Evaluating Environmental Factors

The business environment refers to the set of political, economic, social, technological, environmental, and legal forces that can promote, nurture, constrain and kill businesses in a given territory and market.

A PESTEL (political, economic, sociocultural, technological, environmental, and legal) analysis is a popular tool for understanding the environment a business operates in as well as the trends likely to have an impact on the business’ performance.

In his 2007 note, Opeyemi Agbaje enumerates examples of environmental factors that might have an impact on businesses. Such examples include:

• Political: Political stability, democracy, institutions, party system, human rights press, government efficiency, bureaucracy, political corruption, national influence, military and security agencies
• Economic: Labor markets and policies, capital, infrastructure, natural resources, macro-economic stability, level of investments, interest and exchange rates, money supply and markets, financial sector, foreign debt, foreign reserves, corruption, business associations, economic policy orientation, trade policy, protection and incentives, investment climate, agriculture, manufacturing capacity, fiscal policy, taxation, and government spending
• Social: Culture, demography, population, religion, ethnicity, social structure and dynamics, gender issues, urbanization, health, education, life expectancy, corruption, poverty, language, social communication, and consumption patterns
• Technology: Availability, cost, Internet, e-commerce, obsolescence, technology competitiveness, technology policy, technology use, and pervasiveness
• Legal: Legal system, private property rights, rule of law and constitutionalism, security, regulatory intrusion, changes in regulations, law-making agencies, cost of legal/regulatory compliance, licensing requirements, law enforcement, and regulatory effectiveness
• Globalization: Foreign direct investment, portfolio investment, multilateral agencies, integration with global markets, Overseas Development Assistance (ODA), bilateral relationships, trans-national corporations, international economic law, international criminal law, intellectual property, import and export trade, expatriate influence, immigration and emigration, foreign incomes and remittances

Questions for Your Business:

• What are your ambitions – a high-growth business or a small, lifestyle business?
• How large is your market?
• How quickly has it grown over the past few years?
• How fast will it grow in the next few years?

Things to do

• Conduct a PESTEL (political, economic, sociocultural, technological, environmental, and legal) analysis and identify the trends that will affect your market.
• Speak with your customers, suppliers, and competitors and get some information on market trends:

1. What are the current key trends?
2. What is the evidence supporting the existence of these trends?
3. How have the trends evolved historically?
4. What is the nature and degree of change or turbulence within trends?
5. What kind of impact do the trends have for your business – negative, positive, or neutral?
6. What are the interrelationships between trends?
7. What are the conflicts between trends?

• Identify most critical trends or “issues”.
• Assess the underlying forces.
• Make alternative projections of the issues.
• Derive implications of these forces on your business and your competitors’ strategies.