A thorough analysis of the external environment can improve your business plan and help you predict the conditions in which your business may have to operate in the future.
Such environmental factors may be macro — where things are decided by government economic policy and affect the broader economy — or micro — where things are decided by stakeholders, such as customers, employees, shareholders, and competitors.
A PEST analysis is often used to examine the key macro factors — that is, the political, economic, societal, and technological factors. These factors are inextricably linked. Together they reveal many of the external environmental factors influencing your company’s performance and, subsequently, how you develop your business plan.
- political — Company operations are affected by political factors such as corporate tax, monetary policy, foreign trade policy, competition law, regulation, and government bureaucracy. Education policy also impacts a business’s ability to recruit qualified employees. Such influences can complicate or delay business development.
- economic — Company profitability is influenced by bull or bear markets, infrastructure, inflation, interest rates, fuel prices, and exchange rates. These factors affect the price of raw materials and labor, and the ability to sell goods and services.
- societal — Plans can be affected by societal factors such as the average amount of time people work every week, which typically influences the amount of free time they have to spend elsewhere.
- technological — Company profitability is influenced by technological advances, as technology can have a sudden impact on an economy. The availability of government funding, investment by competitors into R&D, and new production methods can impact your external environment.
External analysis: scenario planning
As part of an external analysis, you may use scenario planning. Scenario planning can help you visualize the future environment for your business. It adds additional value to your PEST analysis by outlining different scenarios of how your business might operate under different political, economic, societal, and technological conditions.
There are four steps to scenario planning.
1. pinpoint uncertainty and impact — You need to plan for the uncertainty of external factors and the impact on your business plan. Factors that seem certain and positive may later become irregular — for instance, the housing market may boom for 10 years, then become unstable.
2. outline alternative scenarios — You should include any environmental factors that have the greatest uncertainty and greatest risk to the business. You examine these factors and develop two or three detailed alternative scenarios for each.
3. select three scenarios — Combining different possible scenario paths for each factor suggests many potential outcomes. Your goal should be to identify three or four important scenarios. You should choose scenarios that are realistic, diverse, and directly linked to any problems relating to your business plan.
4. write scenario descriptions — Your scenario descriptions should be powerful descriptions that highlight the assumptions you’ve made, the relevant business context, and a time line for how the scenario could unfold.
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