DIY Strategy: How to use the PESTLE framework properly

DIY Strategy is about how to make practical use of popular management models

The PESTLE framework is a classic environment-scanning tool used in strategic management. The funny thing is, although many people know what it is they don’t know how to use it properly.

(Refresher: PESTLE is an acronym for Political, Economic, Social, Technological, Legal, Environmental – the themes under which trends that affect how a business operates can be grouped).

In this article I look at how the PESTLE framework can be used to contextualise and inform business innovation, referencing a seemingly counterintuitive decision that led to the creation of an empire.

McDonalds and the birth of fast food

In the late 1940s, there was just one McDonalds – the original restaurant opened by brothers Richard and Maurice McDonald in San Bernardino, Southern California. McDonalds was a burger bar drive-in that appealed mainly to young men; nowhere else could they eat tasty food served to them in their cars by attractive ‘carhops’ in skimpy outfits, who were incentivised to flirt with their customers to earn tips.

McDonalds burger bar was close to a high school and attracted a steady stream of customers. It made the brothers rich, but it was a tiresome business to run and they considered selling the restaurant. Instead, they reduced costs by firing their skilled staff, drastically reducing the size of their menu, and introducing a new method of preparing food, dubbed the ‘Speedee Service System’. This system was the genesis of modern fast food.

The new system was not an instant success. By changing their approach, the brothers had done away with three of their four USPs – quality food prepared to order by skilled cooks, the convenience of being served food in your car without having to get out of the vehicle, and the personalised customer service provided by friendly waitresses (the fourth USP, their location, remained).

Slowly, it gained acceptance and the Speedee Service System became a USP in its own right that enabled McDonalds to become a franchise chain.

This story fascinates me. I’m struck by the brothers’ decision not to sell the restaurant when they became tired of it – selling it would have rewarded them handsomely. More curiously, why did they decide to eliminate everything that appealed to customers about the restaurant?

In fact, the McDonald brothers’ innovation was less of a gamble than it appears. Why? The answer lies in the economic contrasts of the Great Depression and World War II, and we can investigate how best to employ the PESTLE framework as we search for that answer.

Everyone’s entitled to their own opinion

In using the PESTLE framework to inform business strategy, you should take an expansive but coherent view of your operating landscape and, based upon that view, formulate a strategic hypothesis.

A perspective on the future is an incredibly personal thing. It’s informed by a selective reading of the past and present, viewed through the prism of a person’s worldview, which is itself formed from personal experience. Some perspectives are more universal than others, but they are subjectively biased nonetheless.

Fortunately, you’re likely to be working with others whose views don’t entirely correspond with your own, leaving room for meaningful debate and – hopefully – the emergence of a nuanced and risk-weighted hypothesis.

Here’s how to use the PESTLE framework in a group activity aimed at reaching a consensual strategic hypothesis:

1. Working individually, brainstorm observations for each of the PESTLE factors and come to a personal conclusion about the direction of travel for each factor, the more directional or polemical the better.
2. Research quantitative and qualitative source materials to back up your claims, based on a chronological view of history that illustrates cause-effect-conclusion. Embrace this subjectivity – we’re programmed to do it (behavioural scientists call it confirmation bias) and it’s ultimately what taking a risk is all about. But be prepared to quote sources and share your personal views to demonstrate to your colleagues the substance of your opinion.
3. Share your ideas with your colleagues and chart your differing perspectives about the future direction of travel on a linear diagram, with the differing extremes of opinion at each end and the more moderate opinions in the middle. Do this for each factor.
4. Debate each factor, avoiding diplomacy, as it tends to lead to prosaic groupthink that provides no clear sense of direction. Argue your corner! To close the debate for each factor, give everyone the opportunity to put forward a final vote for the direction of travel, by marking a point along the linear diagram of opinion. Take the mid-point of the biggest cluster of votes as the group’s consensus, and summarise what that mid-point means.
5. Once you’ve debated each factor, frame a strategic hypothesis about what to do next that references each of the consensus summaries. Your hypothesis can then be used to contextualise and inform decision-making and innovation design.

Now let’s go back 70 years and consider how the McDonald brothers might have reached a hypothesis that led them to develop the Speedee Service System.

Political factors

Coming off the back of the Great Depression, American industry was revitalised by the mobilisation of unskilled labour in a variety of sectors to support military preparedness for World War II. It achieved something that President Roosevelt’s New Deal programmes never managed. Southern California particularly benefitted from government war expenditure, in both existing and entirely new industries. In fact, it transformed the region.

McDonalds’ conclusion: The war effort succeeded by proving the flexibility and efficiency of a particular approach to manufacturing – the assembly line. This approach to production is the future.

Economic factors

In order to finance World War II, the US government pegged interest rates at a low level and continued to do so after the war had ended. Accordingly, growth rates, though volatile, were huge from the late 1930s to late 1940s. Rates of inflation were also high. The yield on ‘safe’ investments was low and would not cover inflation, while it was possible to borrow money at very low rates.

McDonalds’ conclusion: Government economic policies at this time make it a no-brainer to be in business. Selling the business comes at a massive opportunity cost of foregoing future success.

Social factors

Perhaps more than anything else, the automobile shaped Southern California. By the 1940s, there was one car for every two Californians and its supremacy as a mode of transport was secure. As Americans flocked to the region for work, California built freeways to accommodate the movement of workers from suburban cities to the factories and urban centres in which they worked. Drive-in restaurants, once places to spend leisure time, were fast becoming a convenient aspect of working peoples’ commute.

McDonalds’ conclusion: Restaurants that cater to our increasing reliance on the automobile as a mode of transport are the future of casual dining. That means fast, unfussy service.

Technological factors

An intense focus on scientific and technological innovation began, out of necessity, during the Great Depression and gathered pace during the war. As the quality of life for many Americans increased, a permanent expectation was created – not only would innovation continue to gather pace but it also meant greater wealth, comfort and security for ordinary people. It was a bulwark against a return to depression.

McDonalds’ conclusion: Anything is possible in America, and there is a well-established history of cultural experimentation in Southern California that suggests our fellow citizens will welcome new and novel ways of dining.

Legal factors

Organised labour found its voice, and much political support, during the Great Depression. As more and more people went back to work, the organised labour movement became even stronger during the war (with union membership peaking during the 1950s). So began an ideological struggle with private industry.

McDonalds’ conclusion: Our restaurant operations are overly reliant on people, who are demanding and unpredictable. It’s also unnecessary – precedents in technological innovation and large-scale deployment of the assembly line offer the opportunity to de-emphasise expensive skilled labour.

Environmental factors

Southern California’s natural environment contributed significantly to its appeal. Land was plentiful, leaving significant room for population- and therefore business-growth, the weather was relatively benign (though earthquakes would always be a risk), and rail, sea and road transport routes were all readily accessible, minimising the chances of disruption to McDonalds’ supply chain.

McDonalds’ conclusion: Southern California is an attractive place to be, and we can expect that the region will continue to grow, bringing further benefits in terms of sales growth and cost reductions.

Strategic hypothesis

Taking all of the above into account, the McDonald brothers’ hypothesis might have been:

The key to greater success is a higher volume of sales at reduced cost. The difference between the failures of FDR’s New Deal programmes to rebuild the economy and the success of the war effort was the highly effective scaling of an assembly line approach to mass production in many industrial sectors. By adopting a production line approach we will eliminate the higher costs associated with skilled labour, reduce the prices of our food further, and make it possible for working class families to eat at restaurants. We believe the people of Southern California, given their increased prosperity and willingness to try new things, will forego the standard expectations of restaurant dining – table service, non-disposable kitchenware, an expansive menu – for the convenience and status associated with eating out, and the novelty of a new kind of dining experience.

And the rest is history.