Using the PESTEL Framework to Assess Risk

Assessing and understanding risk is an important part of a loss prevention professional’s role in a retail organization. Giving risk assessment and mitigation the attention it needs can be a tall task. It can feel like there are so many factors and motivators happening that it is almost impossible to stay on top of all vectors of risk. While that may be true, following a framework to assess and understand potential risk factors is a great way for organizations to think proactively and to distribute the appropriate resources for mitigation.

The PESTEL analysis method is a great tool for LP professionals looking to proactively mitigate risk and is an organized way to consider possible risk vectors. The PESTEL (political, economic, socio-cultural, technological, environmental, and legal) analysis method was created by Francis Aguilar, a professor at Harvard Business School in 1967. It was originally called the PEST analysis method, but it had become clear that environmental and legal risks needed to be analyzed and mitigated. PESTEL is traditionally used in business for strategic planning as a method to scan for market research. It is commonly used by businesses as a strategic tool for planning and allocating resources. For loss prevention it can be used to provide a framework in which risk can be anticipated by separating risk factors into distinct categories. We can then use those categories to explore the risks that may be considered.

The categories should not be understood as independent of one another. There is a great deal of overlap. For example, the political climate impacts social factors which then in turn have impacts on our economy. The categories simply are used as a brainstorming starting point and once the initial factors are laid out, we can begin to explore the cascading effects these factors have on our organizations and risk.

Political factors to consider include geopolitical events, governmental policies, leadership, taxes, and regulations. Following and understanding the effects of politics can go a long way in mitigating risk for our organizations. Through this understanding, we can anticipate the public or organizational reaction of these political changes. For example, elections can have a big impact. New officials in certain areas may be tough on crime or lenient on crime. Understanding the potential for risk based on political changes can help with the proper allocation of resources.

Economic factors include inflation, interest rate, GDP, CPI, labor cost, and the overall economic environment. Economic hardship can unfortunately have a big impact on loss prevention risk. Staying on top of economic health helps organizations mitigate shrink. Think about it on a store level, if the economy starts to struggle in a certain community or region, the products that criminals target will change, and the risk for that store or chain of stores will also change.

Social factors include demographics, consumer attitudes, opinions, buying patterns, population growth rate, generational, employment rate, ethical and religious trends, civil unrest, and living standards. Where are populations growing? Where are populations shrinking? Where are populations aging? All these questions should be considered when deciding on resource allocation. It can help to look at the trends and try to stay ahead of them instead of reacting to them after the changes happen.

Technological factors include equipment used in production of goods and services, new and innovative ways of distributing goods and services, new communication methods, artificial intelligence, machine learning, accelerated processing speeds, new hacking methods, and new devices used by criminals. The technology itself can be what is contributing to the risk, but often it is the status of the technology that can most contribute to risk. For example, whether the technology is approaching the end of its lifespan or if it’s a new technology to the organization, these factors can attribute to human error or new holes in security.

Environmental factors include status of raw materials, pollution and carbon footprint, ethical and sustainability challenges, weather events, and global warming. Weather is widely unpredictable, but it is not hard to argue the effect of weather on human behavior and the economy. Understanding environment and climate is an important part of mitigating risk as well as understanding the effect the environment can have on other categories.

Legal factors include liability, health and safety, equal opportunity, advertising standards, consumer rights and law, product labeling, and product safety. The addition of new laws or the adjustment of current laws greatly impacts criminal activity. Thinking through how legal changes can affect your organization is a worthwhile practice when planning.

A lot of companies compartmentalize risk. A framework like PESTEL is an effective way to consider the widespread effects certain factors can have on an organization. Also, working through a framework or process is a great way to enable cross department collaboration and encourage stakeholders to work together.

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