ICAI Notes- Pestle Analysis | Business and Commercial Knowledge (Old Scheme) - CA Foundation PDF Download

PESTLE ANALYSIS

The term PESTLE is used to describe a framework for analysis of macro environmental factors. PESTLE analysis involves identifying the political, economic, socio-cultural, technological, legal and environmental influences on an organization and providing a way of scanning the environmental influences that have affected or are likely to affect an organization or its policy. ‘PESTLE analysis is an increasingly used and recognized term, replacing the traditional framework for monitoring environment known as PEST analysis.

PESTLE is an acronym for:

• P- political,
• E- economic
• S- socio-cultural
• T- technological
• L- legal
• E- environmental

The PESTLE analysis is simple to understand and quick to implement. The advantage of this tool is that it encourages management into proactive and structured thinking in its decision making.



The Key Factors

• Political factors are how and to what extent the government intervenes in the economy and the activities of business firms. Political factors may also influence goods and services which the government wants to provide or be provided and those that the government does not want to be provided. Furthermore, governments have great influence on the health, education and infrastructure of a nation.
• Economic factors have major impacts on how businesses operate and take decisions. For example, interest rates affect a firm's cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy. The money supply, inflation, credit flow, per capita income, growth rates have a bearing on the business decisions.
• Social factors affect the demand for a company's products and how that company operates.
• Technological factors can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation.
• Legal factors affect how a company operates, its costs, and the demand for its products.
• Environmental factors affect industries such as tourism, farming, and insurance. Growing awareness to climate change is affecting how companies operate and the products they offer--it is both creating new markets and diminishing or destroying existing ones.

On the basis of these, it should be possible to identify a number of key environmental influences, which are in eflect, the drivers of change. These are the factors that require to be considered in the matrix. Then transpose the final items that have been identified from your list to a PESTLE matrix as shown below:
The PESTLE Matrix