While commencing with your Start-Up, apart from understanding the market it is also highly important to understand the competitors, the industry and environment we are catering to. We will move to competitors later, let us first understand what we mean by industry and environmental analysis. A combination of marketing theories of PESTEL and SWOT can be used for understanding how does the external environment effect the organisation including a Start-Up. PESTEL is an acronym which stands as:
- P for Political which implies for government, policies, regulations and directions.
- E for Economic which accounts for the various economic factors which affect the organisation. These may include like economic growth of the country, inflation rate, repo rate, exchange rates, purchasing power of consumers and many others.
- S for Social which implies for education, financial condition of the population, gender ratio, demography, purchasing power.
- T for Technology which takes into account carious technological developments taking place. New technologies, innovations as well as legacy system falls under this.
- E for Environmental which accounts for environmental norms and guidelines, sustainability guidelines of the government. Measures for pollution control and reduction in carbon footprint also form part of this.
- L for Legal which accounts for the legal environment that affects the Start-Up. It includes health and safety regulation, consumer protection, company law, competition and intellectual property laws and all such laws and regulations which affect the Start-Ups directly or indirectly.
A lot of credit for developing the PESTLE early pioneers Harvard professor Francis Joseph Aguilar who published about ETPS analysis to indicate the “Economic, Technical, Political, and Social” in his book Scanning the Business Environment and Arnold Brown who introduced environmental analysis to the ETPS analysis as proposed by Francis Joseph Aguilar. Arnold Brown for the Institute of Life Insurance reorganized it as STEP (or strategic trend evaluation process) in his super managing: How to Harness Change for Personal and Organizational Success. With modification even later, PESTLE analysis presently is used understanding the various environmental factors which can affect the Start-Up both at an early age and at different life stages of an organisation. PESTLE analysis can be done over a periodic cycle to understand the constant changes taking places in the environment. PESTLE analysis is generally done along with SWOT analysis about which we will study in the next blog. Let’s understand PESTEL analysis with an example. Suppose, Narendra wants to have a business of solar plants. So before starting off he decided to have a PESTEL analysis done. He has to take the following broad things into account:
Political: What is the government policy on Solar energy? What is the government policy on renewable energy? What is the likelihood of the change in government policies? What are the international treaties that validate the government policy? What is the road ahead of Government policy?
Economic: What is the subsidy provided for a solar plant? What is the subsidy provided to the consumer? The tax rebates or exemptions available to the consumer? The interest on loans available for setting up the business and also to the consumer for purchase?
Social: Where can the consumption of solar power be more? Where to get the cheap skilled labour? What is the awareness of people regarding solar plants in the area?
Technology: What is the latest technology regarding solar plants in the nation? What is the latest technology globally? What technology to implement for maximum profit and benefit?
Environment: What is the environmental norms for setting up a solar plant? What is the allowable limit for production keeping in mind environmental factors?
Legal: What are the environmental laws? What are the specific laws related to solar plants? What are company related laws? Land Laws?
These are some of the many factors that are can taken into consideration while creating a PESTEL analysis. PESTEL analysis can be done very broadly taking into consideration many factors in the form of a detailed study.
Moving further from the environmental analysis lets understand the industry analysis using Porter’s Five forces which was first put forth by Michael Porter in his 1980 book “Competitive Strategy: Techniques for Analyzing Industries and Competitors.” The five forces as mentioned by Michael Porter are:
- Threat of new entrants: It highlights on the ease or difficulty with which a new player can enter the market. If it is ease to enter the market for the new players then already existing industry faces constant threat from new players. Highly skilled industry with high initial cost or cost of research and development, like pharma industry generally have low threat of new entrants and have a stronger hold in the market.
- Buyer Power: If the consumer has more power, then they have more bargaining power relating to discounts and fluctuation of market prices. This is visible in the current online food market, where heavy discounts are the way to attract customers.
- Supplier Power: This refers to the power of the suppliers to regulate the prices of goods and services. More the supplier power more will be the control of the supplier over the market
- Threat of substitutes: If there are substitute products or services available in the market or the product or services can be easily substituted in the future then the competitive advantage of one’s product or service is very low and cannot sustain for a long time. Also, the prices of the product or service will be dependent on the substitute product either directly or indirectly.
- Competitive rivalry: The number of players in the industry along with their respective share gives an idea about the competitive rivalry of the industry. The more the rivalry, the more the prices of goods and services be interdependent.
These were the five forces mentioned by porter in his book. For a Start-Up these five factors need to be taken into consideration while doing an industry analysis. Few factors like low competitive rivalry, high supplier power and low substitutes available are generally preferable for a Start-Up.
Thus, in this second edition of Start-Up essentials we study about the need of market and industry analysis. We also dwell deep in the concept of PESTEL analysis and industry analysis using Porter’s Five forces. Doing the analysis at an early stage helps in understanding the risks in play while taking on a Start-Up Journey and is also helpful in devising techniques to deal with it.
Baba Vidya Grahan 