Table of Content
- Why do we need to understand our external business environment?
- What is PESTLE Analysis?
Why do we need to understand our external business environment?
It’s really important to fully understand our external business environment, even before starting it. Why? Because it could drive our business will goes to and what problem we might face in the future.
For example, Gojek and Grab or any ride-hailing company needs to have deep understanding outside their business before starting? Will drivers want to join us? What kind of law that regulate transportation service in certain country? How about the economics situation in that country? Could they afford our services? And so on.
It will be hard if we only list all the problems. What kind of segment that we need to explore? Does a certain segment important to explore? All these questions are the background in PESTLE analysis. This tool will give us a segment that we need to focus on for our business!
What is PESTLE Analysis?
To put it simply, PESTLE Analysis is an abbreviation of segments we need to focus on when doing external business environment analysis. There are 6 segments:
In reality, we do not necessarily need to fill all 6 factors of PESTLE Analysis. It’s totally okay to only do 4 or even 3, depends on our business model. This usage is what makes PESTLE has a lot of names, sometime people call it PEST or PESTLIED.
Yeah, there we could also add 2 other segments: International and Demographic. But, this implementation is not common in reality. Now, how do we analyze all these segments?
Political is often being confused with legal (it’s ok, me too at first). But the two are completely different. Political factors discussed how and to what degree a government could intervene with our business. If the government has a lot of power to intervene then it could be dangerous for our business.
For example, ride-hailing service. In Indonesia, there was a case when the government could intervene with its base price that leads to several companies losing their customer to public transportation. The other case is corruption. A country with high corruption rate offer much higher risk, as there’s a chance that our business could be involved. To make it easier, here are some factors often discussed for this segment:
- Government power to intervene
- Corruption level
- Foreign trade policy
- Tax policy (is it easy for them to increase or decrease the tax?
- Special tariffs (some country implement this one to protect their national products)
- Trade control
- Lobbying activities
- Competition regulation
- Freedom of press
This one is quite easy to understand. Economic factors discuss a certain economy’s performance. Yeah, obviously. These include inflation rate, economic growth, exchange rate, and interest rates. Do a certain country/city economics in our favor? Or the opposite? It’s important to deeply understand before we scale our market or launch a new product.
All of these factors are important. Let’s say we’re going to create a new product which is an electric car in a new country. We first need to know: what is the inflation rate of an electric car in this country? And what about the exchange rate? This factor will minimize the risk and help us search for its mitigation. There are several other factors in economic factors:
- Economic Growth rate
- Interest rate
- Inflation rate
- Exchange rate
- Availability of credit
- Stock market trends
- Price fluctuations
The next one in PESTLE is: social. This is also quite straight forward, as it is discussing on the general business environment which represents norms, cultures, demography, and values. This is one of the most common problem company faced when expanding their business to a new country. Culture-shock. That’s why deep research is needed to be done beforehand.
The easiest example is when we are creating a wine business and want to expand our market to Indonesia or some other Muslim-dominant country in general. Will, the market use our product? Depends. It came back to the reason why we’re doing the analysis. If now we know that the market does not drink alcohol, what strategy we could use? Or, maybe, choose some other country that has higher chance to use our product?
Here are some other factors to consider in social factor:
- Demography in general (gender distribution, age, etc)
- Birth and death rates
- Number of mariages and divorces
- Life expectancy
- Social classes (some country and city still has this classes)
- Health consciousness
- Attitude towards government
- Buying habits
- Ethical concerns
- Cultural norms and values
- Religion and beliefs
- Education level
- Crime levels
The next important factor is technology. It’s not only for tech-related companies but anything in general. There are several factors included for this one, but the most important ones are technology incentives and access to new technology. With good access and support and technology, we could also create a good environment for technology development.
One example for technology analysis is when we’re a technology company which heavily relied on cloud server. Some country doesn’t have access to this direct server, which leads them to stream from another country and cause delay. This factors needed to be analyze before we decided to launch new service or expand to new place.
Here are some other factors to consider in technological factor:
- Technology incentives
- Research & Development activity
- Technological change
- Access to new technology
- Level of innovation
- Technological awareness
- Internet infrastructure
As I said before, one of the common mistakes in PESTLE analysis differentiates between political and legal factors. In legal, we are more focused on specific laws and not on some political parties. Antitrust laws, Patent laws, and Safety laws are some of the examples.
The best example of legal is a company that trades its product/service globally. Every country has its own set of laws and regulations which makes this activity tricky. That’s why when a company needs to expand to another country, deep research on the law is needed. Not only we need to aware of the current law, but we also need to aware of any potential changes in regulations that could affect our business.
Here are some other factors to consider in law factor:
- Discrimination laws
- Antitrust laws
- Employment laws
- Consumer protection laws
- Copyright and patent laws
- Health and safety laws
- Education laws
- Consumer protection laws
- Data protection laws
Lately, environmental factors plays a big role in company decision. They became really important due to changes in our ecosystem in general. Scarcity of raw material, polution and carbon footprints are some of the examples in why company needs to focus in this factor.
Beside those three, there are still a lots of other important aspect, such as: weather, climate, environmental offsets and climate changes which plays a big role if your industry is on farming or tourism.
Here are some other factors to consider in environmental factor:
- Environmental policies
- Climate change
- Natural disasters
- Air and water pollution
- Attitudes towards green products
- Support for renewable energy