How To Use PESTEL To Identify External Factors That Threaten Your Business’ Strategic Plan

You can have what looks like the perfect business strategy and still be blindsided by an increase in tariffs or a new environmental regulation. That is external factors at play.

External business factors are the uncontrollable environmental factors outside your business that influence your performance. They contrast with internal business factors, the controllable forces within your organization.

It’s easy for an organization to focus only on what it feels it can control: staff, company culture, processes, and finances. But don’t overlook the uncontrollable external factors that affect a business, such as the economy, politics, competitors, customers, and even the weather.

A company’s stability and profitability depend on how quickly it can identify and respond to changes in the external environment. Change is inevitable, and the flexibility to handle unexpected market shifts can mean the difference between survival and extinction. Something as common as a shift in government policy can have a significant effect on a business. Proposed legislation at the federal and state level might legally require a company to change its operations, and so become a critical success factor.

The COVID pandemic shows 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. For some, survival depended on their ability to pivot. The effects of the pandemic are still unfolding, so organizations need to keep reexamining the environment to mitigate risk and to identify opportunities.

To manage external factors, start by learning how to conduct an environmental scan, if you don’t do it already. Then adapt your strategic planning process to account for the factors you identify. ClearPoint strategy software makes it simple to adjust your strategy based on your insights and to repeat these exercises methodically over time, so you have a better chance of reaching your goals. Below we cover both, starting with the most common framework for analyzing external business factors: the PESTEL.

What are the most common types of external factors?

Many challenges are unexpected, but you can still prepare for them and manage them. The most effective way for a business to stay 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 collects relevant information about the outside world, your competitors, and your company itself.

One of the most popular methods for an environmental scan is the PESTEL analysis, an external factor evaluation matrix that covers six types of external business factors:

1. Political: 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.
2. Economic: 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.
3. Social: Emerging trends and patterns in population analytics, demographics, and customer behavior. These may signal changes in customer needs and wants, or a need for change in the workplace.
4. Technological: How innovation and development evolve a market or industry. This includes automation, technology awareness and adoption rates, and new services or products.
5. Environmental: 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.
6. Legal: 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.

A completed PESTEL analysis (sometimes known as PESTLE analysis) gives you a thorough environmental scan of the uncontrollable, external factors your organization should prepare for. 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 put resources behind the plan yet, but think through what would happen if one of these external factors occurred.

How do you conduct an environmental scan?

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 business factors that might affect your organization 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. Discuss the following:

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

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

• 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

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

• 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

What are some of the technological changes that might impact 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

What are some environmental considerations that could affect the organization?

• 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

What potential legislative actions might impact the organization?

• 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.

Using your analysis from Step 2, rate each factor by 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 ones that might affect the company’s strategic direction. Not everything will (or should) rank as important. Your goal 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 business factors most likely to materially affect you, think about possible ways to address them. You don’t need to apply resources to the plan yet.

You can use this example matrix as an annual risk assessment template. It shows an overall impact score if the risk occurred, on a scale of 1 (lowest) to 5 (highest), and the probability of each risk occurring over one- and five-year timeframes.

The PESTEL is one piece of the strategic planning puzzle, so we recommend bringing what you’ve learned into other strategic planning activities. The next step is to analyze your business (and business prospects) further with a SWOT Analysis. SWOT helps you understand your organization’s internal strengths and weaknesses. Combine that with what you’ve learned about the prevailing external factors to find the best path forward.

Perform these analyses regularly so you stay current on external factors that can affect your company in both positive and negative ways. The process isn’t only for Fortune 500s. It is particularly important for small and medium-sized businesses, which don’t have the recognizable brand or steady revenue of larger corporations and may be more susceptible to external factors.

Make external analysis and strategy planning easier with ClearPoint.

After you complete a PESTEL and SWOT analysis, the next step is to adjust your strategy to reflect your insights.

You could handle this task piecemeal across lots of departmental spreadsheets, but we wouldn’t recommend that scattered approach. It’s best to do this work in a centralized corporate strategy software tool like ClearPoint. ClearPoint keeps all your facility’s strategic information in one place, so it’s easy to see where adjustments are needed.

Strategy software also helps you make the most of your PESTEL analysis by letting you:

• Connect each of the potential external factors identified in your analysis back to one of your high-level goals. That way your strategy capitalizes on the opportunities, and your organization can be proactive about managing threats. In some instances, you could also formulate KPIs around the identified risks and opportunities. By linking external factors to your goals and measures, you’re more likely to develop a strategy that gives your organization a competitive advantage.
• Monitor threats in relation to your strategy. After you rank the threats based on their potential impact to your facility, you can add them to ClearPoint and methodically track and report on them over time. Potential threats then become part of your ongoing discussion about strategy, so you stay on top of them.

ClearPoint users are also more inclined to conduct these types of analyses on a regular basis, preferably semi-annually or annually, because the software makes them easier to carry out. You can build a template for the analysis in any application, but without a central place to store, view, and analyze the data in relation to your strategy, the exercise quickly becomes a hassle. ClearPoint also lets you quickly consolidate all the necessary data for both PESTEL and SWOT analyses, compare historical data to current data, and track data trends.