Whilst a SWOT analysis is a good initial tool for understanding what lies just outside the business in terms of opportunities and threats, it is very important for a business to have a very good understanding of the external environment as it is filled with opportunities and risks. This is often referred to as ‘Environmental Scanning’.
Therefore, in conjunction with a SWOT analysis, businesses will also undertake a detailed environmental scan to identify what would be considered as ‘threats’ in the SWOT analysis. To do this, they will often use a further framework. Increasingly, the frameworks which are used are sophisticated, complicated and involve weighting a number of factors which have been identified as critical to future business success.
However, there is a simple model which can help to undertake environmental scanning regardless of business or sector, which is PESTLE. This is another acronym, which stands for ‘Political, Economic, Socio-cultural, Technological, Legal and Environmental’, representing six types of environmental factors which need to be taken into account. Here Apple Inc. will be used as an example.
Political
A business will scan the political environment, looking for opportunities and threats brought about by government intervention or wider political influences. For example, Apple would be concerned about the Competition and Markets Authority intervening in its business due to its growing dominance in the handheld computer market. The political stability of a nation such as China, which is heavily involved in the production (and, increasingly, consumption) of computing goods, would also be of interest to Apple. Alternatively, a change in the political landscape may bring opportunities to Microsoft, too, such as a more liberal market approach from a government which is less concerned with monopolistic markets.
Economic
A business will also be interested in the economic environment, for example the cost of borrowing, the availability of borrowing, exchange rate movements, inflation and whether a country is in a period of growth or recession. Apple would see a threat in any weakening of the dollar relative to the Euro. Apple is based in the US and so a weakening of the dollar would increase the cost of production abroad and reduce the profits made in sales abroad.
Socio-cultural
Social factors commonly encompass demographic issues and lifestyle changes. For example, Apple may see the growth of the affluent middle classes in India as a real opportunity to increase sales in this market.
Similarly, lifestyle changes will have an impact. Factors such as a greater concern for the natural environment, an increase in Higher Education and the rise of social networking have all created new opportunities and threats for businesses in various ways. For Apple, the growth in social networking has created real opportunities but the interest in the natural environment has meant that it has received some considerable negative publicity over the mining and use of rare metals in its electronic devices.
Legal
This encompasses statutory provisions and the common law in relation to relevant areas of law including company, employment, commercial, environmental protection, intellectual property and data protection. This will also include regulatory provisions governing such matters as competition, corporate governance, advertising and trading standards. You can see here how there is some considerable overlap with Political and Economic factors. An example of a legal factor impacting Apple is the complex international litigation with Samsung for various intellectual property patent infringements.
Environmental impact
There has been a rapid growth in pressure on businesses to be environmentally friendly. This has impacted on what businesses do and how they operate with many being called to account for negative impacts on the environment. As Apple works in a sector which has a heavy impact on natural resources, it needs to recognise the potential threats of depletion of these resources as well as negative publicity for such depletion. However, opportunities exist for Apple to establish itself as a green manufacturer if this is an avenue it chooses to exploit.
Criticisms of PESTLE
PESTLE analysis is often criticised for being too simplistic, for not weighing different factors to take into account the relative opportunities and threats which they present and for not being sensitive to the differences in sectors. However, it is useful just because it is a simple tool and it can be applied across businesses. You may find, however, that you are encouraged to use more complex or different tools in later strategic work.