How To Identify External Factors That May Affect Your Business

Did you ever think you had the perfect business plan and strategy, only to be blindsided by an increase in exchange rates or a new environmental regulation?

If you did, you wouldn’t be the first. I’ve had multiple customers tell me similar stories, so I wrote this article to help others learn how to think about and manage external factors that can cripple your business (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 business plan 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?

I like to summarize external versus internal factors in this way: The economy, politics, competitors, and even the weather are all uncontrollable factors that can influence an organization’s performance. In comparison, internal factors such as staff, company culture, processes, and finances, are all mostly within your control.

I’d call artificial intelligence (AI) an external factor that’s having an impact globally; whereas disruptions to natural gas and wheat supply are external factors primarily affecting Europe. City and county elections are external factors impacting local governments and their policies and strategies.

A company’s stability and profitability are dependent on its ability to quickly identify and respond to these types of 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.

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The PESTEL Areas Of Analysis

While many challenges (like COVID) are unexpected, that doesn’t mean you can’t try to prepare for and manage them. I believe 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 our clients use to perform an environmental scan is the PESTEL analysis (sometimes known as PESTLE). 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.Particularly, if you're a local government or operating in a regulated industry like healthcare, you need to follow what’s happening with your elected officials and changing laws. For example, when the Supreme Court handed down its decision in Dobbs v. Jackson and overruled Roe v. Wade and Planned Parenthood v. Casey, it eliminated the constitutional right to abortion. This impacts not only how healthcare facilities currently operate, but how medical professionals and even students are trained. These political shifts affect staffing, operations, and business strategies across the healthcare landscape.
• (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. For example, rising interest rates will greatly affect the mortgage industry but will not matter as much for companies selling small household items.
• (S)ocial: Emerging trends and patterns in population analytics, demographics, and customer behavior. This may indicate changes in customer needs and wants; it may also reveal a need for change in the workplace. I’d call the rise in remote work a significant social factor. There were huge shifts in where people lived coming out of COVID that affected many businesses.
• (T)echnological: How innovation and development evolve a market or industry. This includes automation, technology awareness and adoption rates, and new services or products.AI is something almost every company is thinking about in this category (and it certainly could be added to the Social category above, too). I’ve had people tell me it’s a time bomb that will take away jobs. Other people say it will be the greatest productivity enhancement the world has ever seen. Whatever side you’re on, AI is powerful. Every company should be monitoring changes in this area because it will affect their organization in massive ways. Assess these external factors to see if there’s a risk to your business model, or if it still makes sense.
• (E)nvironmental: The ecological and environmental aspects that affect a business’s operations or consumer demand. This includes access to renewable resources, weather or climate changes, and corporate responsibility initiatives. For example, Hurricane Helene had devastating effects on North Carolina, just south of our ClearPoint offices. While this isn’t something businesses could prepare in advance for, their risk management strategies should include plans to handle extreme weather events in the future.
• (L)egal: There are many tricky legal issues resulting from Supreme Court decisions that affect industries. I described one above, but there are also many issues at the local level that are voted on regularly.  Depending on your organization’s industry, you will need to keep track of major legal changes that could affect your business.

After you complete a PESTEL analysis, you’ll have a thorough environmental scan that identifies uncontrollable, external factors your business 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 organization.

When you operate in the software world like I do, some of the items you identify may be in a Disaster Recovery Plan or a contingency plan. Other items may be in a risk management 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 business planning activities, such as a SWOT analysis.

Your PESTEL and SWOT analyses should inform your business plan. Learn how to refresh your plan here.

How To Conduct An Environmental Scan: A PESTEL Example

I’ll walk you through how to use the above PESTEL areas as a guide for scanning the external environment, using a generic 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?

• Are there any political elections or regulations that may affect your organization directly?
• Are there any policy changes around unemployment or health insurance you need to track?

Economic factors:

What are the economic conditions, and how might they affect your business?

• How is inflation and/or interest rates affecting your organization?
• How is the greater economy affecting purchases or renewals?

Social factors:

What social behaviors are changing, and how might that affect the business?

• Is your organization impacted by changing “hot-button” issues?
• Are people using different social media tools for work-related topics?

Technological factors:

What are some of the technological changes that might impact how we deliver our product or service?

• How is process automation changing your organization?
• How is artificial intelligence affecting your organization or how people find your organization?

Environmental factors:

What are some environmental considerations that could affect the business?

• How is climate change affecting your organization or the need for your products and services?
• Is your organization prepared for extreme weather events?

Legal factors:

What potential legislative actions might impact the business?

• Are there any national legislative votes or priorities that might affect your organization?
• What local legal changes are coming that could impact your organization?

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).

Remember 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, I want you 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 puzzle, my advice is to incorporate what you’ve learned into other strategic activities, such as a SWOT Analysis.

Stay Current on External Factors Affecting Your Business

I recommend that businesses conduct environmental scans on a semi-annual or annual basis. Because strategic plans are typically created on a three- to five-year cycle, this scan frequency ensures you stay current on external factors that can impact your company in both positive and negative ways.

Doing this risk analysis is part of good governance. Particularly when you think about external factors like technology that are advancing by the day, it’s smart to beef up your environmental scans and risk management strategy and processes so you can quickly adapt and evolve as new things come into play.

The process isn’t just for Fortune 500s—it’s particularly important for small and medium-sized businesses like my own 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.

How ClearPoint Strategy Can Help

ClearPoint Strategy equips your business with the tools to seamlessly integrate PESTEL and SWOT analyses into your strategic planning. This feature will enable you to monitor, analyze, and respond to external factors such as political, economic, social, technological, environmental, and legal influences.

Our platform provides real-time data tracking, customizable dashboards, and comprehensive reporting to ensure you stay agile and proactive.

By comparing historical and current data, ClearPoint helps you identify trends and make informed decisions, ensuring your strategic initiatives remain aligned with the dynamic business environment. See ClearPoint in action—book a personalized demo today.

Future-Proof Your Business with ClearPoint Strategy

ClearPoint Strategy provides the tools you need to monitor, analyze, and respond to external factors effectively. Our software helps you stay agile and proactive, ensuring your strategic plans remain resilient in the face of political, economic, social, and technological changes.

Take control of your business environment—book a personalized demo with ClearPoint Strategy today and see how we can support your journey to sustained success.