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Industry Analysis - PESTLE Framework

28 September 2015 |

What is an industry?

"Industry" refers to a sector of an economy, grouping together companies that are related in terms of their primary business activities. An example could be the automotive industry, which is the grouping together of companies focusing their business on the sale, manufacturing, production, design and marketing of motor vehicles.

What is an industry analysis?

An industry analysis aims to establish the attractiveness of a particular industry. Profit margins (the amount of profit generated per item after deducting the average cost of producing each item) vary between different industries, and tools used to analyse industries can pinpoint why that is the case. This helps to understand the competitive environment in which a company operates.

Why is it important to understand?

Case studies often present candidates with a hypothetical scenario in which a (fictional) client is looking to acquire a (fictional) company. Candidates are then often asked to state whether they think the acquisition of the company should go ahead, i.e. would be beneficial to the client. In such a case study interview it is crucial to possess the ability to account for the strengths and limitations of the industry within which the company being analysed operates. This understanding forms part of what is often referred to as a candidate"s commercial awareness. Commercial awareness includes the ability to understand the wider factors underlying, and potential limitations to, a company"s operations and profit potential.

Tools/models used to carry out an industry analysis

Understanding, and being able to apply, at least one simple framework for industry analysis will help candidates stand out in case study interviews and will also strengthen candidates" ability to analyse a business case.

PESTLE Analysis

A PESTLE analysis outlines the impact political (P), economical (E), socio-cultural (S) technological (T), legal (L) and environmental (E) factors have on an industry. It is a useful tool to help candidates understand how macro-level elements impact on an industry and deepen their appreciation of how being part of a specific industry affects a company.

Political

  • Looks at government policies in place that may affect the profitability of the industry, such as tax policies, fiscal policies or trade tariffs.

Economical

  • Considers economical factors such as income elasticity* of the product or service offered by the industry, or macroeconomic aspects such as interest rates**, foreign direct investment (FDI)***, or fluctuations in the country"s currency"s exchange rate relative to other currencies.

Socio-Cultural

  • Examines the social environment of the industry, considering demographics, population analytics and cultural trends.

Technological

  • Identifies what technological innovations exist or might appear in the future that may have an effect on the industry. This can take into account for instance automation, research and development and the level of technological awareness that an industry possesses.

Legal

  • Analyses laws and potential legal developments that may affect the industry. This could include, for instance, health and safety standards, consumer laws and employment laws.

Environmental

  • Considers environmental issues, concerns or trends that may impact the industry.

Defined terms

*Income Elasticity

measures the extent to which changes in income affect demand of a product. The demand for luxury goods has a high elasticity, which means that when people"s incomes decrease, the demand for luxury goods decreases drastically.

**Interest Rates

Interest rate is the amount charged, expressed as a percentage of the loan amount (principal), by a lender to a borrower. A country"s central bank sets an interest rate that is followed by banks and financial institutions across the country. It therefore affects the entire supply of money.

***Foreign Direct Investment

Level of investment made in the country from investors from other countries. The investor and the investment is therefore foreign.