Analyse the Business Environment

Analyse your environment to determine the potential of your business.

In any business environment, there are many factors beyond your control that will affect your business, both positively as well as negatively.  Since you will not be able to influence these factors, it is wise for you to understand them in order to take appropriate steps to minimise threats to your business. Understanding how these factors can also positively impact your business will help you look for advantages and opportunities to exploit.

In the next section, you will learn how to use the PEST analysis to assess your business environment. The PEST analysis is a useful tool used to assess the potential of a business or to review its growth in the context of the environment it is operating in.

Think About It

External factors

Rank the following five factors, which are beyond your control and likely to impact your business, in order of significance:

  • Foreign exchange or interest rates
  • Government policies
  • Regulations
  • Youth culture
  • Think of one more that is specific to your industry / business area / company

Are there factors that you were not aware of before doing this exercise?
Do you have a strategy for dealing with them?

Political and legal factors take into consideration the political party in power, government policies affecting the economy and the degree of government intervention.

In developing the economy, the government often influences healthcare, education, workforce and infrastructure. The government may also implement policies on the types of goods and services they want to encourage or restrict.

Legal factors take into consideration issues pertaining to the law. They include consumer law, antitrust law, employment law, tax policy, labour law, environmental law, health and safety law, trade restrictions and tariffs. For example, limits to the number of foreign hires and increases in minimum wage will affect your operational costs. Changes to intellectual property laws can affect your claims to ownership.

All these factors can affect how you operate, the cost of running your business, and demand for your products. They have direct impact on the economy, and can also directly or indirectly affect the cost of running your business and your bottom line. Think through the following questions.

  • Is there sufficient stability in the government?
  • How do restrictions on, or encouragement of, specific goods and services by the government affect your business?
  • Are there government initiatives or incentives that can aid you in growing your business?
  • What are some laws that could benefit or disadvantage your business?
  • Are there any impending changes in legislation?


Key factors
When doing the PEST analysis, focus on those with the greatest impact on your business at this point in time. Most importantly, you must identify the key factors particular to your business. For example, if you are in the pharmaceutical business, government regulation on healthcare may be critical. If you are using the PEST analysis to compare options, develop a system for scoring of each factor to help you in your decision.

Economic factors include interest rates, economic growth, taxation changes, inflation and exchange rates. They impact how your business operates and the decisions you make.

Ways Economic Factors Can Affect You
Interest rates affect your company's capital cost and the extent your business grows and expands; higher interest rates tend to deter investment as it becomes more expensive to borrow money.

Exchange rates affect the cost of exporting goods and the price of imported goods in the economy. Demand in overseas markets can be affected because a strong currency makes your product more expensive while instability of foreign currency causes uncertainty and hesitation to purchase.

Inflation may cause employees to demand higher wages and increase your overhead costs while economic growth may increase the demand for your products.

Socio-Cultural factors take into consideration trends, behaviour or attitude changes related to culture, health awareness, population growth rate, age distribution, career attitudes and safety expectations.

Changes in social-cultural factors have direct impact on your business operations and demand for your products. You must be able to adapt to these changes and adapt your strategies accordingly.

  •  An aging population requires more medical health care and perhaps less demand for some other products and services. They may also be less likely to work, possibly reducing the workforce and increasing your labour cost.
  • A young workforce will have different expectations of job responsibilities and satisfaction. Growing competition for talent will require companies to think seriously about how to attract them.
  • With growing awareness of environment and corporate social responsibility, you will need to address the concerns of consumers and lobby groups.
  • When doing business in a foreign culture and society, you will need to be sensitive to cultural, superstitious and religious issues.

Technological factors include technological and technical aspects such as research and development activities, speed of technology commercialisation, rate of technological change and automation.

Technology can lead to innovation, reduced costs and improved quality. Companies that own or use these technologies can win customers by offering better products and value. New ways of doing business have also been made possible with the development of systems such as Electronic Data Interchange (EDI), Radio-frequency Identification (RFID) and computer-aided design.


Impact vs Likelihood
Write down the key environmental factors that are likely to impact your business. Decide on the relative importance of each factor based on its likelihood of change and magnitude of possible impact.



Identify the most significant factors, paying extra attention to those that fall within higher Impact.

Think about what can you do to manage these risks, taking into consideration their likelihood and consequences. Find opportunities even in the midst of changes or challenges. Pick out factors that are more likely to bring about a change in attitude or behaviour in your customers.

Do a quick run through factors which you have dismissed. This is to ensure that you have not too quickly dismissed something and missed a hidden threat or opportunity.

To-do List:

  • Assess the technologies available in the market. New technologies and processes can help develop new products; MP4 players, interactive video games, online gambling and high definition flat screen TVs are all new products created by technological advances. The products they have replaced no longer hold sway in the market.
  • Assess whether there are limitations in technology infrastructure when entering a new market. This will dictate the minimum efficient production level and influence outsourcing decisions.
  • Find out whether there are incentives for technology developments in the market you are intending to enter.