Critical examination of the PESTLE
Analysis Model
By Ronald Buye
Introduction
Organizations are composed of group of people working together for a common purpose to
achieve desired goals (North, 1990: 5). Organizations are open systems with subsystems and
therefore paradigm shift is necessary which focuses
on interrelationships rather than cause-
effects (Senge, 1990). Organizational development efforts are designed to improve the
performance of organizations for businesses
profit is largely used to measure performance,
while for non-profit organizations, performance is
measured
in terms of relevance,
effectiveness and efficiency. On the whole it’s therefore important to examine how the external
environment affects the organization’s performance. What happens outside the organization’s
precincts without a doubt influences organizational behavior. Consequently, organizational
learning should constantly focus on the milieu to enable an organizationto have the ability to
develop effective strategies to improve performance.
The article critically examines one of the models used in organizational analysis abbreviated as
PESTLE for political, economic, social, technological, legal and environmental (natural)
dimension of the external environment. Each of the dimensions is presented to provide
justification
for
the
model.
The
macro
environment
analyzed
using
the
PESTLE is congruently important as the micro environment.
Organizational environment
Comprises all factors and forces outside the organization that affect and can be affected
by the organization. The internal setting "consists of those relevant elements and factors
within the boundaries of the organization that influence organizational
include
organizational
members,
physical
infrastructure,
performance they
organizational
leadership,
culture, systems and structure.
External environment
The external environment consists of forces and factors outside the boundaries of the
organization that influence how the organization operates. The external environment can
bedirect (micro) or indirect (macro). The external environment can provide both facilitating and
inhibiting influences on organizational performance.
Direct environment can affect its operations. It consists of clientele, suppliers, and
competitors or entities that do similar work. The most important aspect of micro-environment
is the clientele. Competitors are also important in the micro-environment and they include
organizations with similar or related products. To remain competitive an organization
should have competitive and comparative advantage over its rivals.
Strengths and
weaknesses analysis focuses on all aspects of internal operations, for example, people,
finance, services.
Macro Environment:The macro Environment includes all the factors and forces that are
part of the larger society and also affect the immediate -environment. These factors are
not directly under the control of the organizational but can have serious consequences on
organizational performances. The factors
can
Cultural, Technological, Legal and Environmental.
be categorized Political, Economic, Socio-
Organizational analysis
This is the collection, analysis and use of data focusing on forcesfrom outside the organization
more often than not to improve organizational effectiveness. It’s the process of examining the
operations and performance of an organization. Organization analysis is a diagnostic process that
helps to better understand the performance of an organization. It can be undertaken after an
initial capacity assessment to obtain deeper knowledge about the causes of organizational
weaknesses and to identify emerging opportunities.
The analysis is often carried outto take action to respond to negative forces. It’s helpful to be
acquainted withforces that have cropped up in the organization such that appropriatestrategies
are developed to address the challenges.This is an analytic process that enables organizations
toassess organizational performance, by identifying strength, weakness,
threats and
opportunities.
There are different organizational analysis tools that can be used which include:McKinsey 7S
Framework, Porter's Five Forces framework, PESTLE(political, economic,
Technological, legal
and
Social,
natural environment), SWOT (strength, weakness, opportunities,
threats), POCC (potential, opportunities, challenges, constraints) and SOAR analysis (strength,
opportunities, aspirations and results). The focus is on PESTLE analysis which is one of the
tools for conducting environmental scans on the organizations’ environment they areuseful
organizational development tools for determining organizational growth or decline,
organizational current state, capacity and strategic direction.
PESTLE Analysis
The PESTLE Analysis is one of the tools that is used to identify and analyze the key drivers of
change in the organizational environment. The PESTLE Analysisis an acronym for political,
economic, Social, Technological, legal and natural environment.PESTLE analysis is an
organizational audit of the firm’s operations in order to determine the different factors and
forces in the external environment that affect the success of an organization.. The
term
originated from Aguilar(1967) who presented ETPS (Economic, Technical, Political, and
Social) in his book Scanning the Business Environment. . Methods of data collection
include in discussions, interviews, and surveys can be used to assess the internal
environment.
The tool allows the assessing of the current environment and potential changes. It’s based
on the premise that organizations that continuously scan their environment have competitive
advantage because it helps in gathering, analyzing, and using the information to improve
organizational performance. More so it’s used in predicting and evaluating the future
state of affairs.
It’s generally seen as part of SWOT analysis process because it examines opportunities and
threats in the organization’s external environment. It is a part of the external assessment,
appraisal, review and evaluation. as well as the interests of political. Economic, social,
legaleconomic related stakeholders who can also be identified from the analysis and included
in the results.
It is very useful when an organization is commencing or
different product. PESTLE Analysis can
introducing a
assist an organization in be acquainted with
opportunities offered by existing conditions in the organizational environment. It can also
be used for identifying current or possible future challenges, allowing for effective planning of
how to best manage these challenges. The results of this analysis can facilitate changes or
improvements in areas identified.
Importance of using PESTLE analysis

PESTLE analysis is a useful tool for understanding the organizational environment
to identify opportunities and deal with threats

It enables the organization understand the organizational environment

It enables the organization use data in the strategic direction and formulate goals to
help realize the mission and vision of the organization.

Analysis enables the organization to identify critical factors and forces, formulate
action plans, and develop goals to improve performance.

It generates information for the organization to enable them plan and appraise
operations for improved performance.
their

The tool allows the assessing of the current environment and potential changes.

It helps in gathering, analyzing, and using the information to improve organizational
performance.
Political
by the
environment:PESTLE analysis is used to examine howorganizations are affected
political environment. For instance the analysis can generate results on the political
situations on whether there is political stability which is favorable to organizations. On the other
hand unfavorable political climate including war situation and uncertainty of governments can
negatively affect the organization. Identifying opportunities and dealing with threats in the
political environment can greatly benefit the organization.
Economic environment: The analysis using PESTLE generates data on economic situation in
terms of taxes, tariffs, interest rates, economic growth, recession, inflation rate, exchange
rate, minimum wage, wage rates, unemployment, cost of living, working hours, credit
availability, financing availability, level of economic growth.
economic situation and how it might
By providing results on the
impact on the organization helps it to respond
appropriately. For exampleeconomic recession can negatively affect the performance
and continued existence of organizations. More so, interest rates affect a firm's cost of capital
and therefore to what extent
an organization develops
and
expands.
This implies that
organizations, should use PESTLE to analyze the economic situation in its environment, where
they operate in order to understand if the current economic environment presents opportunities or
may pose threats.
Social dimension: The social environment includes the values, beliefs, attitudes, opinions,
and lifestyles
of
stakeholders. Social beliefs, values and lifestyles influence clients. The
analysis of demographic factors includes the study of the human population regarding
size, geographic distribution, age, education levels and income distribution. By generating
demographic data it
labour force.
helpsorganizations todelineateits probable
market and also relevant
Technological
dimension:by generating information on technological advances it enables
organizations be prepared to applicably change and operate using the most relevant technologies.
New technologies
identified would
improve productivity and
probably reduce cost of
production depending on technological advancement. However, thechanges identified in the
technological environment may present opportunities or threats to the organization. For
instance the cost of acquiring new technologies may significantly increase the costs of the
organization, which, in turn, might affect the organizational cost of production. Many
organizations
use
technology
such as internet and
telecommunication technologiesto
improve efficiencyand effectiveness because they easily interact with clients and suppliers.
PESTLE analysis enablesorganizations to update their own technology as it can become
obsolete.
Legal dimension: The legal environment includes the laws and regulations of a country.
PESTLE analysis generates data on government rules and regulations that will influence the
way in which an organization will produce and sell its products. Such laws can negatively
or positively affect organizational
operations. Organizations must
analyze
and
identify
those factors (legal environment).
The Ethical dimensionwhich can be included separately also relates with the social and legal
dimension. Ethical factors involve duties, values, ethos or morality, integrity, and behaviouro a
particular society. This are not legal but can inform the rules of a particular society. What is
ethical and non-ethical determines how the organization. A particular practice might not be
ethical and therefore not acceptable in a particular community. Therefore operates what is
ethical and unethical should also be analyzed .
Natural Environment dimension:It also includes the nature and
physical environment
which consists raw materials, and other natural resources such as the land and physical space
on which organization operates. PESTLE analysis examines the natural environment to
generate information on pollution , raw materials and government regulations on protection of
natural resources. Pollution generated by the organization or others can negatively affect its
operation and reputation especially if its operations damage the environment. Hence its
important to generate data using PESTLE on Environmental protection policies, pollution,
waste management among others.
The PESTLE model is limited by uncertainties in the external environment because external
factors change and therefore need regular review which is costly. It needs an adequate time and
experts to conduct the analysis . A lot of information generated by the analysis makes it
difficult to understand by organizational staff internal and policy makers . More so PESTLE
analysis is not feasible and is inadequate because it only focuses on the macro environment,
ignoring the micro environment and the internal factors.
Other Organizational Analysis Models
Strategic Triangle Model
This model determines the efficiency and effectiveness of an organization. It’s a conceptual
framework which uses three key elements: the corporation, customers and competitors forming
‘strategic trianglewhat (Ohmae,1982) and how they analyzed and integrated to improve
performance.
Corporation


Improving its strength
Informed decisions
Customer




Customers interests
Customer needs
Expected customers
Customer location
Competition

Corporate image
SWOT analysis: is
an acronym for “strengths, weaknesses, opportunities, and threats.”
Strengths and weaknesses are considered internal factors, and opportunities and threats are
considered external factors.
Using a SWOT analysis helps an organization identify where
they’re doing well and in what areas they can improve. SWOT analysis SWOT or situation
analysis is used when without to look at both the internal and external environment.
SWOT
stands
for Strength, Weakness, Opportunity and Threat.
The
internal factors
considered are the strengths and weaknesses where the opportunities and threats are
external factors that are all used and considered to help improve the overall decision
making process in dynamic strategic situations the business is facing. The strengths are
positive characteristics in the internal business environment which can be capitalized on to
increase the overall organizations performance. The weakness are factors of the internal
environment
which
may
restrict
and
interfere
with
the
positive
organizational
performance. The internal environment factors will include finance, production, research,
development and marketing. The opportunities include factors of the external environment
that act like stepping stones for the organization in order to achieve their current strategic goals.
The threats include the factors that have an effect and may interrupt the organization from
achieving the goals. Often threats will come out of the external environment
SOAR analysis: is an alternative to SWOT and it’s based on appreciative inquiry to analyze
the strengths, opportunities, aspirations, results (SOAR).
It focuseson the current reality
anddesired state or vision to develop strategic goals. However it ignores weakness and threats
because it uses appreciate inquiry approach which focuses on the positive aspects of the
organization.
POCC Analysis: The analysis of the Potentials and Opportunities, Constraints and
Challenges (POCC) or (Strength, Weaknesses, Opportunities and Threats (SWOT) Potentials,
Opportunities, Challenges, and Constraints (POCC) Analysis of Potentials, Opportunities,
Constraints and Challenges (POCC) Assessing the Potentials, Opportunities, Constraints and
Challenges is very crucial for planning. Key development issues, priorities and formation of
programmes of action are based on existing potentials and opportunities to enhance
and
facilitate the chances of success. Constraints on the other hand have to be managed or addressed
to ensure effective plan implementation. .Potentials, Opportunities, Challenges, And Constraints
(POCC) in addressing the problems using the guidance below:

Potentials refer
to internal factors,
advantages,
and
resources
that can
organization to enhance its chances of achieving the selected goal and objectives.
enable

Opportunities are the external factors (beyond the organization) that positively influence
development in the organization to enhance its chances of achieving the selected goal and
objectives.

Challenges are the external factors or obstacles (outside the organization) that may
hamper smooth development efforts.

Constraints are
the
disadvantages
emanating
from internal factors
that
hinder
the organization from achieving the selected development goal and objectives.
Porter's Five Forces framework:It was developed in 1979 by Michael Porter of Harvard
Business School for looking at the strength of five important factors that affect competition potential entrants, existing competitors, buyers, suppliers and alternative products/services.
Using this model, you can build a strategy to keep ahead of these influences.
McKinsey 7S Framework: The McKinsey 7S Framework emphasizes balancing seven key
aspects of an organization. The elements are strategy, structure, and systems, shared value, staff,
skill, and style.
Conclusion
This article focused on examining the PESTEL model used to analyze the external environment
of organizations which incorporates the opportunities and
the threats,. Organizations should
develop strategies using the PESTLE analysis to determine the opportunities and deal with
challenges in order to improve organizational performances. Threats
from the macro
environment should be managed by coming up with the most effective solutions. The
framework has a number of limitations which includes uncertainty, cost and time constraints.
Therefore organizational development efforts by change makers should use this model together
with other models.
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