SWOT and Pestle analysis is a strategic analysis tool that feeds important information into the business strategy formulation process. SWOT stands for Strengths, Weaknesses, Opportunities and Threats. SWOT is used to determine the current position of an organization. The first two components pertain to internal factors and the latter two concern external issues. Pestle (or PEST) is an acronym for Political, Economic, Social, Technical, Legal and Environmental analysis. Pestle is a tool for assessing the external context of an organization (Bee, 1998). Sequence
Pestle can be used alone or in combination with SWOT. If combined, Pestle analysis is done first to provide a context for SWOT analysis (Basu, 2004). Pestle analysis delineates the broad environmental context that affects the business and the changes that occur in this context. SWOT analysis then interprets these findings to determine organizations' strengths and weaknesses, and opportunities and threats (Needham et al., 1999).
Significance of Pestle
Classical management theories failed to consider the environment vis-à-vis the organization and viewed organizations as closed, mechanical systems. Modern theory regards organizations as open systems. Organizations, like individuals, have needs. These needs are satisfied through contacts with the wider environment. The open-systems view stresses the importance of organizations' interactions with customers, competitors, suppliers, labor unions, government agencies, and the contextual or general environment (Morgan, 2006). Pestle is a tool that helps scan the broader environmental context.
Significance of SWOT
SWOT analysis is a focusing device or framework in the process of formulating a business strategy. A strategy helps the organization build upon its achievements, plan for the future and monitor progress. An effective strategy should utilize unique strengths to distinguish the business from competitors. It should exploit links with the environment to fulfill organizational needs and be in harmony with the environmental changes. A strategy should strive to achieve a vision that defines the long term success of the business. This may entail addressing weaknesses (Needham et al., 1999).
All management tools suffer from shortcomings. A combined SWOT and Pestle analysis can overcome some of the limitations they suffer as a standalone tool. SWOT analysis focuses on the immediate business context and can lead to ignoring important broader environmental changes that can redefined a business. Pestle can highlight long-term environmental shifts and cover this weakness. Pestle is more outside focused while SWOT considers implications for the bottom-line (Davies, 2007; Dess et al., 2004).
Conducting SWOT and Pestle analysis is not an end in itself. The output should be fed into a strategy formulation process. These tools may produce a long list of important issues. Weighing them correctly is important in their effective incorporation into the strategy formulation process. Moreover, strengths may not translate into competitive advantage because of mismatch with organizational goals. SWOT analysis tends to give a static view of the competitive landscape. It is important to consider how things develop over time. Also, it is important to avoid focusing on a single strength (Henry, 2008; Dess et al., 2004).
How to do a SWOT and PESTLE Analysis
Some business analysis is a waste of time particularly when you work for yourself because you’ve no manager to impress or colleagues to show your 50 slide Powerpoint presentation on the affect rainfall has on the volumes of washing machines being sold.
However, some business analysis tools are extremely worthwhile. Even if you just scribble down a SWOT and PESTLE analysis it can help to remove you from the daily slog of running your business and appreciate the bigger picture.
What exactly are SWOT and PESTLE?