Strategic frameworks to make better business decisions

What is PESTLE?

A way of grouping the external factors that affect your business, PESTLE stands for political, economic, sociological, technological, legal, and environmental developments. These may present threats or opportunities for your business.

This analysis encourages you to look outside of what’s going on in your day-to-day business operations and see what might be on the horizon that could affect your customers, suppliers, and your business.

PESTLE is a core analysis to do when you’re creating your initial business plan and as your business progresses, refreshing your three-to-five-year plans.

Conducting a regular review of these external factors is known as ‘horizon scanning’. It’s a great habit to get into, as it’s easy to get so wrapped up with operational delivery that you miss opportunities or changes in your business environment that can blindside you if you aren’t expecting them.

The kinds of things that go in each category are:

Political – taxation policies, political stability, new free trade agreements, government policies and strategies

Economic – interest rates, inflation and disposable income, unemployment rates and labour market demand, salary inflation, exchange rates, economic growth/recession

Sociological – population age and growth, trends in attitudes, lifestyle norms, education levels

Technological – innovations such as artificial intelligence (AI), internet of things (IoT), the metaverse, the technical literacy of a population, access to reliable internet, mobility, security

Legal – changes in legislation and best practices such as health and safety, employment, intellectual property, advertising, consumer safety

Environmental – weather patterns, climate change, sustainability, waste management, habitat protection

How to use PESTLE in your business

As you think about each of these categories, consider the impact on your target customers and suppliers and what this could mean for your business, as well as anything that impacts your business directly.

For example, if inflation were to increase rapidly and interest rates increased, the following things might happen:

• Your personal and business bills could go up – so you may need to pay yourself more, increase prices or absorb higher overheads, or make savings.
• Interest on any debt with variable rates would increase and you may find it harder to borrow more – so you might plan to pay down debt faster or change to new fixed rates.
• Cash in savings could earn more interest.
• Your existing team may request higher salaries.
• Recruitment conversations may face tougher negotiations on salary.
• Suppliers might have to raise their prices, affecting your cost of sales.
• Businesses may cease trading, affecting your supply chain, or presenting opportunities if it’s a competitor.
• Customers may spend less and save instead.
• Price competition and promotional activity intensify – so you may introduce new products, services or offers to attract new customers or encourage the loyalty of existing ones.

Your PESTLE analysis is an important step in forming your strengths, weaknesses, opportunities and threats (SWOT) analysis, too. It forms the basis of your opportunities and threats, which are always external factors.

As with the example given above, once you have identified the factors you can start to consider what strategies will help you to explore opportunities and mitigate threats.

As your business develops, PESTLE analysis can also be useful to refer to when you are researching new international markets, doing risk analysis and financial forecasting resilience scenarios.

For more information, take a look at our articles on using your cash flow forecast for decision-making and how to build a resilience action plan.

What is a SWOT analysis?

The SWOT analysis is a versatile tool that can be used to help you make strategic decisions for your business.

It’s a very simple grid matrix with four boxes to outline what you or your business is good at and does well, what you’re weaker at or need to improve, what opportunities there may be in the market, and what potential threats there could be.

How to use a SWOT analysis in your business

As you start out in business, your new business idea should ideally combine your unique strengths with an external market opportunity. You could also be looking for gaps in the market where an existing business is weak in some area and turning that to your advantage.

At any time in your regular business planning cycle, you can use a SWOT analysis to develop strategies that leverage your strengths to pursue arising opportunities. You can also think about what strategies would address your weaknesses and help to prevent the potential threats from affecting your business.

As your business progresses and your strengths develop, you can keep updating your SWOT analysis to see what new opportunities you might be able to explore. For example, you might have developed new skills that allow you to enter a new market, or a new trend may mean your product will be in demand, meaning you need to find ways to scale up your production. You may also find that some weaknesses develop if you’re growing fast, so making SWOT a regular part of your business review and planning process can be helpful to keep an eye on these.

Although a lot of people think about using SWOT for their overall business, as you get used to the process, you can apply it to different areas of your business, to consider your suitability to pursue a new geographical market or sector, and to compare yourself with competitors.

Get further guidance on how to complete a SWOT analysis and a template.

When considering competition for your new business idea or long-term strategic planning, it can be helpful to zoom out first to look at the overall sector you operate in.

What is Porter’s Five Forces?

Porter’s Five Forces looks at how many players are there, how difficult it is to get into the market, how much power suppliers and customers hold, and substitute products. Analysing this will help you decide if an opportunity is worth pursuing, or even if it’s time to get out of the market.

This framework is powerful because it takes you out of your own business and gives you distance to look objectively at what is going on in the market.

If your market is easy to get into, not requiring huge investments in premises, machinery, new technologies or even qualifications, then unless you’re the first one doing it, you’re likely to find a lot of competition – or there soon will be.

As competition intensifies, customers and suppliers gain more power. If they know they can easily go to a competitor, customers can drive down your prices. Similarly, suppliers may put up their prices if they have a lot of demand from all the competitors in your market.  

Where there is evidence of unmet or poorly serviced customer needs, there is a higher risk of substitute products. Whole industries are being disrupted in this way, for example visual media, banking and private hire transport.

How to use Porter’s Five Forces in your business

All of this has consequences for the potential profitability of your business. If you are in a sector where costs are being driven up and prices are being driven down, it’s hard to differentiate yourself from competitors and there seems to be more popping up each day, then you will see you are at risk.

It doesn’t mean you should definitely leave this market, but you can use the information you gather to weigh your options. For example, you may ask, can you innovate? Can you buy companies and become a bigger player? Can you produce your own materials that you currently buy in? Could you outsource something? Import components? Can you afford to play the price game and try to attract new customers with an irresistible offer?

Conversely, you might have an idea for a substitute product that could come and disrupt an industry like this. It doesn’t need to be product-based, either – it could be the way you deliver a service.

You can add your insights from your Porter’s Five Forces analysis into your SWOT analysis under opportunities and threats. You can then generate options for your business such as those above, leveraging your strengths.

Once you have a good high-level view of your market, you may wish to look at some of the competitors within your market. You can research and compare them to how your business operates, looking for ways to do things better in a meaningful way for customers. Check out our guide on how to conduct market research and competitor analysis for more on this.

What is the Ansoff Matrix?

With four boxes that look at products and markets, the Ansoff Matrix is a useful framework for generating ideas on how you can grow your business.

It is ideal to use following the PESTLE, Porter’s Five Forces and SWOT analysis because you will have naturally begun to generate some ideas, and this framework helps you add further growth opportunities. Some of these may have huge potential for your business’s profitability, while requiring limited up-front investment.

How to use the Ansoff Matrix in your business

For each quadrant, you consider how you can grow your business in that way, asking a question:

Market penetration: How could you sell more of your existing products to your existing customer base?

Product development: How can you develop new products to sell to your existing customer base?

Market development: How can you sell existing products to a new market you don’t currently operate in?

Diversification: How could you develop new products to sell to a new market?

Of all of these, the options falling into the diversification quadrant would be the most risky and should only be attempted when you are in a very strong financial position and can spare resources to research the new market thoroughly and develop and test the new products or services.

Market penetration would usually be considered to be the least risky. However, this isn’t always the case if you are in a highly competitive market. If you have done a Porter’s Five Forces analysis, it will have helped you to identify whether it’s worth continuing to invest resources into your existing market. If you decide it isn’t, Ansoff Matrix will give you lots more options to consider.

As an example, if you currently produce men’s waterproof jackets that you sell direct to the customer, your matrix could include:

Market penetration: Provide discounts or referral incentives, sell online.

Product development: Develop a line of men’s waterproof trousers, hats or gloves.

Market development: Begin selling to trade customers such as construction, postal and council services workers.

Diversification: Develop a line of waterproof dog jackets, women’s walking boots, children’s snowsuits, campervans, or canoes.

At this stage, it’s about generating possibilities which you can then prioritise based on your resources, how difficult it is to enter an industry, whether it’s an attractive market to enter, etc.  

What is the Impact-Ease Matrix?

With all of this analysis and idea generation, the Impact-Ease Matrix is your friend for making decisions on which of the strategies or actions should take priority.  

It is ideal to use after you have been doing analysis such as PESTLE, Porter’s Five Forces, SWOT and Ansoff Matrix. You will have many ideas and it might feel a little overwhelming if you don’t have some way of prioritising them.

This framework has an axis of increasing impact on one side and increasing ease on the bottom for you to plot your options against.

How to use the Impact-Ease Matrix in your business

Assign each option with a reference number.

Taking each of your options in turn, ask yourself, ‘what level of impact could this have on helping my business to reach its key goals?’ You can categorise it as low, medium or high.

Next, for each option, ask ‘how easy is this option to implement based on my circumstances today?’ In considering this, think about likely costs, time and effort involved, and the level of behavioural change you might need. Again, give it a rating of low, medium or high.

Once you have a rating for impact and ease, you can plot the option on the graph using its reference number.

For example, if you wanted to plot the options from the Ansoff Matrix example above, you might say:

1. Provide discounts or referral incentives (high, easy)
2. Sell online (high, medium)
3. Develop a line of men’s waterproof trousers (medium, hard)
4. Develop a line of men’s hats (low, hard)
5. Develop a line of men’s gloves (low, hard)
6. Begin selling to trade customers such as construction, postal and council services workers (high, medium)

… and so on.

You can decide to go for the high impact and easy to implement ones straight away and move on to more detailed planning.

If you have a few options that fall into the high impact and easy to implement category, and you’re working with a team, you could put it to a vote.

While this is an ideal decision-making tool to use for multiple strategic options, you can also use the Impact-Ease Matrix for simpler day-to-day planning and decision-making.

For example, you can use it to prioritise the tasks in your day so that you focus on the ones that are high impact and easiest first to give you momentum, before tackling the others.

You can also simply use it as a sense check. Ask yourself what level of impact and ease an opportunity presents. This might be taking on a particular client, using a piece of technology, or accepting a marketing opportunity.

If winning a prestigious client is likely to win you more work later, it may be high impact. If you have all you need to meet their requirements and they are also going to be a pleasure to work with then it’s an easy implementation, and an easy yes overall.