In the first part of this series, we examined how to use the VMOST framework to perform an internal environment analysis. In this post, we will take that knowledge further by considering a framework for external environment analysis known as PESTLE. If any of this sounds strange to you, I strongly recommend reading the earlier post.
The external environment refers to factors that are outside the direct control of the organization. In the external environment, an organization is unable to determine outcomes on its own. It is forced instead to respond to the forces of the environment which may be favourable or unfavourable.
And that brings us to PESTLE. Pestle is an acronymn used to represent some of the factors that should be considered when attempting to understand the external environment that a business operate or will operate in. They are:
- Political
- Economic
- Socio-cultural
- Technological
- Legal
- Environmental
Political
Businesses are never completely insulated from political factors. The politics of an environment, whether on the national or international level such as the war in Ukraine, or even on a local level, can affect the ability of an organization to accomplish it outcomes or even cause completely unexpected disruptions and changes. As a result, an analysis of the external environment requires taking a look at the political factors at play.
A few years ago, motorbike hailing startups such as Gokada and Opay came into the Nigerian market with a lot of fanfare. The business models seemed quite promising as the market size was very huge and relatively untapped. The startups received funding relatively quickly, and quickly invested into gaining market share. Unexpectedly, however, there were a series of draconian government law imposed by the government of Lagos State, which was the primary market for these companies. One of them was a requirement that the companies operating in that space needed to pay an amount most considered to be unreasonable for licensing. Another challenge, which would eventually make it impossible for the companies to continue operating their original models, was the ban on motorcycles on virtually all the major roads in the state.
Economic
Economic factors are usually factors such as interest rates, inflation, the monetary policies imposed by the government, exchange rates etc.
Again, Nigeria provides a classic example of how economic factors can severely affect a business. With the value of the country’s currency, the Naira, losing value within unprecedented timeframes, it is very difficult for companies to plan especially if they produce output that requires any form of externally sourced input.
Sociocultural
Sociocultural factors can determine trends which influence business. If, for example, a population becomes interested in having more children, this can affect different categories of companies ranging from those who manufacture baby food to different levels of schools. On the other hand, if the population is less interested in precreation as is the trend in much of Europe, a number of industries are affected as well. Factors like religious beliefs, culture, norms, and even trending roumours are not left out.
Technological
the T stands for technology, technology so the introduction of new technologies can change the game for example new maybe self-driving cars for instance there is an entire industry that is built around cars that are driven by human beings but if you have a situation where cars become self-driving then it affects that industry but it affects not only the industry of people-driven cars it also affects several other industries for example driving schools suddenly they’re not going to be as relevant as they were before even video game manufacturers might be affected because if they were making video games that had to do with car racing and stuff like that perhaps they were making those games with drivers seated on the cars and that context but with self-driving cars all of those would change the thinking behind it would change so several industries can be affected another very good example that i like to give is the introduction of technology for advertising using social media so for example now it makes more sense to advertise a lot of products on social media as against going on radio or going on television what that implies is that there has been a shift the industries the companies that used to be the major ones before in the information space are no longer as important as they were before and and so technology is very important it must be considered um as part of your factors when you’re doing your organizational strategy.
Legal
The L in PESTLE stands for legal the legal factors so in different countries there are different legal factors and what are the legal factors i’m talking about things like employment law things like contracts law the different things that guide the legal frameworks in those countries and i think that an important legal factor is also maybe the time it takes to get justice that’s very important i once met a man in the U.S and we were talking and then he told me that his organization would have loved to invest in Nigeria but that they wouldn’t be able to and i was trying to push for him to abandon that mindset but then he asked an important question he said if something goes wrong and we want to sue we want to go to court in Nigeria it’s going to take forever to get justice and that for me was a very important point because that shows that the legal factors are simply wanting if justice is very difficult to get if the laws are not very well defined or things like that those are factors that must be considered in the organization’s strategy
Environmental
the final set of factors are the environmental factors environmental factors and these are the trends in the environment the things that affect the environment or the trends that are upcoming with regards to the environment it is important that while doing the organizational strategy an organization must consider factors such as climate change and the effect of such trends i mean the trends of the advocacy about climate change on their own organization other environmental factors include things like deforestation, things like animal welfare and other factors like that so in this class we’ve looked at organizational strategy we defined strategy and then we talked about the internal environment and we talked about the external environment we said that internal environments can be analyzed using a framework such as VMOST and the external environment can be analyzed using PESTLE if you’re able to do those two very well you should have a very good understanding of the strengths weaknesses opportunities and threats of your organization.
PESTLE is an important acronym for external environment factors. However, it is not the only one. Looking to learn more? Consider our BCS Foundation Certificate in Business Analysis prep course.
