Understanding the PESTLE Analysis with examples

Starting a business or entering a foreign market is a crucial step. It requires deep understanding of the industry, economy, and the factors affecting them. Thus, a myriad of strategy frameworks is utilized. With today’s piece, we’ll look at one such framework called PESTLE analysis with examples. It analyses the Political, Social, Economical, Technological, Legal, Environmental factors vs the business. In essence, it is used to study the impact of external factors on business. The factors are classified as:

PESTLE analysis with examples

Now, let’s understand the factors and framework in detail. To start with, assume that you are planning to start an automobile manufacturing business in India.

Pestle Analysis with examples
Political Factors:

These are factors related to the role a government plays in a sector, its regulations, political stability, foreign trade policies, trade policies, tax policies, labor laws and so on. To understand the attractiveness of a market, all these factors should be analyzed.

For the automobile sector, about 25% of total auto components are imported from China, with which India has frictions now and then. There is a probability that a ban or high tariffs would be imposed on these components. This makes the sourcing of components precarious in India. Also, the auto sector has to comply with emission norms that keep changing. Presently, the sector is transitioning from BS-IV norms to BS-VI norms. Similarly, the labor laws in India are less business-friendly. These factors combined are going to have an impact on the business, which has to be accounted for before starting off.

Related: Take a look at why India decided not to sign the RCEP deal
Economic Factors:

Economic factors accentuate an economy’s performance, position, and the impact of its macroeconomic indicators such as inflation rate, unemployment rate, economic growth, interest rates, consumer demand, foreign exchange rates, and liquidity in capital markets. There is a direct impact of these factors on a business’ performance. Inflation rates will affect the pricing of the product and consequently, consumption and profit margins. Similarly, interest rates affect the cost of borrowing for businesses, foreign exchange rates affect the cost of imports and exports, and so on.

The automobile sector has been witnessing a demand slowdown since the last three quarters. The interest rates have dropped. Foreign exchange rates have been more or less stable. All these factors determine the present and future of any company.

Related: Take a look at the impact of Chinese ban on Indian economy
Social Factors:

Social factors relate to a country’s demographic, population growth, age and income distribution, culture, availability of skilled and fit workforce, and societal norms. An understanding of these factors is essential to enhance the management-worker relationship, positioning of the business, and its product to target the right customers. India has a rich demographic dividend but lags in the availability of skilled workforce.

So, an automobile company will have to consider this to find the right talent required and design its training capabilities accordingly. It will have to position its products and market them considering the culture and customer requirements in India.

Technological Factors:

These factors relate to the innovation in technologies that affect the operations of a business or cost of a product. Research and development capabilities and requirements, level of innovation, automation, AI and technological awareness amongst the consumers are some of the factors. These factors help in understanding the manufacturing constraints of a business or whether a new product should be launched. A product about which there isn’t enough technological awareness is likely to fail.

The automobile sector sees a rapid change in technologies owing to changes in emission norms and customer requirements. It is steadfastly moving towards electric vehicles (EVs) and designing a business considering it is a challenging task, as the manufacturing process, raw material, testing and quality parameters will also change.

Related: Take a look at improved customer experience using Augmented Reality
Legal Factors:

Legal factors play a crucial role in a business’ operations in a country as it has to comply with all its laws. These factors often overlap with the political factors but they also include laws such as consumer protection laws, discrimination laws, employment laws, and intellectual property laws. Therefore, an automobile company will be required to comply with all the laws pertaining to intellectual property when filing for a patent.

At the same time, if it does business internationally, then it will have to comply with international norms, or norms of individual countries in the absence of international norms, which can be tricky. Failing to comply with these laws may result in the erosion of a company’s goodwill as we have seen in the case of Volkswagen.

Environmental Factors:

In recent times, the environmental impact of businesses has become an essential part of business strategies. This is due to an increasing carbon footprint, global warming, and depleting natural resources. Factors such as wastage disposal, water consumption, emissions, and fluid discharge are highly regulated by governments across the world. So, before starting a business, you need to ensure that the required set-up is in place to monitor these factors. Further, adhering to these factors and doing business sustainably also wins you customer goodwill.

Conclusion:

PESTLE analysis is very extensive and there are many other factors besides the ones mentioned. It is important to analyze the factors together and not in isolation as each of these factors is linked to another.

The concept was penned by Shivam Ghule, a co-author at CaseReads.

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