Introduction to External Analysis
External strategic analysis assists organizations in determining how the evolution of new trends and changes in their industry will influence their ongoing business operations and future strategies. The conclusions of an effective external analysis will help organizations to succeed in making the necessary modifications and organizational changes in alignment with how the industry is changing as per developments in the business environment.
Having said that, an effective external analysis enables the top management and leaders of companies to identify the risks as well as the opportunities that exist in the external industry environment. Consequently, the top management can undertake effective planning to mitigate the identified risks and exploit the recognized opportunities by refining capabilities and strategies.
Moving forward, let us lay emphasis on PESTLE Analysis which is a common and widely applied strategic planning model used by organizations to examine the external business environment.
Introduction to PESTLE Analysis
PESTLE Analysis is a strategic planning model that companies apply to recognize relevant factors in the macro business environment to ascertain their influence on their current operations and strategic goals. PESTLE offers scope for a comprehensive analysis of the external business environment taking into account every possible determinant that exists in the macroenvironment.
To elaborate, the PESTLE Analysis Model classifies the external business factors into broad categories of political, economic, social, technological, legal, and environmental influences. It delves deep into how these key factors in the external business environment impact an organization’s future plans, strategies, and tactics with respect to revenue generation, customer acquisition, market penetration, and other business objectives.
Moving ahead, it is essentially noteworthy that the PESTLE Analysis is always applied externally to an organization. To elaborate, PESTLE does not include what a company is doing internally or the internal resources and capabilities of a given organization. The model examines how the external business factors affect the entire industry to which a given organization correlates. To add, it highlights how the industry trends are evolving and whether these trends will prove favorable or unfavorable for an organization.
For instance, if you are conducting a PESTLE Analysis of Ford, the analysis will look into how the external factors impact the entire automotive industry in terms of expansion, entering new countries, customer acquisition, retention, and so on. Nothing internal to the company or its operations ought to be included in the PESTLE Analysis of Ford.
Moreover, the article will further explain how you can conduct a worthwhile PESTLE Analysis of an organization taking into account the above-mentioned determinants in the external business environment affecting a given industry. But before we move to the stepwise process of conducting an effective PESTLE analysis, let us list all the key external factors that need to be taken into consideration in the course of the analysis.
Significant external factors in PESTLE Analysis
Key political factors to include
Political stability with respect to a specific nation or in the global context
For industries to survive and flourish in a favorable macro-environment, political stability is indispensable. When there is high political stability, industries can operate in a systematic way and find new opportunities. For instance, in the UK or US, because of great political stability, there are new opportunities for industries. On the contrary, if we look at Afghanistan, the massive political upheaval can force businesses to shut down or lose profits to the Taliban.
Taxation policies and government incentives to the industry
Next, in the political context, taxation policies and government initiatives to support a specific industry are of great importance. If there are strict taxation policies, the industry is affected negatively while liberal taxation policies offer businesses an opportunity to generate greater profits. Similarly, in case the government of a country offers incentives or any special benefits to an industry, it is a positive factor. To cite an example, the EV industry in the US has got a major boost because of government incentives to EV manufacturers.
Free Trade Agreements under international treaties like NAFTA, ASEAN, EU, Trans-Pacific Partnership(TPP), and so on.
From the viewpoint of the export of finished goods and the import of raw materials through a global supply chain, it is important to identify the trade relations of the country. The greater the number of multilateral trade agreements of a country with other nations the better it is for companies to operate on an international level. You should search for the free trade agreements that a nation has with other countries.
The current state of foreign relations with respect to trade tariffs, policies, and disputes
The ongoing trade relations also impact the industry in a direct as well as indirect manner. When a country has good foreign relations with other parts of the world, it describes a favorable scenario for all industries. Based on good foreign relations, they can plan to internationalize their presence or get supply chains from other countries. On the contrary, trade disputes between countries can cause major disruptions like supply chain crises. The disruptions caused by the US-China trade rift and sanctions on Russia are clear examples of the same.
Social welfare policies of the concerned government
It is also significant to recognize if there are any social welfare policies of the government for specific industries. These policies can exist in terms of CSR responsibilities, employee health, mandatory employee benefits etcetera. The presence of a large number of regulatory policies will affect industries negatively.
Foreign Direct Investment (FDI) regulations of the government in the concerned industry
If a company is planning to invest in other nations for greater profitability, the FDI regulations of the government in the destination country will be of immense importance. These FDI regulations will define the possibility of foreign investments and their scalability over time.
Key economic factors to include
Present inflation rate and future projections
The inflation rate is a pivotal determinant in the external economic environment specific to a country or at the global level. When the inflation rates are moderately high, goods and services attain their real price because of positive price adjustment. However, above moderate levels, inflation leads to a decline in demand, and purchasing power of consumers is hit. For industries, moderately high inflation is the best-case scenario.
Current state and future projections of GDP and per capita GDP
GDP growth is one of the most realistic indicators of economic prosperity. High GDP will hint at economic progress in a way that would benefit the industries and also increase the purchasing capacity of consumers. For any company looking to expand to a new market or emerging markets, the GDP projections and per capita GDP in the target country will be of key significance. No company would want to enter a country that has miserably low GDP levels.
Current interest rate and future forecast
For any industry, the interest rates in a country are among the crucial financial indicators. Companies would look to enter those nations where the interest rates are slightly lesser. Governments or economic bodies of different countries often lower the interest rate when they look to attract new investments as well as the consumption levels in a country. On the contrary, high interest rates would count as an unfavorable scenario for an industry. Hence, for analysts, it is important to scan the list of interest rates set by different countries.
The unemployment rate in the country or at the global level
The unemployment rates can have dual implications in terms of strategic planning. Firstly, a moderately higher unemployment rate is an opportunity for the industry to hire employees at lower wages. However, when unemployment rates are very high, it will also imply that people have no revenue, are caught in debts, and have little purchasing power.
Exchange rates between critical markets
Currency exchange rates are also among the important economic determinants that industries need to take into account in the course of strategic planning. Progressive exchange rates will mean positive signs for companies.
Industry growth rate and future projections in terms of CAGR
When it comes to scalability, it is largely subject to how well an industry is anticipated to grow. A real measure of the growth projections is the compound annual growth rate of an industry that gives an overview of the expected growth rates. If the projected CAGR is high, it will encourage the companies to bring in new investments and boost capabilities in a constant manner. On the contrary, a low CAGR in the present industry might encourage companies to diversify and explore new markets to mitigate the risk of low growth in one industry.
Industry demand trends
The demand trends in the industry will also play a crucial role in the planning phase and the organizational change management process. If there is a high demand for products or services in the industry, it is a positive development for the industry and vice versa.
Key social factors to include
Level of consumerism in the country or at the global level
Among the social determinants impacting the industry externally, the level of consumerism is among the top trends. To explain, if the level of consumerism is high in a country or at the global level, it provides an opportunity for the industry to acquire new customers and hence, consolidate profits. On the contrary, low consumerism levels would discourage companies when they look to expand.
Lifestyle trends in a country or globally
The next social determinant is linked to lifestyle trends. Modern lifestyles and consumer trends will imply that people are willing to try new brands and products including premium ones. Hence, countries that embrace modern lifestyles will be the best entry markets for companies looking to expand to new countries. On the flip side, it would not be very beneficial for MNCs to expand to countries where lifestyle trends are orthodox or conservative.
It is also relevant to understand the demographics of a particular market that has various segments of consumers. These demographics can exist in the form of generations, geographical locations, cultural dimensions, income levels, and so on. To cite a relevant example, let’s say a gaming company based in the UK is looking to expand to the Asian markets. Now, for this company, it is vital to take age demographics into account as youngsters would make the largest market for gaming. Having said that, targeting a country where the average age is 40-45 will not be a great decision strategically.
Local religious beliefs and their impact on consumer attitudes
Local religious and social beliefs are also an important dimension of the external social environment. Religious and ethnic beliefs determine the choices of people as consumers. For instance, in Islamic nations of the world, launching pork hamburgers and other pork-based products will not be an effective decision. Similarly, launching beef products in India will count as a bad strategic measure on the part of a company.
People’s attitudes towards work and recreation
The attitude of people towards employment, earnings, and recreational activities are also important from the social perspective that companies need to look at. If people have a very casual attitude towards their jobs and work, the company is less likely to get a competent workforce in a new entry market.
People’s preference towards sustainable business practices
In contemporary times, consumers’ preferences are rampantly changing towards sustainability. People are now preferring shopping from sustainable brands that have a larger purpose to care for the environment and the planet. To further explain, the preference for sustainable brands is much higher in countries where the overall literacy rate is high. Subject to the inclination of consumers in a specific country toward sustainability, businesses need to plan their raw materials, supply chains, and packaging.
People’s preference with respect to offline buying and online shopping
The e-commerce sector is growing at a fast pace and in the developed countries of the world, online shopping has become a more preferred medium of buying. Companies need to analyze the division between online and offline sales and hence, plan their sales channels.
Key technological factors to include
Level of investment in research and development
R&D investments have a key role to play in defining the scope of technological innovations in an industry. When the global R&D investments are high, there is a large possibility for new technologies that can make businesses more efficient and scalable. To explain, in a growing technological infrastructure, companies can look forward to incredible innovations.
Government’s focus on technological development
Coherent to the first factor with respect to technology, the interest of governments in scaling innovation and bringing new technologies to the forefront is also to be gauged. If governments are supportive of new technologies and are investing in R&D, industries have new opportunities to explore.
The level of development and maturity of technology
Further, subsequent to the research and development, the stage of maturity of technologies is also an important factor. The greater the number of mature and proven technologies available in the industry the better it is for businesses. For example, Artificial intelligence or IoT are mature technologies that companies these days can readily use. But if we look at the metaverse, it has not reached that maturity level yet. Given the great dependence of industries on technology, assessing the maturity of technologies becomes essential.
State of intellectual property rights/issues in the local environment
New technologies and inventions need to be backed by intellectual property rights and patents. Hence, it is important for businesses to assess whether a country has strong intellectual property rights or not. In case, new entry countries do not have strong intellectual property rights, companies can lose their technological advantage to competitors in the absence of a well-defined legal framework.
Trends with respect to evolution and changes in technological infrastructure
Trends with respect to how employees and consumers respond to technological changes are also essential to assess. In the ideal scenario, customers in an industry should be aligned to new technological integration in a way that attracts them. For instance, infotainment systems in vehicles have found great acceptance among tech-savvy car owners as well as the younger generations. On similar grounds, employees should be aligned with technological advancements as well.
Latest and emerging technologies in the industry
Disruptive technologies are making their way to every industry now. From the strategic point of view, it becomes very vital to identify the emerging technologies that are setting new trends in the industry and also the upcoming technologies that would have a huge impact in the near future. This is for the simple reason that businesses need to align their strategic plans and operational plans with these technologies at the epicenter.
Key legal factors to include
Legal norms regarding monopolies and private property
Checking for antitrust and anti-competitive laws prevalent in countries is important as these laws restrict companies from gaining monopolistic control over the market. So, companies can dominate the market in a more worthwhile way in countries that lack anti-competitive laws.
Besides competitive laws, it is also essential to look into other legal norms that directly impact the industry. These include laws against harassment, discrimination, nutritional levels information, product safety features, need for certification by competent bodies etcetera.
State of legal protections on intellectual property
The state of legal protections on intellectual property in a country should also be taken into consideration. Vulnerabilities in terms of losing intellectual property can negatively affect companies and lead to heavy losses.
Relevant consumer laws applicable in the current scenario
Legal norms also take into account the legal structure in a country with respect to safeguarding consumer laws. Knowing the consumer laws well can help companies to frame policies and strategic plans aligned with consumer laws to avoid any trouble in the future.
Besides competitive laws, it is also essential to look into other legal norms that directly impact the industry. These include laws against harassment, discrimination, nutritional levels information, product safety features, need for certification by competent bodies, packaging laws etcetera. Further, there are also laws related to workplace safety, minimum wages, and other ethical business issues. These laws directly impact the industries as companies have to comply with these laws and they can face lawsuits in case they violate the same. From the business point of you, those countries are better suited for entering where there are minimum legal obligations as they would cause unprecedented challenges and delays.
Key environmental factors to include
Local environmental issues of key concerns
In the course of the external analysis using the PESTLE Model, it is essential to look at the local environmental issues prevalent in a country or at a global level. For instance, textile industries are largely dependent on water, and hence, expanding to new countries which have regular droughts and scarcity of water will lead a textile business to a lot of challenges. Such challenges need to be identified by underlining the local environmental issues.
Environmental issues in the industry
Next, having assessed the local environmental issues, the next factor that needs to be looked at is the host of environmental problems in the industry. If an industry is crippled by massive environmental issues like high emissions, large waste generation, and so on, companies should look to find ways for addressing these problems to come out as sustainable and responsible for a better perception among customers and stakeholders.
Legalities with respect to sustainable practices
It is highly vital to look into the environmental laws of specific nations that relevant industries need to comply with. In terms of planning, businesses need to keep these legal norms and guidelines in mind to frame policies that do not contradict industrial environment laws set by national or local governments. Ignoring these laws can attract heavy penalties and hence, business losses. Most countries now have net-zero targets with respect to emissions, policies against pollution, regulations on single-use plastics and plastic packaging that companies need to respect.
Impact of international environment and climate change treaties
Most countries of the world are parties to internal environmental commitments like Sustainable Development Goals, Paris Agreement, and COP 26. The international environmental commitments directly impact industries as they will further inspire policies and regulations in favor of sustainability that will lead to drastic industrial changes to keep up with international obligations.
Regulations on energy consumption and waste disposal
Furthermore, it is essential to look into the legal and environmental policies that overlook energy consumption in various sectors and keep waste disposal in check. For industries that are largely dependent on non-renewable energy sources, it has become indispensable to invest in harnessing clean energy sources to sustain in the future. Besides, industries also need to comply with waste generation and disposal norms. Most governments of the world are now bringing stricter laws with respect to waste generation.
Impact of international environmental organizations
The role of international environmental organizations and committees like PETA, Greenpeace, Earth First etcetera. These organizations often raise their voices against environmental problems in industries and their impact also influences consumers’ buying decisions. For instance, a recent investigation by PETA exposed how Louis Vuitton’s suppliers are exploiting live snakes for leather and subjecting them to unethical practices. Given the global influence of PETA, the investigation brought the entire industry under scrutiny and brands started to become questionable. Hence, it becomes important for companies to take these influences into consideration and look to negate such troubles.
Now that we have looked into a detailed assessment of each significant factor across various classifications in the PESTLE Analysis model, let us now look at the stepwise approach to conducting the analysis effectively.
A stepwise guide for conducting a worthwhile PESTLE Analysis
Identify the specific objectives of a PESTLE Analysis
PESTLE Analysis can be carried out for different objectives that a company may have an objective you may have with respect to conducting the PESTLE analysis of a company. A PESTLE Analysis may be required in the general context with respect to an organization considering all key objectives like expansion, higher revenue generation, and so on.
On the contrary, conducting a PESTLE analysis may be required with respect to a specific objective like expanding to emerging markets, higher customer acquisition, change management in the organization, refining organizational capabilities etcetera. To cite an example, if Tesla has to plan the expansion of its operations in India, using a PESTLE Analysis, the top management can evaluate if the external business factors with respect to India are favorable for the company or not.
Having said that, with respect to the above example, a PESTLE Analysis can be used to determine the external factors in a specific country that a business is looking to enter. Besides, in another context, a PESTLE Analysis may be required to present the global perspective of an industry.
When you begin a PESTLE Analysis, you should be clear with the specific objectives of the external analysis you are conducting.
Having said that, you need to validate and filter factors such that they should have an impact on the current business operations and future planning of a company.
Recognize the relevant external factors corresponding to the industry
It is important to realize that not all of the above factors would be applicable to every industry. Factors would largely vary from one industry to another. For instance, for automotive industries, net zero emissions targets would be a more important factor while for the retail or quick-service restaurant industry, government policies with respect to single-use plastics will have a greater role in planning. Having said that, it becomes vital to shortlist the external factors based on their relevance with respect to the industry under consideration. Narrowing down on factors keeping specific industrial concerns in mind will lead you to a more effective and conclusive analysis that will lead to efficient decision-making.
Identify factors that are relevant in the current scenario
The external factors that you take into account for a PESTLE Analysis need to be relevant in the current scenario. If they are not relevant in the concurrent scenario, their impact on the industry will be redundant and the analysis will turn out to be ineffective. You have to identify the political, economic, social, technological, legal, and environmental factors that directly correlate with the industry and have an influence on the current scenario as well. To elaborate, the factors you identify to include in your PESTLE Analysis should have an impact on the current trends in the industry as well as the future trends that directly impact the industry and hence a given organization.
For instance, if you are talking about specific consumer laws in a country that may affect the industry, those acts and regulations should be valid in the present scenario as well. If an act has been replaced or altered in the due course of time then you need to mention the current act/law or the recent amendments in that act. Talking about a particular law without discussing its present relevance or mentioning a law that has become obsolete will be irrelevant in the context of the analysis.
Having said that, you need to validate and filter factors such that they should have an impact on the current business operations and future planning of a company.
To encapsulate, PESTLE Analysis of a company is always carried out in the external context taking into account the influences in the macro-environment affecting the entire industry. It offers a realistic picture of the various opportunities that are available for the company to exploit and also the risks that it is exposed to because of external developments. By taking the above-mentioned factors into consideration and applying them as per the mentioned steps, you can conduct a highly effective PESTLE Analysis with credible insights.