We all know which cities of India are famous for what kind of industries that they have. For example when you think of Information Technology companies; Bangalore, Hyderabad and Chennai would come to most of the people’s minds. It is not just by coincidence that foreign companies chose those cities of India as their destination to start their IT companies. Do you know what kind of analysis is done before any company wants to setup an office in another country. One of the tools used is called PESTLE analysis. It stands for Political, Economic, Socio-cultural, Technological, Legal and Environment Analysis. To do business in any country, a business must know each of these factors and how these factors affect their business. Let’s review what each of these factors mean below
Political Factors: - Countries have a variety of political structures. Political structures also refer to the way in which governments are run. There are 5 common political systems around the world
- Democracy
- Republic
- Monarchy
- Communalism
- Dictatorship
Stable governments, minimal corruption, communal tensions and violence coupled with maximum freedom of press, ease of doing business and quick turnaround time are some of the factors which investors look at in a country.
Economic Factors: - Economic factors include inflation, interest rates, foreign exchange rates, economic growth patterns (Gross Domestic Product) etc. It also accounts for Foreign Direct Investment (FDI) in certain industries. Country’s dependence on other countries in terms of important natural resources such as oil, monetary policies of the central bank, balance of payment positions and forex reserves are important for an investor to get a comfort level.
Socio-cultural Factors: - This includes the socio-cultural aspects of the population of a country; demographic information such as age, education and skills, health, social values, lifestyle factors, all affects the choices that people make in what they buy and consume. For example, given nuclear families and working spouses in metro cities, there has been an increase in day care facilities, packaged foods etc.
Technological Factors: - This refers to innovation, automation, research and development and the technological awareness that a market possesses. Technological advancement improves productivity in the goods and services that a country produces.
Legal Factors: - This taken into consideration the consistency of interpretation and application of relevant legal, consumer, safety standards, labor laws etc. Transparency in legal environment and enforcement of laws are things which investors favor.
Environmental Factors: - Factors of a business analysis include but not limited to climate, weather, geographical location, global changes in climate, environment offsets etc. Investors favor environmental policies on pollution control, waste disposal, mining and protection of fauna and flora etc. to be clearly spelt out.
PESTLE analysis is also used as a tool by companies before the launch of a new project/product /service.