Economic Factors in your PESTEL Analysis

Part 3 of 7

Contents

Introduction

PESTEL has two “E’s” in it. The first one stands for Economic factors: those external economic factors that might have a direct or indirect long-term impact on a company’s success.

For example, high unemployment will cause consumers to have less spending power. Less spending power translates into lower sales volume for retailers. If retailers are selling fewer products, then they will order fewer goods from manufacturers. So, if you are a retailer, a distributor, a logistics company, a manufacturer, a supplier to a manufacturer, or participating somewhere else in the supply chain, your business will more than likely be negatively affected by high unemployment.

Of course, companies participating in the supply chain will attempt to counteract the effects of rising unemployment by lowering prices or taking other steps that will negatively impact profitability. Clearly, changes in the global economy or a regional economy will trickle down to even the smallest or newest businesses.

The following are just some of the issues that might be considered when evaluating economic factors:

Unemployment
Stock market performance
Sovereign debt markets
Growth rates (country, region, world)
Interest rates
Rates of inflation

Exchange rates
Disposable income
Price fluctuations
Availability of credit
Changes in GDP
Access to credit

Our clients make important business decisions regularly regarding economic issues and how best to mitigate their impact. Here are some examples:

Investor Visas

One of the services we offer is business planning for investor visa applicants. Many countries offer visas to investors and entrepreneurs who wish to relocate or expand for economic reasons. For example, an economic factor that attracts most of our investor visa clients to the United States is the enormous size of our country’s market.

Examples of investor visa clients we have recently assisted include:

A Czech Republic software company that wishes to open an office in the U.S. to get more customers.
A Swiss manufacturer of large HVAC systems that needed to open a U.S. office to improve service to its already installed base.

Access to Credit

Access to credit in most developing nations is very limited or, in some instances, non-existent. Clients based in these countries come to us to prepare international-standard documents that will enable them to communicate the reasons why a foreign bank or investor should provide capital so that the client’s company can continue to grow or so that it can complete the development of its real estate project or technological innovation. A well-executed PESTEL analysis will form the basis of these documents.

Examples of clients we have recently assisted with investor-ready and bank-ready business plans include:

An East African company hoping to build a plastic lumber plant that, in addition to providing a cheaper, more durable product, will help recycle plastic waste and give jobs to poor, often unemployable citizens.
A 35 MW solar energy power plant that will provide the necessary additional energy needed to allow the country’s mining companies to expand.

Foreign Exchange Exposure

In many countries, business leaders and investors deposit their excess cash in local currency bank accounts. In doing so, they have a risk of their deposits losing value if the local currency weakens against the U.S. dollar, the Euro, or the British Pound. This results in less buying power when they need cash to purchase goods and services. To mitigate this economic risk, they deposit their money in local currency bank accounts in countries whose currencies are tied to the U.S. dollar or the Euro.

More sophisticated ways to mitigate currency risk can be accomplished by using one or more of the following instruments:

Currency forward contracts can be structured to specific currencies, amounts and maturities.
Currency futures can be used to hedge exchange rate risk.
Currency ETFs can be used as hedges and this is an excellent way to hedge smaller amounts.

Currency options offer the opportunity to hedge exchange rate risk. However, they are only available in specific amounts.

Inflation

Inflation, and more importantly, the projected future rate of inflation, will often force companies to raise prices or accept smaller profit margins. If you intend to expand your business to a new country, be certain that you have an understanding of the effects inflation will have on your forecasted profits. In your PESTEL analysis, you need to analyze your potential success in a 2% inflationary environment vs. a 12% inflationary environment. Bottom line, you must determine if the other economic factors involved in your new market are more compelling than the risk associated with high inflation.

Conclusion

A PESTEL analysis will identify these and many other economic risks. Once identified, a well-documented business plan will help business leaders to make the best long-term business decisions about their specific enterprises.

This is Part 3 of our series on PESTEL analyses. Go to Part 2 here. Our next post in this series will be on the Social factors to be considered in a PESTEL analysis.