External Risks: How to Define Them How to Fight Them. PNC Insights

For example, businesses that rely on fossil fuels online video maker, video editor and video hosting or produce large amounts of greenhouse gases may face increased regulations or consumer pressure to adopt sustainable practices. On the other hand, businesses that adopt sustainable practices can benefit and excel from increased consumer trust and loyalty. For example, the increasing trend toward health and wellness has created a demand for healthier food options. Businesses that cater to this trend can benefit from increased sales and commercial profits. On the other hand, companies that need to adapt to changing social attitudes and trends avoid losing customers and market share. In this article, we will examine each of the six factors in the PESTLE Analysis in detail and provide examples of how they can impact an organization.

Political Factors in PESTEL Framework

However, if XYZ decides to undercut ABC’s prices, this becomes a strategic risk for ABC. Also, business credit lines issued by banks, are used by companies to tap into for working capital. As interest rates rise in the overall market, so too, do the rates rise for variable-rate credit products. Increases in interest rates by the Federal Reserve can lead to higher borrowing costs by increasing the interest expense for short-term and long-term debt. For example, if a company issues a bond—which is a debt offering—to raise funds while interest rates are rising, the company will need to pay a higher interest rate to attract investors. For example, companies can obtain credit insurance for their accounts receivable through commercial insurers, providing protection against customers not paying their bills.

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Department of Justice when its internal anti-money laundering (AML) operations team was unable to adequately stop money laundering in Mexico. This is where—for deeper levels of analysis—a rapidly evolving set of technologies, such as machine learning (ML), artificial intelligence (AI) and predictive analytics, might come in. These technologies are already offering risk managers the ability to automate time-consuming processes. Specifically, Risk Cloud Quantify® enhances traditional risk quantification and scoring techniques with Monte Carlo simulations and supports the Open FAIR model.

1. Anything that threatens a company’s ability to achieve its financial goals is considered a business risk.
2. Of course, there is no single plan that can eliminate risk, but with proper planning, companies can anticipate risks and respond appropriately.
3. Internal risks that can impact a business often come from decisions made by the management or executive team in pursuit of growth.
4. Consumers are willing to switch brands if they find a business ignoring its environmental duties.

Conducting a PESTLE analysis can help reduce the chances you’ll be caught unaware by a crisis or other adverse situation facing your business. It should become part of your larger toolkit for risk management, scenario planning and stakeholder engagement. For example, during an how to write a winning invoice letter in 8 easy steps economic recession, consumer spending tends to decrease, negatively impacting the financial standings (capital) of businesses that rely on consumer spending. On the other hand, economic growth can provide businesses with opportunities for growth and expansion.

Most risk managers, who already spend much of their time identifying risks—when they would rather spend it on developing strategies to mitigate those risks—know this conundrum all too well. One option is to create a centralized repository that tracks proposed and newly created rules and regulations, to identify how they could affect businesses if passed. This resource could also track public complaints against other similar organizations, and any resulting fines or penalties. Political risk is comprised of changes in the political environment or governmental policy that relate to financial affairs. Changes in import and export laws, tariffs, taxes, and other regulations all may affect a business negatively. Research and development is often a component of reducing internal risks because it involves keeping current with new technologies.

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Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. The opinions expressed in this article are not necessarily the opinions of PNC Bank or any of its affiliates, directors, officers or employees. For instance, what if a manufacturing organization identifies a critical parts supplier that was completely shut down during the pandemic and took an inordinate amount of time to restart? A simple solution would be to increase inventory of that supplier’s products or even to switch suppliers completely.

PESTEL Framework: The 6 Factors of PESTEL Analysis

A successful finance department should understand traditional business bookkeeper vs accountant: comparing careers and growth risks, such as fluctuating interest rates or cycling commodity prices. Yet some risks are unpredictable; not a single finance department could have foreseen in 2019 that a global pandemic was coming and the extent to which it would wreak havoc on human health and commerce. A company can reduce internal risks by hedging the exposure to these three risk types.

For a practical guide and resources on how to conduct a PESTEL analysis, check out this step-by-step guide—it’s an investment in knowledge that pays the best interest for your business’s future. Environmental factors refer to the impact of the physical environment on businesses. These factors can include climate change, natural disasters, and environmental regulations.

A strategic solution would be to   investigate bringing production capabilities in-house or redesigning products to eventually avoid reliance on single- source components. Companies can respond to economic risks by cutting costs or diversifying their client base so that revenue is not solely reliant on one segment or geographic region. Technological risk includes unforeseen changes in the manufacturing, delivery, or distribution of a company’s product or service. A company may need to hire or replace personnel key to the company’s success. Strikes can force a business to close for the short-term, leading to a loss in sales and revenue. When it comes to PESTLE, Walmart is like a retail ninja, sidestepping global politics, outsmarting economic shifts, and embracing technology – all while keeping those aisles stocked.

Both consumers and governments penalize firms for adversely affecting the environment. Companies are also rewarded for having a positive impact on the environment. Consumers are willing to switch brands if they find a business ignoring its environmental duties. Recognizing evolving technologies to optimize internal efficiency is a great asset in management. Depending on the analysis results, businesses can improve their strategic management and planning while responding to forces that are out of their control and gaining a competitive advantage. I love understanding strategy and innovation using the business model canvas tool so much that I decided to share my analysis by creating a website focused on this topic.