Crafting a Strategic Response to the World You Live in with PESTLE

The world is a big complicated place. A PESTLE analysis provides a way to understand your world…but that only matters if you turn the information PESTLE generates into something useful. Following your PESTLE analysis with three more steps (and merging it with another critical business analysis tool) can lead you to something actionable.

As we discuss in Learning Tree’s course The Strategic Role of the Business Analyst, the business analyst is the person best positioned to ensure that an organization’s software projects are actually contributing to the organization’s strategic goals. Business Analysts do that by answering two key questions:

  • What is happening outside of our organization?
  • How might what is happening outside affect what we do inside?

The problem is that the world outside your organization is a great big messy place — trying to understand “what is happening” in your worlds isn’t a trivial task. The only way to tackle understanding what’s happening in your world is to break the problem down into smaller pieces that are capable of being understood by mere mortals (like business analysts). A useful tool here is a PEST analysis or, on some occasions, its extended version called PESTLE in North America and PESTLE in the UK.

But a PESTLE analysis is only useful when it goes on to help you with the second question: What impact will that have on your organization? There’s always a danger that a PESTLE analysis ends up being a useless list of “interesting factoids.” Fortunately, there are three steps you can follow to get you from facts to an actionable strategy.

From PEST to PESTLE/PESTEL

First, of course, you need the information from a PEST analysis. A basic PEST analysis has you consider your world by dividing it up into four focused categories:

  • Political: How do governments affect your organization and the economy as a whole? Obviously, this includes tax law but this category also includes tariffs and other trade restrictions, labour/environmental law, and so on.  Going beyond that, this category includes political stability and the services provided by government (the availability of a trained and educated labour force, for example).
  • Economic: Is the economy growing or shrinking? How is your national dollar doing against other nations? How does foreign trade affect you, the goods/services you buy, and your customers/vendors/business partners? What is inflation doing to your prices and costs?
  • Social (including culture): If you think that cultural issues are too abstract to be worth considering, consider the cultural revolutions that have changed how companies treat “fair trade” issues, pollution, safety and organic products. This category also includes demographics. For example, for most nations in the G8 the population is aging and most of the population growth is coming from immigration. How does that affect your customers? How about your work force?
  • Technology: Technology changes the barriers to entry for any business. The revolution in electric cars, for example, has led to the first new car company in North America that has survived more than a few years: Tesla. The growth of AI is allowing companies to provide new levels of personalized customer service without having to hire more staff. As Bill Gates commented, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”

Expanding the analysis to PESTLE or PESTEL adds these two categories:

  • Legal: This is a subset of the political realm but it makes sense to consider the legal environment separately when the issues are sufficiently complex or important to your organization.
  • Environment: Since the laws around pollution are currently (and relatively) static, today the focus in this category is on addressing sustainability and your organization’s commitment to being a good corporate citizen. But, looming over all of this, is climate change which has the capacity to both create and destroy business opportunities.

Three Steps to Making PESTLE Useful

The information that you’ll generate in these four or six categories will all be very interesting…but not necessarily useful. In fact, it can be as overwhelming as just looking at the world as one big ball of confusion. There are three steps you can take to convert the output of a PESTLE analysis into something actionable.

The first step in making the analysis useful is to concentrate on those changes that will affect your organization – in other words, to concentrate on what’s relevant to you. If you can’t see how a particular item will cause your organization to change its plans then discard that item. If you’re not willing to do that, at least put the item to one side and only bring it back in when you do see how that item might cause your organization to change its plans. As this step implies, anything that just reinforces that your organization is doing the right things isn’t as useful as those items that suggest your organization needs to change.

The second step is to recognize that putting the information in categories doesn’t help understand their impact on your business. The categories are just a tool to help you break down the outside world into manageable chunks and to ensure you do a thorough analysis. Once you’ve been through the categories, ignore them. Instead, look for those relevant items that relate to each other across categories. That all of these items are occurring right now probably isn’t an accident — they’re probably related to each other. Look for the underlying cause(s) that drive these items.

These two steps will prune what can initially seem like a laundry list of facts and trends into a manageable set of related external forces that are essential to your organization. These are the forces that have the potential to trigger change in your organization.

Generating an Actionable Strategy

The final step is to assign those forces to the four categories of a SWOT analysis: Is this force contributing to one of your organization’s Strengths and, as a result, providing an Opportunity? Or is this force a Threat that exposes one of your organization’s Weaknesses? If a force isn’t an opportunity or a threat, you have to ask: Does it really matter to your organization? If it doesn’t matter to your organization, you have another opportunity to reduce the list to what’s essential to your organization.

Once you’ve done that you’re ready to generate an actionable strategy by answering two more questions:

  • How can your organization follow up on those opportunities?
  • How can your organization defend itself against those threats?

Answering those question is, in the end, what will make your PESTLE analysis useful. And, who knows? The way your organization responds to a threat can turn that threat into an opportunity.

Author: Peter Vogel

Related Training:
Business Analysis

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