One of the most powerful tools that our digital consultants use when evaluating a business is the “PESTLE Analysis.” This tool is used to examine the external environment of a business. If the business is looking to enter a new market or area, then PESTLE Analysis is a recommended tool.
What does PESTLE stand for?
“P” stands for political, “E” for economical, “S” for social, “T” for technological, “L” for legal, and “E” for environmental.
You would look at a business concept using the varying perspectives:
The aim is to look for the limitations and opportunities based on those perspectives.
PESTLE – Expanded and Applied
In this perspective, your examining to see if the government poses as a threat or opportunity to your business. The government yields a lot of influence; they can create taxes, tariffs and incentives that can affect your business and the industry. For example, NAFTA (North American Free Trade Agreement) which enables a Canadian business to easily do business with American businesses is meant to encourage trade between both countries. If your a Canadian business and you supply material goods, this agreement can be both beneficial and detrimental. It would be beneficial for you if your good or service is high in demand and low in supply in America – as you can charge higher rates. It would be detrimental for you if your good or service is low in demand and high in supply in America – as you would have to charge lower in rates to compete. If your good or services are not competitive enough, the competition from America can take your market share.
Viewing a business in the economic perspective enables you to see how a nation’s economy can effect your business. A nation’s economic factors include (non-exhaustive): inflation, interest rates, federal spending, etc. If a country has a low interest rate for borrowers, this could be an opportunity for you to leverage funds from that country to grow your business. This could create inflationary pressures that could affect your business – especially, if your in the finance sector.
A social perspective encourages you to look at the culture, patterns, behaviors, and social norms of the targeted business landscape. Some business models will work effectively in some countries, while in others it will not be effective. For example, a client of ours wanted us to build a car dealer auction website in China. At first glance this seemed attractive, since the massive population of China and their increasing middle and upper class (more disposable income to buy premium and used cars). However, as we explored deeper, Chinese dealerships currently prefer to pay cash and underneath the table to avoid taxes from the Government. This would make our website’s business model ineffective as the dealerships do not want to show their transaction history or volume. There are of course other solutions to this problem, but this is one example of using a social perspective to analyze a business.
Technological factors typically pertains to the following: the ability for the targeted customers to use technology, and acquire technology. For example, India is known to be the best place to outsource software development to. You would assume that you could find a computer in almost every household. This is not the case, as there is a large population that live in rural communities who do not have access to internet or the computers. Examining a community’s access to technology is important if your good/service is dependent upon technology.
Legal factors are very important. They include and are not limited to factors such as: patents, trademarks, contractual law, securities and market law, safety standards, labor law, and more… In some countries, the citizens are required to work longer hours in order to retain their jobs. Minimum wage is also an important figure to keep note. Some companies choose to do business with certain countries because of these legal advantages.
Environment factors include: climate, temperature, seasonality, and precipitation. If your in an a business that is connected to industries such as farming, agriculture, construction, and retail – you will want to study environmental factors. A client of ours: one of the largest retail chain in Canada was fascinated to note that a particular group of sweaters were extremely popular in one province, and in another province it would seldom sell. The workers in Alberta would buy this sweater all season – whereas in Ontario, these sweaters would not even be be sold.
As you can see, using PESTLE analysis can help you avoid problems. If used intelligently, it can be used to identify opportunity.