Did you ever think you had the perfect business plan and strategy, only to be blindsided by an increase in tariffs or a new environmental regulation? This article will help you discover how to think about and manage external factors that can cripple your strategic plan (or open up new opportunities). If you don’t do it already, you need to learn how to conduct an environmental scan and adapt your strategic planning process accordingly.
The controllable and uncontrollable aspects that affect a business can be categorized as internal and external factors, respectively. From goal setting to daily operations, it can be easy for an organization to focus on what it feels it can control internally. Yet it’s critical not to overlook the uncontrollable, external factors that impact a business.
Why consider how external factors will affect your business?
The economy, politics, competitors, customers, and even the weather are all uncontrollable factors that can influence an organization’s performance. This is in comparison to internal factors such as staff, company culture, processes, and finances, which all seem within your grasp.
A company’s stability and profitability are interdependent on its ability to quickly identify and respond to changes in the external environment. Change is inevitable and having the flexibility to deal with unexpected market mutations can mean the difference between survival and extinction for an organization. Something as common as a shift in government policy could have a significant effect on a business. Proposed legislation at the federal and state level might legally require a company to make changes to its operations and therefore become a critical success factor.
The COVID pandemic provides a good case study into how significantly external factors can impact organizations. While some were harder hit than others, nearly every business was forced to evaluate the changing landscape and adopt coping strategies of some kind. In some cases, survival depended on their ability to pivot. Even now, the effects of the pandemic are continuing to unfold, making it necessary for organizations to continuously reexamine the environment to not only mitigate risk but also identify opportunities going forward.
The PESTEL Areas Of Analysis
While many challenges (like COVID) are unexpected, that doesn’t mean you can’t try to prepare for them and manage them. The most effective way for a business to prime itself to be flexible and adaptive is to develop a framework for conducting an environmental scan.
An environmental scan is the process of methodically gathering, analyzing, and interpreting data about external opportunities and threats. It’s a mechanism to collect relevant information about the outside world, your competitors, and your company itself.
One of the most popular methods used to perform an environmental scan is the PESTEL analysis. This model is an external factor evaluation matrix that focuses on six spheres of data:
- (P)olitical: The extent to which a government may influence the economy and thereby impact organizations within a certain industry. This includes government policy, political stability, and trade and tax policy.
- (E)conomic: How economic conditions shift supply and demand to directly affect a company. This includes economic growth or decline, and changes in interest and inflation rates.
- (S)ocial: Emerging trends and patterns in population analytics, demographics, and customer behavior may indicate changes in customer needs and wants; it may also reveal a need for change in the workplace.
- (T)echnological: How innovation and development evolve a market or industry. This includes automation, technology awareness and adoption rates, and new services or products.
- (E)nvironmental: The ecological and environmental aspects that affect a company’s operations or consumer demand. This includes access to renewable resources, weather or climate changes, and corporate responsibility initiatives.
- (L)egal: The current legal allowances or requirements within countries or territories in which an organization operates. This includes health and safety requirements, labor laws, and consumer protection laws.
After you complete a PESTEL analysis (sometimes known as PESTLE analysis), you’ll have a thorough environmental scan that identifies uncontrollable, external factors your organization should prepare for. It’s appropriate to have a plan of action for the items you think could actually occur and have a material impact on your business. In software, it might be called a Disaster Recovery Plan or a contingency plan. You don’t need to apply resources to your plan at this time, but it’s important to have thought through the implications of one of these external factors occurring.
After your PESTEL analysis and planning, you can look internally and continue with other strategic planning activities, such as a SWOT analysis.
Your PESTEL and SWOT analyses should inform your strategic plan. Is it time to refresh that plan? Learn how to do that here.
How To Conduct An Environmental Scan: A PESTEL Example
Let’s walk through how you might use the above PESTEL areas as a guide for scanning the external environment, using the COVID pandemic as an example.
Step 1: List the external factors that might affect your business in each area.
Conduct a brainstorming session with a group that includes those who have expert knowledge of the business and/or the world outside the business.
Political factors:
What’s happening politically in the environment in which you operate?
- Paycheck Protection Program (PPP) for eligible businesses
- New unemployment regulations
- New regulations extending health insurance coverage and paid sick leave
Economic factors:
What are the economic conditions, and how might they affect your business?
- Potential need for layoffs or furloughs
- Reduction in disposable income could potentially decrease future sales revenue
- Inflation/interest rates will likely reduce the future availability of credit
- Tax relief for retirement fund withdrawals will impact retirement planning, making it necessary for some employees to work longer than originally expected
- Future costs of providing healthcare services with the required PPE may become a long-term issue
Social factors:
What social behaviors are changing, and how might that affect the business?
- Changing preferences for in-office vs. remote work
- Parents working remotely will need to juggle work and childcare
- Remote/hybrid work could negatively impact company culture
- Possible need for social distancing customers when the business reopens
Technological factors:
What are some of the technological changes that might impact how we deliver our product or service?
- Remote work will necessitate the use of more digital tools to carry out certain internal processes
- Restricted physical interactions may require new digital ways of working with customers
Environmental factors:
What are some environmental considerations that could affect the business?
- New strains of COVID may continue to affect operations over the long term
- Returning to the workplace may require air quality monitoring and sanitization products to create a safe environment
Legal factors:
What potential legislative actions might impact the business?
- Uncertain timeline around returning to work safely and how to manage individual preferences for work location
- Implications of mandatory vs. voluntary COVID vaccination for employees
- Considerations for reopening physical store locations safely for customers
Step 2: Analyze the implications of each PESTEL factor on the business.
Assess the implications of each external factor by considering these questions:
- What is likely to be their impact over time—in the short, medium, and long term?
- What type of impact are they likely to have—positive or negative?
- What is the importance of each factor? How significantly would its implications affect your business if they did (or didn’t) become a reality?
Step 3: Rate the impact and likelihood of each factor.
Taking into consideration your analysis from Step 2, rate each factor according to its overall potential impact on the business (high or low) and the likelihood of it happening (high or low). Which areas are of highest concern? Which areas might impact the strategic direction of the company? Keep in mind that not everything will (or should) rank as important. Your goal here is to identify high-impact influencers that warrant further consideration.
Step 4: Take action to either leverage potential opportunities or mitigate potential threats.
Once you’ve determined the external factors that will most likely materially affect your business, think about possible ways to address them. It’s appropriate to have a plan of action for the items you think could actually occur, even if you don’t apply resources to your plan at this time.
Because the PESTEL is just one piece of the strategic planning puzzle, we recommend incorporating what you’ve learned into other strategic planning activities. The next step is to further analyze your business (and business prospects) using a SWOT Analysis. SWOT helps you understand your organization’s internal strengths and weaknesses; combining that information with what you’ve learned about the prevailing external factors will help identify the best path forward.
Staying Current On External Factors Affecting Your Business
It’s recommended that organizations conduct environmental scans on a semi-annual or annual basis. This frequency ensures you stay current on external factors that can impact your company in both positive and negative ways. The process isn’t just for Fortune 500s—it’s particularly important for small and medium-sized businesses that don’t have the recognizable brand or steady revenue of larger corporations and may be more susceptible to the influence of external factors.
If you don’t have the bandwidth or the time to conduct these analyses regularly, performance management software like ClearPoint can help. Organizations that use ClearPoint reap the benefits of data collection without all the hassle. So, you can quickly consolidate all the necessary data for PESTEL and SWOT analyses, compare historical data to current data, and easily track data trends. If you’d like to see ClearPoint in action, get in touch—we’d love to show you!
