Top 6 External Factors Affecting Organisational Performance
“What you don’t know will hurt you” (Rohn 2011). This risk of insufficient information gain, in an organisational context, is broadly categorised into internal factors i.e. those under the control of the company no matter whether they are tangible or intangible and external (environmental) factors i.e. those outside and under no control of the company (Mageplaza, 2022). Far from mutually exclusive, these external factors can often drive internal factors and in some acute cases, internal factors can influence external factors. This has been demonstrated at Square, Inc, where the emerging strategy (internal factor) was to lobby the creation political environments (external factor) that were favourable to its business. (Business Research Methodology, 2021).
Despite their non-mutual exclusivity, let’s focus on the external factors in isolation so as to explicitly capture their relevance to organisational performance.
Notwithstanding the actions of such organisations as Square, Inc, external factors affecting organisational performance, generally speaking, cannot be fully controlled (Picincu, 2019). A more common, albeit less efficient approach, is for organisations to take action macro level action, in result to changes in external factors, opposed to addressing these external factors through internal means.
Imagine now the fundamental external factors, as identified by Francis Aguilar (1967); these are Political, Economic, Social, Technological (PEST). Shortly after, Legal & Environmental were also identified and subsequently morphing the PEST acronym into PESTLE.
Similar to the interdependence of external and internal factors, for clarity, each external factor shall be analysed in isolation, to explicitly capture its relevance to organisational performance.
1. Political
The previously elected British Prime minister, Liz Truss, made clear the Conservative Party’s pledge to businesses; namely price freeze for some energy bills, the reduction of business taxes i.e. National Insurance, corporation tax and business rates, possible review of IR35 legislation, delivering on Brexit opportunities for business and a cautious approach to net zero that won’t harm businesses (Bromley, 2022). Whilst it is evident that factors instantiated by national political groups can effect an organisation’s profit margin and their ability to access off-payroll workers e.g. contractors, one should not neglect the risk derived from the international political scene.
2. Economic
With high energy costs negatively affecting Earnings Before Income Tax (EBIT), according to Mike Foster, CEO of the Energy and Utilities Alliance (2022), this should also boost a move towards renewable energy such as hydrogen, solar or wind. Not only does renewable energy offer a more cost effective source, the sunk cost of such energy saving measures has recently been incentivised through 0% Value Added Tax (VAT) in Great Britain and 5% VAT in Northern Ireland; a reduction from 20% VAT. Organisations such as BT, Sky, Land Securities and British Land are exemplifying the adoption of VAT reduction techniques and have been ranked amongst Carbon Clears top FTSE 100 organisations for carbon and sustainability (Exchange Utility, 2022).
3. Social
Amidst the fallout from the COVID-19 Pandemic is the paradigm shift of social attitudes towards working from home, with nearly 40% of people not wanting to leave their homes to work (Smith, 2020). The resultant organisational change in response to this social shift is evident amongst many large and highly influential organisations such as Google, Microsoft, Morgan Stanley, Capital One, Slack, Amazon and Paypal (Kelly, 2020). Evidently, from share price analysis, this change was necessary to maintain and in some cases, improve performance amongst these organisations.
4. Technological
Technology factors affect PESTLE analysis because they relate to the availability, development, and existence of technology (Moneyaves, 2022). For example, in the UK, the health of the broadband infrastructure was such that the opposition Labour party made the nationalization of the network a key policy in their failed bid for office in 2019 (Forbes, 2022). Mobile networks have also been stretched with outages reported by O2, EE and Virgin Media. This is not surprising, given the rise in demand resulting from the shift towards more working from home but consequentially, organisations have been left with the financial outlay for the provision of laptops, additional monitors, secure and robust communication software/hardware. One should note the requirement for human resources to manage cyber policies such as security updates and patches to counter the increase in cyber vulnerability (due to working from home), has also increased.
5. Legal
Government policies and legislations are often changed to promote a fair and ethical business space. For example the Food Retailing Commission (FRC) advocated the introduction of a Code of Practice, which would ban such organisational practices as changing prices without notice or demanding payments from suppliers; implicating the pricing model of many food retailers such as Tesco (Pestle Analysis, 2014). One should note the fallout from Brexit legalities, with respect to trade in and out of Northern Ireland, has still not been resolved and thus still impacts many organisations some years later.
6. Environmental
According to Ionos (2020), the availability of natural resources is one of the top 5 physical and geographical environmental factors currently affecting organisations. For example, the cost of European Brent crude oil stood at US$61 a barrel in the 1st quarter of 2021, which represents a quarterly increase of 37%, and yearly increase of 19% (RICS, 2021). Evidently, being cognisant of changes across all the external factors empowers organisations to mitigate one environmental risk e.g. increases in crude oil price, by capitalising upon favourable changes in economic trends towards renewable energy.
More recently these environmental factors have been extended further to include Ethical, Demographic, Innovation, Regulatory & Competition (Janse, 2021). This extension is however beyond the scope of this article.
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References
Aguilar, F. J. (1967) Scanning the Business Environment. Information Uncover.]]
Business Research Methodology (2021) Square PESTEL Analysis. Available at: https://research-methodology.net/square-pestel-analysis/ (Accessed:19 September 2022).
Exchange Utility (2022) British Businesses Make the Transition to Renewable Energy Sources. Available at:https://www.exchangeutility.co.uk/news/british-businesses-make-the-transition-to-renewable-energy/ (Accessed: 20 September 2022).
Janse, B. (2021) _PESTEL Analysis_. Available at: https://www.toolshero.com/marketing/pestel-analysis/ (Accessed: 19 September 2022).
Kelly, J. (2020) Here Are The Companies Leading The Work-From-Home Revolution.
Available at: https://www.forbes.com/sites/jackkelly/2020/05/24/the-work-from-home-revolution-is-quickly-gaining-momentum/?sh=632f766b1848 (Accessed: 17 September 2022).
Pestle Analysis (2014) PESTLE Analysis for Tesco discusses its Business Environment. Available at: https://pestleanalysis.com/pestle-analysis-tesco/ (Accessed 13 September 2022).
Picincu, A. (2019) The Environmental Factors That Affect a Business. Available at: https://bizfluent.com/info-7853935-environmental-factors-affect-business.html (Accessed: 18 September 2022).
Mageplaza (2022) What Are Internal & External Environmental Factors That Affect Business. Available at: https://www.mageplaza.com/blog/what-are-internal-external-environmental-factors-that-affect-business.html (Accessed: 23 September 2022).
Rohn, J. (2011) ‘Motivational Legends: Training, Development & Character for Personal Success’. Available at: http://www.audible.com/pd/Business/Motivational-Legends-Audiobook/B005IGXAJ4/ref=a_search_c4_1_1_srTtl?qid=1488858788&sr=1-1 (Accessed 23 September 2022).
