PEST Analysis was created by Harvard Professor Francis J. Aguilar (Late), initially known as ETPS, a scanning tool mentioned in his 1967 book “Scanning the Business Environment” . This acronym stands for: Political, Economic, Social, Technological, now updated to PESTEL/PESTLE including Environmental and Legal factors. Other well-known variations of this acronym include: PESTLIED, STEEPLE, SLEPT and LONGPESTLE.
This tool is extremely useful when to start a new business or enter a new market. For a thorough understanding of both—internal and external factors, this tool can be collaborated with SWOT analysis and PORTER’s FIVE FORCES .
The main advantages of this framework are :
- External factors analysis
- Quick & simple review
- Broad overview of market conditions
Some disadvantages of this framework are :
- No review of internal factors
- Short lifespan of analysis (unstable nature of factors)
- Requires extensive data & an unbiased review of each factor
How do we use PESTLE analysis effectively?
Let’s review its use through an example.
Popular teenagers fashion brand American Eagle (American Eagle Outfitters, Inc.) failed in the U.K., and shutdown operations within three years of its launch (2014-17). One of the prime reasons for their exit was “intense competition”. They had opened two stores in London and one in Kent in 2014. Other American fashion brands like Forever 21, J. Crew, Abercrombie & Fitch, and Banana Republic also failed to impress customers in the U.K. (same time period).
Why do American fashion brands fail in the U.K.?
- No tailormade offerings for the U.K. customers
- Overcrowded market
- US retailers’ products are expensive
American Eagle was started in 1977, as a men’s outdoor apparel. Later, they evolved as a teenage fashion brand, with a focus on—women’s apparel (high gross margins) and young adults (16-34 yrs.). Currently, they own over 1,000 stores in North America, and licensed their brand in 24 countries .
PESTEL Analysis for American Eagle in the U.K. market:
Political & Economic: Since 2010, citizens in the U.K. faced welfare cuts (social security benefits). This fuelled their desire to exit from the EU, as the lack of such benefits hit millions of working families, already deeply impacted by the 2008-09 global recession . These factors reduced the value of GB Pound in the global market, which reduced the disposable income of citizens (expensive imports). As people have less confidence in the future of their economy, they choose to spend less on expensive brands like American Eagle.
Social, Technological, Environmental & Legal: Amidst the ongoing Brexit, youngsters are uncertain of their future in the U.K. They choose to shop on thrifty & local brands over premium fashion brands. These brands offer trendy fashions similar to American Eagle at a lower price range. Even strong local brands like Marks & Spencer & Debenhams shutdown some stores due to low foot traffic.
E-Commerce fashions in the U.K. also charge low prices to customers and offer speedy delivery. They are taxed lesser than their brick & mortar counterparts (based on number of buildings occupied). The U.K., being densely populated & well connected by roads and railways, helps speedy delivery of packages.
Therefore, a better approach for American Eagle to enter a crowded market like the U.K. would be to open a flagship store at one of the high streets in London. Unlike stores in upscale malls—tough competition and high operating costs—a standalone store provides better visibility (low operating expenses). Thus, they can focus on unique offerings to differentiate themselves, and justify the premium prices. Once they create a niche for themselves, they could profitably expand to large malls and use e-commerce channels.
© Sudhanshu Vuppuluri, 22-01-2020
- Images: business-to-you.com, www.bargainmoose.ca, pexels.com, unsplash.com (Photo by John Cameron on Unsplash; Photo by Sandro Cenni on Unsplash), commons.wikimedia.org