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While external factors are uncontrollable, they don’t have to be unforeseeable...
- Run a PESTEL scan across all six spheres. Brainstorm with people who know the business and the world outside it.
- Rate each factor high or low on impact and likelihood. Not everything should rank as important; the goal is finding the few high-impact influencers.
- Write a contingency plan for factors likely to hit. You need not fund it yet, but think through the implications now.
- Repeat the scan semi-annually or annually. Smaller businesses without steady revenue are more exposed to external shifts.
- Follow PESTEL with a SWOT analysis. Combining internal strengths and weaknesses with external factors shows the best path forward.
You can have what looks like the perfect business plan and strategy and still be blindsided by an increase in tariffs or a new environmental regulation.
This article shows 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, 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’s easy for an organization to focus on what it feels it can control internally. But the uncontrollable, external factors still affect the business, and you can’t afford to overlook them.
ClearPoint Strategy helps organizations monitor and respond to these external influences so strategic initiatives keep up with a changing business environment.
Our software builds external factor analysis into your strategic planning process, so you can adjust early.
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. Internal factors such as staff, company culture, processes, and finances, by contrast, all seem within your grasp.
A company’s stability and profitability depend on how quickly it can spot and respond to changes in the external environment. Change is inevitable, and the flexibility to deal with unexpected market shifts can mean the difference between survival and extinction.
Something as common as a shift in government policy can have a big 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 is a good case study of how much external factors can affect organizations. Some were hit harder than others, but nearly every business had to reassess its situation and adopt coping strategies of some kind. In some cases, survival depended on their ability to pivot.
The effects of the pandemic are still unfolding, so organizations need to keep reexamining the environment to reduce risk and find new opportunities.
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The PESTEL Areas Of Analysis
Many challenges (like COVID) are unexpected, but you can still prepare for them and manage them. The most effective way for a business to stay flexible 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. Make 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 the plan yet, but you should think through what would happen if one of these external factors occurred.
After your PESTEL analysis and planning, you can look internally and continue with other strategic planning activities, such as a SWOT analysis.
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
Start with what’s happening politically where you operate.
- Paycheck Protection Program (PPP) for eligible businesses.
- New unemployment regulations.
- New regulations extending health insurance coverage and paid sick leave.
Economic Factors
Look at current economic conditions and how they might 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
Note which social behaviors are changing and how that might 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
List technological changes that might affect how you deliver your 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
Consider the environmental issues 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
Identify legislative actions that might affect 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).
Look for the areas of highest concern and the areas that might change the strategic direction of the company. 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. Have a plan of action ready, even if you don’t put resources behind it yet.
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.
Stay Current on External Factors Affecting Your Business
We recommend running an environmental scan semi-annually or annually. That keeps you current on external factors that can affect your company, for better or worse.
The process isn’t just for Fortune 500s. It matters even more 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 get the benefits of data collection without the hassle. You can quickly pull together the data for PESTEL and SWOT analyses, compare historical data to current data, and track trends.
If you’d like to see ClearPoint in action, get in touch. We’d love to show you.
How ClearPoint Strategy Can Help
ClearPoint Strategy gives your organization the tools to build PESTEL and SWOT analyses into your strategic planning. You can monitor, analyze, and respond to political, economic, social, technological, environmental, and legal influences.
Our platform provides real-time data tracking, customizable dashboards, and reporting, so you can react quickly.
By comparing historical and current data, ClearPoint helps you identify trends and make informed decisions as the business environment changes. See ClearPoint in action. Book a personalized demo today.
Future-Proof Your Business with ClearPoint Strategy
ClearPoint Strategy helps your strategic plans hold up through political, economic, social, and technological changes. Book a personalized demo with ClearPoint Strategy today and see how we can help.
Common questions
How often should we redo the environmental scan?
Run a full PESTEL scan once or twice a year, timed so the results feed your planning cycle. Between scans, assign someone to watch the high-impact factors and call an off-cycle review when one moves, such as new legislation, a sharp interest-rate change or a major competitor’s entry.
Who should take part in the PESTEL brainstorm?
People who know the business and people who watch the world outside it. Include finance, operations, legal or compliance, and staff who deal with customers, regulators or suppliers every day. Frontline staff often see shifts in customer behavior before leadership does. Keep the group small enough to rate the factors together.
How do we turn a high-impact external factor into something the plan tracks?
Give it an owner, a warning signal and a prepared response. For each factor rated high impact and high likelihood, name who monitors it, define the indicator that triggers action, and write the contingency plan in advance. Then add it to your risk register or strategic plan so it is reviewed with everything else.
Should PESTEL come before or after SWOT?
Before. PESTEL scans only the outside environment, so its high-impact findings become the opportunities and threats in your SWOT. SWOT then adds internal strengths and weaknesses, and comparing the two shows where you can exploit an opportunity or are exposed to a threat. Finish both before setting objectives.
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