Startups have it rough because many new business owners jump into an industry blind. They open up shop and blast through challenges headfirst without a second thought. As a result, this attitude puts new businesses at risk of the things the entrepreneur did not prepare for and was not ready to face. Consequently, this leads to the closing and shutting down of the business within the first five years of operations.
As sad as this situation sounds, this is the harsh reality numerous startups face every day, and it all boils down to the lack of careful preparation on the business owner’s part. Media and business-guru type of advice has proliferated the internet, making everyone think hustle and diligence are the sole factors that dictate business growth and performance.
So, to break this cycle of starting, crashing, and burning down, we want to emphasize the significance of planning, testing, and market research before opening up your business. And to start, we will take a look at analyzing the external factors that affect business.
What Is External Business Environment?
We strongly encourage business owners and entrepreneurs to invest back into their startup and strive to improve every aspect and facet of their company. However, this advice is often taken the wrong way, and far too much focus is placed on the internal part of the business, leaving the startup prone to instability and shock from the external factors.
These external factors are characterized by macro-economic features that a company has no control over. They operate outside the business and can have a positive or negative impact on growth and performance:
- Political: Political situations and government regulations fall under the Political spectrum of the external business environment. They come in many forms, such as tax policies for proprietorships and corporations, state labor laws, legal issues, and the like. Startups must adhere to these set rules and guidelines and can either help or limit the scope of operations.
- Economical: Business exists to generate income and make a profit. As such, the Economic factor has a significant impact on the business because it covers aspects like incurred expenses and cost of sales. They come in different forms like exchange rates, inflation, cost of raw materials, and many more. Economic factors dictate the purchasing power of a business and the ability to make a profit.
- Social: The social spectrum of the external environment deals with the characteristics of the population. These can range from lifestyle choices, current trends, culture, norms, and different types of demographics. The social factor determines the buying patterns of customers and the likelihood of your audience to purchase your product or service.
- Technological: As the name suggests, this refers to the factors that affect the technical dimension of your startup and the changes it can potentially bring in terms of productivity, efficiency, and more. Technology stands at the center of innovation, and when emerging technologies break into the mainstream market, they can either vastly improve your business or make it obsolete.
- Environmental: Lastly, we can’t forget the environment. Things like climate, changes in weather, and different geographical events can affect your startup. From a product point of view, your selection needs to account for the environment of your locality. Likewise, if your storefront and business operations work in an earthquake-prone area, you need to have security measures.
These factors are commonly referred to as PESTE analysis and come in different names such as STEP, PEST, and PESTLE. Others also add legal and competition as other external factors of the business environment.
Dividing Your Focus: Taking Advantage of PESTE Framework
Understanding the PESTE Framework gives you a macroeconomic view of your external business environment. It narrows down the aspects that you should consider and helps you work around potential challenges that may arise in the natural course of business. Through careful examination, you will identify strengths that can work to your advantage and weaknesses that limit your startup.
Understanding Your Demographic
A great example of utilizing the PESTE Framework is through the social aspect. You should innovate and adjust your product or service according to the social needs of your audience. Taking into account the culture and buying patterns of your demographic, you will get the opportunity to capitalize on their triggers and offer more meaningful experiences.
Another excellent practice of implementing the PESTE Framework is isolating specific external factors that can negatively impact business growth. Through identifying economic downtrends and bearish movements, tax laws and incentives, and similar, you can essentially prepare for worst-case scenarios. This will give your business safety against financial instability and shocks, such as the pandemic the world is currently facing.
Of course, there are many more applications of the PESTE Framework and analysis, and this but the tip of the iceberg. So, we strongly suggest more research and brainstorming to help address the needs of your startup.
What Are the Limitations?
Likewise, the PESTE Framework is not perfect, and there are certain limitations. An example of this would be potential analysis paralysis. Juggling too much information would lead to overload and decision-making nearly impossible. It would cause tunnel vision and work against your business, and when you need to think about how to franchise your business or expand into new markets, you’ll always be second-guessing and miss out on opportunities.
Conclusion: Finding Balance
Overall, the external business environment is essential but should not be your primary focus. You should weigh the opportunity cost of all aspects of your startup and achieve balance. One thing’s for sure, though, you now have a new tool of analysis to help with your decision-making and planning.