February 23, 2023
Did you ever think you had the perfect business strategy, only to be blindsided by an increase in tariffs or a new environmental regulation?
That scenario is a perfect example of external factors at play.
What are external business factors? They are the uncontrollable environmental factors taking place outside your business that influence your performance. These are in contrast to internal business factors—the controllable forces happening within your organization.
It can be easy for an organization to focus solely on what it feels it can control—things like staff, company culture, processes, and finances. Yet it’s critical not to overlook the uncontrollable, external factors that impact a business, such as the economy, politics, competitors, customers, and even the weather.
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.
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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.
So what’s the best way to think about and manage external factors? If you don’t do it already, you need to learn how to conduct an environmental scan. You’ll also need to adapt your strategic planning process to account for those factors you identify. ClearPoint strategy software makes it simple to adjust your strategy based on your insights—and continue doing these exercises methodically over time so you have a better chance of reaching your goals. In the sections below, we’ll discuss both of these aspects, starting with an explanation of the most common external business factor analysis framework, the PESTEL.
While many challenges 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 types of external business factors:
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.
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. Discuss the following:
What’s happening politically in the environment in which you operate?
What are the economic conditions, and how might they affect your organization?
What social behaviors are changing, and how might that affect the organization?
What are some of the technological changes that might impact how you deliver your product or service?
What are some environmental considerations that could affect the organization?
What potential legislative actions might impact the organization?
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 business factors that will most likely materially affect 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.
This example matrix can be used 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); as well as the probability of each risk occurring over one- and five-year timeframes.[/caption]
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 important to perform these analyses with some frequency so 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.
So what do you do after completing a PESTEL and SWOT analysis? The next step is to adjust your strategy to reflect your insights.
Unless you’re prepared to handle this task in a piecemeal fashion across lots of departmental spreadsheets (which we wouldn't recommend because it’s a scattered approach), it’s best to do this work in a centralized strategy software tool like ClearPoint. ClearPoint houses all your facility’s strategic information in one place, making it easy to see where adjustments need to be made.
In addition to centralization, strategy software helps you make the most of your PESTEL analysis by allowing you to:
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 itself in any application, but without a central location to store, view, and analyze the data in relation to your strategy, the exercise itself will quickly become a hassle. Plus, ClearPoint allows you to quickly consolidate all the necessary data for both PESTEL and SWOT analyses, compare historical data to current data, and easily track data trends.