NOTE - The model is also known in various guises as PEST, STEP, STEEPLE and PESTLE. It was originally conceived as ETPS by Harvard professor, Francis Aguilar.
So, how does PESTEL help a company with their overseas expansion plan?
Often used for existing challenges, PESTEL is also helpful for new market research. You could use it with a SWOT analysis to identify existing opportunities and threats.
Or it can forecast future issues that will need careful management.
A PESTEL analysis will uncover obstacles that will make it harder to do business in a foreign market
Expanding globally carries many challenges due to differences between locations and countries. From language and customs to the pace of business change to the currency or technology.
Often, the biggest obstacle to doing business is registering a legal entity in-country. This process can be very costly and can take up to a year to complete. This time will be better spent growing market share but can get eaten up by paperwork and delays.
They can help you set up quickly without establishing a legal entity in a particular country. That means - speed to market!
Let’s examine each element of the PESTEL framework and some questions to ask when planning.
Political factors relating to government influence on the economy
To what extent does the government intervene in the economy?
Is their political stability?
Are there trade tariffs that will be a barrier to doing business?
Are there any sanctions imposed on the country?
Are there upcoming elections that could change the attractiveness of the country?
How quickly are business applications processed? Is it liable to bureaucracy?
For example, if you were looking to start a small business in Asia, the length of time can vary widely
This variance can slow your growth if you are caught unaware.
Airswift can help you establish a presence in Singapore within days. But we know in The Philippines it will take several weeks and perhaps months. In either location, we can have talent deployed and effective immediately through our global employment outsourcing model.
The variations in establishment time are huge differences. And if you need to be generating cash quickly, every extra day matters.
Economic factors affecting business operations when expanding internationally
What is the economic growth rate? Is there projected growth in GDP over the next 5, 10 and 20 years?
Are there strategic industries that you can either compete in or supply to?
For B2C firms, is consumer spending expected to increase? A good indicator would be increasing proportions of middle-class incomes in society.
What is the unemployment rate?
Are interest/inflation/foreign exchange rates volatile? Are you capable of managing global payments in this country?
Are there incentives or foreign direct investment (FDI) initiatives to attract multinationals?
Failing to factor in hidden costs can impact the profitability of your expansion. You need to expect a stable investment plan to continue growing
But volatile inflation or exchange rates will erode profits. As business expenses increase you may need to put off investment or hiring decisions.
Using BIS data, we tracked how much a currency had appreciated or depreciated since 2010.
The chart represents how much the rate has deviated up or down each quarter over the 10-year period. The bar for each economy demonstrates how widely the currency had swung from high to low over time.
The currencies of Singapore, New Zealand and the Euro Area did not deviate much. However, there were big swings in Argentina and Russia as economic issues derailed growth. Depending on your business model, this volatility can represent a huge risk.
Of course, it is worth paraphrasing financial advisers and saying...
'Past performance does not predict future returns'
A better indicator of future potential can be seen in the social factors of an economy. In particular, the potential labour force and demographics can influence an economy.
Implementing processes to ensure EU ETS compliance can be costly. You may need to hire environmental specialists or radically change operational procedures.
Even companies in sectors not regulated by the EU ETS may face a higher cost. Their customers may seek to reduce supply chain spend to mitigate increasing costs.
Local environmental policies will also create opportunities for companies pivoting to meet climate goals.
The UK plans to increase investment in offshore wind and attract global innovation. In fact, IRENA is forecasting global offshore wind capacity to increase 41x by 2050. As the industry grows, a global supply chain will grow with it.
You may have also seen PESTELE with three E’s, with the last E representing ethical factors
In recent years, strategists have added another important factor. Ethical factors should guide business decisions around your workforce and license to operate.
Does the country have a reputation for poor workforce policies? Does this include child labour or human slavery violations?
Does the country have policies to encourage fair trade practices?
Can your business contribute to social improvement through corporate social responsibility initiatives? These could include philanthropic or charitable activity to support national advancement.
Labour laws and workers’ rights vary by country. And not all countries are receptive to a foreign company implementing their local employment policies
If an American company is expanding, the Occupational Safety and Health Administration’s (OSHA) standards may not apply. So, it will be difficult to regulate and standardise working conditions between countries. This could cause tensions between headquarters and policymakers.
Another ethical factor to consider is expectations of working hours and conditions. Our World in Data found global variance in working hours and productivity levels. An expanding company used to long/short working hours may have a culture shock elsewhere.
Okay, so that helps me understand potential constraints. How can I still expand my business overseas?
International growth is key to staying competitive. It’s a process that should be carried out carefully. Otherwise, you may encounter a number of pitfalls.
How partnering with a global employment & mobility specialist can help in international markets
Your strategy to expand overseas should consider partnering with a local expert.
International companies that specialise in global employment can help navigate the intricacies of expansion.
Here are a few ways of how they can do that:
They have experience operating in the country
They are familiar with the local employment and tax laws
They have networks of local talent
They understand the details of successful and compliant country operations
A global employment and mobility provider can help with all, or some of, the following.
Global Employment Outsourcing
This is where a provider acts as the Employer of Record. They can act as a third party between the company and its employees. The most important benefit is that the provider holds the legal entity and liability. They also understand how to calculate payroll, taxes, leave accrual and administer benefits.
They are, essentially, a full scale outsourced Human Resource function for your company, which is beneficial when expanding. Corporate tax liabilities are reduced since they aren’t the legal employer of record, even while technically operating in-country.
Global Immigration Services
If any part of your workforce will include expats, you’ll need to manage immigration service. A local partner can manage work permits and authorizations, applications, and advisory services.
Tax laws vary by location, and payroll is a detailed process that can be prone to error. You may wish to work with a provider who has a track record and systems for processing local payroll.
Many companies choose to outsource payroll due to limited infrastructure. They can then save time and money and focus on scaling their operations.
Mobilizing an expat workforce has many facets. From managing real estate to relocating family members and finding accommodation and schools.
When you work with a Global Mobility provider, they handle this. This then frees you to focus time and attention on setting up an in-country operation.
When setting up operations in a new location, creating an HR function is essential. As such, you may want to opt for consulting advice from local specialists.
Summing up: using PESTEL analysis to assess risk and sustain growth through international business expansion
When you are growing fast, a market expansion strategy helps you go further and build for the long term. This allows for faster organic growth of a company.
How can a PESTEL analysis help?
A PESTEL analysis identifies the challenges and opportunities of a global expansion. By analysing the new market, business leaders can decide if it is a viable opportunity.
What are the advantages of global expansion?
Global expansion can be a source of new revenue streams and organic growth. It can also help mitigate intense competition through new markets and diversification. Other benefits include improved access to talent pools, investment, and a more diverse customer base.
What are the challenges of international expansion?
A PESTEL analysis uncovers many challenges of global expansion. For business planning the cultural, political, and legal barriers can be most complex. Key considerations include the below:
The time and cost of setting up a legal entity
The risk of tax and labour law non-compliance
Governmental policy relating to your industry
Access to talent
How to execute a successful global expansion strategy
Companies that partner with a global employment and mobility provider find many benefits. The following are benefits that our clients have experienced when partnering with Airswift:
Speed to market
Ability to quickly mobilise a global workforce
Reduction of tax liability
This post was written by: Liz Fiumara and Rob Boyle, Content Development Manager and Marketing Campaign Specialist