While external factors are uncontrollable, they don’t have to be unforeseeable..
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.
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.
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:
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.
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.
Conduct a brainstorming session with a group that includes those who have expert knowledge of the business and/or the world outside the business.
What’s happening politically in the environment in which you operate?
What are the economic conditions, and how might they affect your business?
What social behaviors are changing, and how might that affect the business?
What are some of the technological changes that might impact how we deliver our product or service?
What are some environmental considerations that could affect the business?
What potential legislative actions might impact the business?
Assess the implications of each external factor by considering these questions:
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.
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.
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!