Everything you need to know about using PESTLE analysis for risk management purposes, its benefits and other business analysis tools for uncovering risks.
PESTLE analysis is a wide-reaching business analysis tool that looks at Political, Economic, Sociocultural, Technological, Legal, and Environmental forces in the surrounding business environment. It can be an especially useful tool in the context of risk management, where it helps business analysts in identifying potential risks. In this article, we'll look at what you need to know about using PESTLE analysis for risk management purposes… but first, what exactly is risk management?
What Is Risk Management? (Definition)
Risk management is a business process that involves identifying, evaluating, and planning for potential business risks. By using risk management insights, businesses can prevent significant unnecessary costs and meaningfully maximize revenue. This makes risk management a crucial part of an effective business development strategy.
Risk management can be divided into the following steps:
- Risk identification. Perhaps the most important step in risk management is identifying potential risks. There is no single best approach to risk identification, since many risks are difficult to spot. As a result, business analysts consult a wide range of tools (like PESTLE analysis) to identify potential risks.
- Risk evaluation. The second step in risk management, also known as risk analysis or risk assessment, is evaluating any risks that have been identified. Risks come in all different sizes: some may wipe out an entire business, while others can have minimal impact. Risk evaluation is the all-important step of assessing risks on a case-by-case basis to determine how significant they are.
- Risk mitigation. In some cases, special steps will need to be taken to respond to certain risks. This process, known as risk mitigation, is essential. Being able to identify and evaluate risks is hugely beneficial, but being able to actively circumvent them is how businesses gain the most value from risk management.
- Risk monitoring. A sometimes forgotten step in risk management is that of monitoring. All risks, regardless of whether they were actively mitigated or deemed insignificant, should be continuously monitored. Risks that have already been addressed may reappear, while risks that were considered insignificant may further develop.
Adding PESTLE Analysis in the Risk Management Framework
PESTLE analysis is a popular business analysis tool that involves identifying and evaluating Political, Economic, Sociocultural, Technological, Legal, and Environmental factors that affect a business. It can be a particularly useful tool in the context of risk management, where it provides a straightforward framework that business analysts can use to identify potential risks.
PESTLE analysis forces you to consider a wide variety of variables in the greater business environment. By doing so, it allows you to uncover potential risks in areas that you may have otherwise ignored. To understand this, it's helpful to look at how risks can be found in each of the six PESTLE categories:
- Political. Changes in the greater Political environment affect some businesses more so than others. For example, software houses will rarely have to worry about changing Politics; however, if a business is largely dependent on trade or travel (especially where there are unstable connections with other countries), looking at the Political outlook may help to identify new risks.
- Economic. Especially on longer time frames, the Economic factors affecting a business may have a lot to say about potential risks. For example, a rising minimum wage or growing competition might both impact a business in a negative way if no protective measures are employed.
- Sociocultural. People are the lifeblood of any business, in that they always play the role of the customer in one way or another. As a result, changes in the Sociocultural environment can have a massive impact on businesses. Examples include changes in consumer eating habits, clothing preferences, or hobbies.
- Technological. As new technologies are developed, it may make some businesses redundant. Once again, Technological changes tend to happen over a longer timeframe, but they can have huge impacts on a business' bottom line.
- Legal. The threat of Legal action is one of the biggest risks any business faces. Whether that refers to Legal proceedings initiated by a customer or fellow competitor, it can still be a serious risk. What adds more risks is the lack of knowledge of the confusing financial terms and legal lingo.
- Environmental. With the growing relevance of Environmental issues, businesses also need to look at these factors to identify potential risks. These risks may result from Environmental changes themselves, such as rising sea levels or less predictable weather cycles, or from regulation surrounding these changes.
It's important to note that PESTLE analysis usually takes into account both positive and negative factors affecting a business. However, in the case of risk management, it's the negative factors which are most interesting. As a result, an analyst using PESTLE analysis for risk management purposes should focus only on negative factors.
Benefits of Using PESTLE Analysis in a Risk Management Plan
You may be wondering what the benefits of using PESTLE analysis in risk management are. Perhaps the biggest benefit of PESTLE analysis is that it forces you to evaluate the business environment from six unique standpoints. As a result, you're able to identify potential risks you may otherwise miss. This is important because business analysts might focus on obvious risks when conducting risk management, such as the risk of new competition, overlooking more complex ones.
Other Business Analysis Tools for Risk Management
There are a variety of other business analysis tools, which can also be used in risk management. Perhaps two of the most popular are SWOT analysis and Porter's Five Forces.
SWOT Analysis
Like PESTLE analysis, SWOT analysis is a business analysis tool that looks at both positive and negative variables. In particular, SWOT takes into account the Strengths, Weaknesses, Opportunities, and Threats affecting a business. The crucial category in SWOT analysis, as regards risk management, is that of Threats. Threats are, for all intents and purposes, the same as risks, and often relate to the business' Weaknesses.
Porter's Five Forces in Risk Management Process
Another powerful business analysis tool is Porter's Five Forces. The five forces, which this tool considers, are:
- Competition in the industry
- Potential of new entrants into the industry
- Power of suppliers
- Power of customers
- Threat of substitute products
As you can see, this tool may also help to uncover a business' risks. However, the categories are nowhere near as broad as in PESTLE analysis.
