PESTLE
PESTLE stands for Political, Economic, Socio-cultural, Technological, Legal and Environmental analysis; some models add Ethics and Demographics and call it STEEPLED. It is done mostly from the viewpoint of a business choosing among countries for an offshore unit, and it analyses the external environmental factors that will influence the business. A business must know each factor and how a change in any of them would hit it.
The sample question offers forex reserves, RBI monetary policy and dependence on other countries for natural resources, and the answer is all of them. Anything about the money side of the country, including its external position and resource dependence, is an economic factor, not political or legal.
The BCG matrix
Porter and PESTLE analyse industries and countries. The BCG analysis, developed by the Boston Consulting Group, looks at the segments of a business on a portfolio basis through two lenses, market growth and cash generation.
| High market growth | Low market growth | |
|---|---|---|
| High market share | Star: growing market, large share, generates increasing cash over time. Cera Sanitaryware. | Cash cow: low growth means little cash needed to hold share, while the established share throws off steady cash. Navneet Publications (books and notebooks: a predictable industry, strong brand, penetrated distribution, ready market, strong balance sheet, new content whenever a syllabus changes) and Colgate. |
| Low market share | Question mark: fast-growing market, low share; the right strategy and investment can build share, but it may consume cash and never generate enough. Tata Nano failed; Bajaj Pulsar succeeded. | Dog: slow growth and intense competition produce little cash. |
The matrix gives investors a sense of each segment's attractiveness.
Structure, conduct, performance
SCP analyses an industry through its structure (monopoly, oligopoly), its conduct (commoditised or specialised, seasonal or round the year, cyclical or non-cyclical) and finally its performance (RoE, RoIC, WACC). It can be seen as an extension of Porter's model: structure and conduct roughly cover Porter's ground, and performance adds the financial dimension.
Competitive intensity (number of players), concentration, relationships among players, market size and growth rate. Analysts ask how many players exist, whether a few dominate, how business splits between organised and unorganised players, whether substitutes threaten, how supplier and buyer equations stand, and whether backward or forward integration exists or is possible. This overlaps with Porter's five forces and SWOT.
Structure shapes conduct on pricing and innovation, and each industry has its peculiarities: umbrellas and raincoats are seasonal, FMCG and pharma sell all year; high interest rates deter real estate and four-wheelers but not two-wheelers as much; mining is commoditised while FMCG and white goods sell on brand power. Analysts ask whether the business is cyclical and what drives it (commodity prices, rates, currency, global factors), whether it needs skilled labour and whether talent is available, how customers choose, how technology will affect it, and how dependent it is on government policy.
Structure and conduct produce the financials. Businesses with high returns on capital and equity create wealth for owners in the long run; the ratios are dealt with in the quantitative analysis chapters.
- PESTLE studies the external environment of a country a business is choosing to enter: Political, Economic, Socio-cultural, Technological, Legal, Environmental; STEEPLED adds Ethics and Demographics. Not every factor affects every company equally.
- Economic factors include GDP growth and its contributors, inflation and rates, import and export composition, balance of payments, exchange rate stability, monetary and fiscal situation, financial markets, taxation, dependence on natural resources such as oil, central bank policy and forex reserves. Legal discomforts cited: the Vodafone retrospective tax and cancelled telecom and mining licences.
- The BCG matrix sorts business segments by market growth and cash generation: stars (Cera Sanitaryware), cash cows (Navneet Publications, Colgate), question marks (Tata Nano failed, Bajaj Pulsar succeeded), dogs.
- SCP looks at structure (monopoly or oligopoly, number and concentration of players, organised versus unorganised, substitutes, supplier and buyer relations, integration, size and growth), conduct (commoditised or specialised, seasonal or year-round, cyclical or not, skill needs, how customers choose, technology and policy dependence) and performance (RoE, RoIC, WACC). It extends Porter's model with the financial dimension.