Aug 12 2019
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A PESTLE analysis is, in effect, a broad assessment of the key features of the external environment facing a business. Developed since the late 1960s, a PESTLE analysis delves into six key areas: Political, Economic, Social, Technological, Legal and Environmental (or Ethical) factors affecting a company’s operations. Although many of these factors involve issues outside the direct control of a business, awareness and effective management of the external environment is vital for attaining a competitive advantage and ensuring a company is better placed to respond to any upheaval or opportunities on the horizon.
The granularity of IBISWorld industry research, and the breadth and interlinkage of the full report collection, provides an essential tool for businesses seeking to conduct a PESTLE analysis, providing extensive industry information and key external drivers from the UK and global Business Environment Database. In considering the broad context of a business’s operations, a PESTLE analysis offers useful information in isolation, looking at the ‘big picture’ factors that may influence a decision, market, or potential new business. The PESTLE framework, however, becomes substantially more potent when used in conjunction with an assessment of a business utilising a SWOT or Porter’s Five Forces framework. A SWOT analysis, for example, explores these factors at a business or product level, and the complementary nature of such frameworks means they are often best employed together.
In this case, using IBISWorld research for a PESTLE analysis will be demonstrated with the Motor Vehicle Manufacturing industry, but the method is the same for each industry in our growing collection of 440+ UK industry reports and 100 reports on industries in the Irish economy.
This factor considers the way in which a company’s operating environment is influenced by government practice, whether at the international, national, regional or local level. Considerations that may affect business plans include upcoming changes of government, prevailing instability, competition policy, spending and tax regimes, business and labour regulations, business policy and incentives, the government’s approach to trade and tariffs and a range of other short- and long-term issues. It is important to note the distinction between specifically political and more broadly legislative factors.
IBISWorld Chapter: Brexit Impact Statement
'Each report in IBISWorld’s UK collection includes a Brexit Impact Statement, detailing the extant effects, industry concerns, and future impacts of the UK’s decision to leave the European Union. The political ramifications of this decision on a company’s operating environment are extensive, ranging from short-term upheaval and the need for no-deal planning, for example, to the longer-term impact of future trade and immigration policy as the United Kingdom develops new international relationships.
Under a no-deal exit, tariff barriers would be considerable, with a 10% tariff on cars and a 4.5% tariff on car parts, pushing up cost and affecting competitiveness. Indeed, the Society of Motor Manufacturers and Traders (SMMT) has suggested that potential EU tariffs on cars alone could add at least £2.7 billion to imports and £1.8 billion to exports annually.
Over the longer term, the industry could be hit significantly by non-tariff barriers, as the industry's supply chain is highly globalised and many operators rely on just-in-time production. Companies in the industry rely on smooth movement of component parts across borders to be used shortly after arrival in assembly lines across the United Kingdom. In a report to the parliamentary select committee, industry operators have noted that every 15 minutes of customs delays could cost motor vehicle manufacturers £850,000 per year. Such delays and additional costs could therefore affect profitability and the competitiveness of the industry on the international market. As a result, the majority of UK car manufacturers have stockpiled components and raw materials as well as evaluating suppliers that would be most affected if tariff and non-tariff barriers are introduced.
In addition, the industry is currently facing a skills shortage and a potential limit to free movement could increase search and wage costs for car manufacturers. Limits to free movement could further reduce production, as the SMMT states that 10% of people employed in the UK automotive manufacturing sector are from the European Union.'
IBISWorld Chapter: Operating Conditions
Operating Conditions subsections to Consider:
Regulation & Policy – Medium and Increasing
The Regulation & Policy section of the report offers information on the international and domestic regulatory landscape, assessing the extent to which operators are governed by cross-border legislation, and indicating the direction of political and regulatory pressure
'The industry is moderately regulated, with manufacturers having to adhere to legislation relating to vehicle safety and emissions standards. These standards are set by the European Commission and they have become more stringent in recent years as efforts to reduce CO2 emissions have intensified. New EU cars were required to emit less than an average of 130 grams of CO2 per kilometre in 2015. This limit is set to be reduced to 95 grams of CO2 per kilometre by 2021.'
Industry Assistance – Medium and Steady
Although many businesses receive little in the way of assistance beyond that acquired through membership of an industry association, the government plays an active role in the promotion of some industries. Understanding the importance of government assistance and the options available to a new firm is key in assessing the political landscape.
'On a domestic level, government funding for research and development has also supported innovation in recent years. In March 2017, Toyota secured £21.3 million in government funding to improve its Derbyshire facility's environmental performance. Ford's struggling engine plant in Bridgend received £15 million in state aid from the Welsh Government in 2015 to safeguard jobs and sustain production. In the March 2017 Budget, the Industrial Strategy Challenge Fund was announced, which included funding for research into batteries that can power electric cars.'
Other IBISWorld Chapters to Consider: Industry Performance
The performance section of IBISWorld reports covers the breadth of the industry’s operating landscape, and includes detail on political developments affecting past five-year performance, and expected performance over the coming five-year period.
The Economic aspect of a PESTLE analysis considers the general state of the economy, goods, services and finances, including inflation, interest, economic growth, exchange rates and unemployment, as well as geographic factors influencing the economic environment. Consequently, information relating to the Economic factor may be found across IBISWorld reports, with the weighting differing depending on the industry.
IBISWorld Chapter: Industry Performance
Industry Performance subsections to consider: Key External Drivers
The Key External Drivers section of the report highlights the most important items from IBISWorld’s Business Environment Database, indicating the scale and direction of the impact these have on a given industry.
Real Effective Exchange Rate
'There is a significant level of international trade in the industry. When the pound depreciates, domestically produced vehicles become cheaper on the global market, while imported vehicles become more expensive, benefiting manufacturers. However, the majority of motor vehicle parts are also imported before the vehicle is assembled, meaning that a weaker pound increases costs for domestic manufacturers, compromising profitability. The real effective exchange rate is expected to decrease in 2019-20, providing an opportunity for export growth but potentially dampening profit margins.'
IBISWorld Chapter: Products & Markets
Products and Markets subsections to consider
An industry’s exposure to international trade can have a significant impact when assessing Economic factors in a Pestle Analysis.
'Industry exports performed strongly at the beginning of the five-year period through 2019-20. Exports are expected to account for 50% of industry revenue in the current year. According to the SMMT, the volume of vehicles exported in 2017 declined slightly due to operators scaling back production as a result of prevailing uncertainty, which is expected to affect export revenue despite the favourable exchange rate. The same body reported a 21% decline in export volumes for the first six months of 2019, as operators contended with the UK’s expected exit from the European Union, when compared to the same period in the previous year. This is expected to lead to a fall in export revenue in the current year.'
The physical location of an establishment naturally affects its economic potential. This is particularly important for some industries, particularly extractive industries, and an industry’s physical location has an impact on its supply chain relationships, regardless of the sector in which a company operates.
'The Midlands is traditionally a major transport and automotive hub. The East and West Midlands are expected to account for 24.8% of industry establishments, at 9.8% and 15% respectively. The Midlands has excellent transport links with both the populous south and the North West. Major player Jaguar Land Rover has all but one of its manufacturing facilities located in the West Midlands and Aston Martin is also located in the region. The East Midlands is home to Toyota’s UK manufacturing operations.'
Social factors in a PESTLE analysis are varied and can differ substantially depending on the industry or business in question. Longer-term social factors, such as demographic trends, alongside shorter-term social trends, such as changing behaviour regarding social media and purchasing practices all influence company performance.
'Societal trends can have a considerable influence on business practices. Recently, this has been most notable regarding public concern over environmental issues, which has prompted a number of changes to business practices across many sectors of the economy. Reputation is intrinsically linked to the Social factor of the PESTLE framework, and consumer-facing companies can face substantial reputational damage if they do not effectively consider social and market trends. Ultimately, social factors affect how a company conducts business, and can also change the ways in which a company interacts with its customers.'
IBISWorld Chapter: Industry Performance
Industry Performance subsections to consider
Key External Drivers
IBISWorld’s Business Environment Database includes a large number of items directly concerned with social factors. These include demographic factors, such as the number of the population in given age ranges, for example, and numerous social factors with a more direct link to industry performance, such as total online expenditure. It also covers broader trends, such health concerns. Continuing to use the Motor Vehicle Manufacturing industry as an example, consumer confidence is a key driver of the underlying market.
Consumer confidence index
Individuals purchase a significant proportion of the cars manufactured by the industry. When consumer confidence is low, households tend to scale back discretionary purchases such as new cars. By the same rationale, when consumer confidence is high, individuals are more likely to purchase big-ticket items such as motor vehicles. Consumer confidence is expected to fall in 2019-20, posing a threat to the industry.
'Diesel vehicles rose to account for 51% of UK car sales in 2014, compared with 38% of sales five years earlier, according to the SMMT. However, the Volkswagen emissions scandal has since weighed on the popularity of diesel vehicles, along with high taxes imposed by the government. More recently, air-quality concerns have decimated sales, with SMMT data showing that total new registrations for diesel vehicles were 17.1% lower in 2017 when compared with 2016. This trend has continued into 2019, and new registrations for diesel fuel types declined by 22.1% up to July 2019, when compared to the same period in 2018.'
IBISWorld Chapter: Products & Markets
Products & Markets subsections to consider
Demand Determinants and Major Markets
The Demand Determinants section of IBISWorld reports provide an overview of the key factors affecting demand, including the impact of social trends. The Major Markets section details how major markets have changed over the past five years, including which are satisfying an increased or decreased share of revenue. This can provide a good indication of the social factors driving revenue.
'Industry demand is influenced by global economic conditions, fuel prices, the exchange rate and domestic economic indicators. Industry products are discretionary items and changes in economic conditions influence consumer confidence and inevitably demand. When economic conditions are more prosperous, higher levels of disposable income and consumer confidence encourage demand for big-ticket items such as cars. As a result, demand has been driven down by lower consumer confidence and subdued economic conditions in the second half of the period as customers and businesses opt to delay purchases.'
IBISWorld Chapter: Competitive Landscape
Competitive Landscape subsections to consider
Basis of Competition
Reputation and brand strength are often key to competition in an industry, and broader social factors have a substantial influence on how companies must manage and improve their practices and reputation. For example, in the Motor Vehicle Manufacturing industry, diesel sales spluttered after the public fallout following Volkswagen’s diesel emissions scandal.
'Consumers are also more likely to purchase a recognised and trusted brand, so maintaining a positive brand image and having strong advertising and marketing campaigns improves competitiveness. This makes it especially important to abide by the tightening regulations governing vehicle emissions.
Being able to adapt manufacturing to suit changing consumer preferences provides a significant competitive advantage. For instance, Nissan had great success with its Qashqai model when economic conditions were subdued prior to the start of the period and motorists sought cheaper fuel-efficient alternatives to an SUV.'
The Technological aspect of a PESTLE analysis covers the rate of technological changes, R&D activity and automation. This can be both in terms of an industry’s direct activities, and how it is affected by such changes through its supply chain. Digital technologies have been particularly prominent in recent years, but mechanical and physical technological development remains important. Technological developments can be in terms of production and operational practices, or the product or service itself. An assessment of the technological factors that affect a company also includes disruptors to traditional modes of operation.
IBISWorld Chapter: Operating Conditions
Operating Conditions subsections to consider: Technology Change
'The use of computer-aided design systems has allowed for the development of lighter, more fuel-efficient vehicles in a faster and more automated manufacturing process in recent years, while enhanced quality control procedures and superior manufacturing equipment have improved safety and vehicle reliability. Some manufacturers have developed platforms that require fewer components, reducing labour costs and boosting efficiency.'
A PESTLE analysis includes assessment of the legal and regulatory regime under which a company or industry operates. This factor is focused on the laws directly connected to a business and its area of activity. This can include employment law, such as the National Minimum Wage and National Living Wage, health and safety regulations, environmental regulation, GDPR and data protection laws, and numerous other standards and pieces of regulation governing operations, either domestic or international in character.
IBISWorld Chapter: Operating Conditions
Operating Conditions subsections to consider: Regulation & Policy
'The industry is moderately regulated, with manufacturers having to adhere to legislation relating to vehicle safety and emissions standards. These standards are set by the European Commission and they have become more stringent in recent years as efforts to reduce CO2 emissions have intensified. New EU cars were required to emit less than an average of 130 grams of CO2 per kilometre in 2015. This limit is to be reduced to 95 grams of CO2 per kilometre by 2021.
For much of the period, tests for CO2 emissions only regulated certain pollutants and manufacturers only had to ensure their vehicles met standards in laboratory conditions. Real world testing commenced in September 2017, which meant all newly launched car models in Britain are to be tested on road conditions and in the laboratory. These tests are more representative in relation to CO2 emissions and fuel economy than the previous system. Every new car sold in Britain is also subject to a new test called the Worldwide Harmonised Light Vehicle Test Procedure.
Safety standards have also increased in recent years. In November 2014, the European Commission introduced legislation requiring new vehicles to be equipped with electronic stability control systems, advanced safety features such as driver seatbelt reminders, ISOFIX child seat anchorages, tyre pressure monitoring systems and gear shift indicators.'
As evidenced above, IBISWorld reports complement the PESTLE framework, providing decision makers with the insight and analysis needed to make better, more strategic business decisions.
By taking a deeper dive into a given industry, IBISWorld research also allows you to complement PESTLE analysis with insight gained using the SWOT or Porter’s Five Forces Frameworks.
A subscription to IBISWorld provides decision makers with access to our full suite of 440+ UK industry reports, with 100 Ireland industry reports also available. Want more information on IBISWorld and PESTLE? Contact us to speak with one of our representatives today.