PESTEL tool

PESTEL tool

By:

Ghaith Albahr & Reem Barakat
PESTEL tool

Reem Barakat: Research Coordinator in INDICATORS

What are the external factors that affect the success or the failure of startups?
Business sector is a very complex, anything happens in the country affects it, directly or indirectly as well as the internal factors that affect companies such as the employees and the required logistics, and the external factors such as competitors, customers, and suppliers…etc, there are bigger and more dangerous factors, if not taken into account, these factors are generally centered around the surrounding regional environment such as the economic downturn, the changing climate of some countries, the political circumstances, society targeted by the company, and several other factors that must be taken into consideration.

When proposing a new project idea it cannot be adopted only because it is unique, for example according to Wikipedia KitKat company offered 300 different flavors of chocolate bars in Japan since 2000 to test and release new products in Japanese market, taking advantage of the low of fees on primary products, this helped in the company success and achieve more sales in Japan from 2012 to 2014, due to the fact that generally known about Japanese people love green tea, this made KitKat launch a chocolate bar with green tea flavor in 2004, even it changed the cover of this chocolate to green color, while it is in all other countries where offered in red cover, KitKat depended on the research of society norms and traditions, that why it went to this big change in Japan and which was one of the most important factors that helped the company make huge profit.
PESTEL tool

As well as the example of KitKat, many companies try to enter the market without taking into account these external and regional factors which caused its failure.

What are the external and regional factors that must be considered for your new business?
As we’ve see in KitKat example it is necessary to pay attention of many regional factors, in order to test these factors correctly without neglecting any of sensitive aspects it’s recommended to use PESTEL tool which is considered one of the idea validation tools, this tool helps to know the circumstances and the general factors that surrounding the company and their impact on it. PESTEL focuses on six main factors that neglecting them may cause the company failure or loss of money and time, for example, if we are seeking to establish a construction company that costs millions of dollars which will be in a country where the market in need of the services of such company, but in terms of political and economic conditions, it has been found that the continuous depreciation of the currency of the country has a high likelihood to cause the company failure, if several million dollars are invested in the company and the money transferred to the local currency and the value of currency decreased to the half over three years this means that if the company gain 100% profit actually it will just be reached to zero point comparing to the value of the capital in dollars.

In order to have integrated analysis of the regional factors affecting the company, PESTEL tool focuses on the following six factors:

• POLITICAL: which means studying the country political stability in its relations with neighboring countries and other countries, and how that affects the company we want to establish, such as political boycotts that occur between countries that negatively affect import and export, and tax policy that the state provides for foreign companies or goods imported from certain countries, I.e. the economic war launched by America against China, in this period it’s not recommended for a US company to start a business that highly dependent on Chinese electronic parts because double the taxes will cause the business failure because of the high prices of their products, which leads to their inability to compete.

PESTEL tool

• ECONOMIC: Which means knowing whether the country is in economic recession or growth, the stability of the local currency, what is the situation of country credit rating, the extent of confidence in the products it exports, and everything related to the economic aspects of the country with focusing especially on the factors that affect our company, in the example that we’ve mentioned before, we’ve seen how the decrease in the value of the currency cause the company to lose all of the profit despite the fact that all indicators related to the demand for the construction services were positive.

• SOCIAL: all about social customs and traditions, the composition of the society, religions and intellectual currents…etc. Let’s say that the company works in Middle East in the field of food products, when trying to enter the Japanese market, it launched products similar to the ones it offers in the Middle East market and faced low sales and huge losses even though the same products were successful in the Middle East, so when returning to the reasons it found that the company was offering products of family sizes which is too big for the Japanese family, while in the Middle East the family consists of an average of six, while the Japanese family consists of a maximum of three.

• TECHNOLOGICAL: It is all related to the technological infrastructure in the country that affects our business which its negligence could be the reason for its failure, especially if it depends in a large part of its work on that. I.e. before YouTube, several companies tried to launch sites of video watching but they failed because the Internet was at that time still on Dial-Up system which did not help to attract people to watch videos because it takes too long to be loaded, as for YouTube succeed because it was established with the beginning of the DSL internet, which was the most important factor for its success.

• ENVIRONMENTAL: everything related to the environmental conditions in the country, regulations related to the environment and environmental licenses, which have a direct impact on the company in this aspect. I.e. it was noticed that many investors who moved from countries that did not require complex environmental licenses and established factories in other countries immediately started planning for work with maximum capacity and built financial plans on their expectations to start production directly they were shocked that these countries did not allow them to operate except for a limited capacity for factory waste and exhaust tests to obtain the environmental licenses and operate the factory with full capacity, some factories required at least six months to obtain the environmental licenses and that led to huge losses that started from contracts that were concluded with customers and were not fulfilled and employment of workers that should work with full capacity, in addition to mistakes in the financial calculations.

• LEGAL: it means the regulations stipulated by the state related to employment regulations, consumer protection, ownership, health, education and the conditions that the state sets in general for the establishment of any company, neglecting the regulations will cause the company’s failure as if the company establishes the project without paying attention to the legal conditions related to employment and calculates the cost of the product and the pricing neglecting the costs related to employment, which leads to mistakes in pricing and the company’s loss.

How do I make the best use of PESTEL?
Mostly, PESTEL analysis implemented through workshops in which investors and people who participate in the establishment of the company, in addition to experts and specialists in several fields, the most important of which is the company’s field of work itself and specialists in economics and law, and the other fields that related to PESTEL analysis. The depth of the analysis, discussions and the number of workshops that needed depend on the business size and complexity.

To benefit more from PESTEL analysis, it is recommended to look at the risks that this analysis reveals as opportunities, as it can be turned into opportunities by building procedures or bringing about changes in the project idea so that it is able to deal with those risks or use them as a market entry. In other words, if it shows from the results of PESTEL analysis that there is a big risk that the company may face in an aspect it is not necessary to consider the business idea a failure or cancel it, but rather to think about how to develop the business idea in order to exceed this risk, make it as a competitive advantage and increase the opportunities of the success of our business.