PESTLE Analysis Explained

Not very long ago, countries prided on erecting protectionist barriers for foreign companies from entering their markets. Higher rate of taxes, compulsion to take local company as a majority partner, differential tariffs and the like was the norm rather than exception. As these barriers started collapsing with the opening of economies, mainly coinciding with the advent of the internet, companies scrambled to make hay. While Chinese and American companies established themselves in all countries, several others also began taking roots. Would it have been possible for these companies to make this transition easily? Especially in the VUCA world when things changed in the blink of an eye?

When such strategic decisions are made, plenty of groundwork goes behind it because a lot is at stake for the company- money, people, brand equity and credibility. It is here that the companies embark on conducting the PESTLE Analysis (Also referred to as PESTEL Analysis).

This is a tool (referred to as a pneumonic) used by companies considering the following factors:

  • Political
  • Economical
  • Social
  • Technical
  • Legal
  • Environmental

All these factors play a critical role during the decision-making process for any company or organization.

Usage of PESTLE Analysis

A business entering a new country must deal with several volatile factors (as the above pneumonic suggests) putting it at a vulnerable spot in terms of survival.

When failure affects the company in more ways than success, it is pertinent to take all due precautions even before taking the first step.

Asking the right questions about the key factors that govern its sustenance and then growth, helps in determining whether it’s a correct decision or not. These answers form the basis on which decisions are made.

Companies rarely take impulsive decisions as most are based on solid business logic backed by strong data. These Data-Driven-Decisions seldom go wrong. When combined with tools like the PESTLE Analysis, companies have a strong idea of whether to enter the new country or not. This becomes the key strategic planning tool in decision making. Many times, the PESTLE Analysis is combined with SWOT Analysis and Porter’s 5 forces to arrive at a strong and convincing conclusion.

Each of the 6 PESTLE Factors Explained

P: POLITICAL

World politics has never been easy and straightforward, especially now in the global internet era. Regimes and political ideologies drive a nation’s business and foreign relation policies to a large extent. Several leaders win elections and come to power based on promises made to the electorate regarding encouraging local businesses. At such times, companies must be wary about entering while facing hurdles all the way. Trade and normal relations with other countries cannot be assured in all cases.

Ex. An American company entering India must consider India’s relations with its neighbors. Matters become even more challenging in case of countries facing trade sanctions or blacklisted by the stronger countries. Tax structures, bureaucracy, local trade unions also play a key role in the political rigmarole.

E: ECONOMIC

Money is a key deciding factor after politics, for sure. Though economic indicators are regularly published, they are not the sole determinants for decisions. Central Banks publish the annual growth rate, GDP, Consumer Price Index, Factory Outputs and the like, which give a fair picture of the country’s economic health. Other indicators like the Ease of Doing Business Index and Transparency International’s rankings are also considered.

But more than anything, the interest rates, currency exchange rates, inflation rates and the rate of unemployment determine the cost that a company would incur while entering a new country.

S: SOCIAL

A country’s people and demographic trends provide a strong indicator whether a new business can survive and flourish. It is the way the people lead their lives, their health (and the healthcare), life expectancy and population growth rates, cultural and social milieu in which the business operates. A company cannot overrule ingrained social and cultural norms which could also prove highly risky. Examples galore of how companies blundered with brand names, usage of icons considered holy by some cultures or products that meet disdain. Take Iranian razor brand Tiz – (meaning sharp in Persian) which when launched in Qatar evoked resistance because it denoted an objectionable slang word.

T: TECHNOLOGY

It’s one of the most crucial determinants in today’s age, especially when it comes to high tech products that need a highly evolved local technological ecosystem to support it. Countries like India, Israel, Indonesia or China have a robust software industry that helps any company whose main business is dependent on software professionals. Hence companies find it easy to set up and get up and running quickly and economically.

Even facilities like high-speed broadband internet, suitable climate to establish data centers, manufacturing facilities for components all play a key role.

L: LEGAL

Abiding by a country’s law is paramount to establishing business in that country.

If the legal establishment of a country is to be conducive for businesses, it becomes easier for more companies to come. Even foreign companies must follow laws pertaining to setting up, labor laws, consumer laws, safety laws, employee welfare laws and more.

A company must abide by ALL the laws without an exception and there’s no leniency in not doing so. Having a strong legal advice with local lawyers certainly helps.

E: ENVIRONMENTAL

What was relegated to something only activists spoke about until a few years ago has become a significant factor for businesses and governments alike today.

Environment laws pertaining to pollution control, usage of harmful chemicals, processes and effluents, disposal of industrial waste, water and air come into picture even before an industry is established.

Several companies face tremendous local resistance from environmental activists while getting large tracts of land, cleared after felling trees or forest areas.

Soft Drink companies, chemical plants, etc. must be careful of what they intend to do with the water, air and waste disposal to stay clear of environmental laws of the country.

It is only after all these detailed analyses that a company concludes about entering a new market. After all, business may be all about profit making, but one must put the money where it’s worth doing so.

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