Did you ever think you had the perfect business plan and strategy, only to be blindsided by an increase in tariffs or a new environmental regulation? This article will help you discover 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, you need to learn how to conduct an environmental scan.
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 Importance Of External Factors
What are external factors? 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.
For example, the new tax code that went into effect this year impacts how corporations are taxed. Every company must have staff and procedures (internal factors) in place to learn the new code (external factor) and make necessary accounting changes in order to file correctly for 2018. If a company is slow to respond and only begins to address the revisions to the tax code next April, it will create additional organizational challenges and potential financial penalties.
Conducting An Environmental Scan
While external factors like government policy changes are sometimes unexpected, that doesn’t mean you can’t prepare for 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:
- (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: Changes in the sociocultural market environment that illustrate customer needs and wants. This includes emerging trends, population analytics, and demographics.
- (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. 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.
Your PESTEL and SWOT analyses should inform your strategic plan. Is it time to refresh that plan? Learn how to here.
Staying Current On External Factors Affecting Your Business
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 brand or revenue of larger corporations and may be more susceptible to the influence of external factors.
Instituting an effective method for identifying external factors and completing environmental scans is a valuable exercise. It can help your organization take advantage of opportunities before your competitors do, address threats before they become significant problems, and align strategic plans to meet changing demands in the marketplace.