending on content.
Environmental: Consideration regarding the carbon emissions from using paper and printing, any wastage, recycling processes, and so on.
Questions
Now test your understanding.
Q1. Aneesa is studying PESTLE analysis and has queried which section taxation would fall into?
- Political.
- Economic.
- Social.
- Technological.
- Legal.
- Environmental.
Q2. Matthew is studying PESTLE analysis and has queried which section demographic changes would fall into?
- Political.
- Economic.
- Social.
- Technological.
- Legal.
Answers: Q1. Political; Q2. Social
- Karen Groves is an AAT tutor and Faculty Director of Accounting at e-Careers
