Many companies go under because they become too self-focused. Apply this simple tool to understand the external factors affecting your digital transformation.
Digital transformation isn’t like flipping a switch. It’s a slow and often messy process, but for those that pull it off, it can make your business more efficient, more productive and more profitable.
I’m here to help. As the author and instructor of the Watspeed Digital Transformation Certificate Program at the University of Waterloo, I’ve studied organizations big and small to learn what makes for a successful transformation—and how to avoid problems that lead to a digital dead end.
Every month, I’ll share a new lesson on how to steer your organization through the rough waters of digital transformation. Yes, there will be homework. But if you pay attention and put in the effort, it won’t be long before you start seeing real results.
Why are well established companies failing so often today and, more importantly, what could they have done to ensure their survival? In every sector, inadequate response to technological change is regularly causing corporate demise. Many household brand names that been brought down in this way: Blackberry, Sears, Nortel, Kodak, Toys R’ Us and many more.
These failures have resulted in lost livelihoods for the people they employed and impacted their communities. While their activities may be replaced by those of other companies, these may be in other cities, states or continents. In terms of economic development, helping existing companies adapt is very important, especially as technological change, and hence failure, is accelerating.
There are, of course, many reasons that companies fail to adapt, including technical capability, employee skills, culture and leadership incompetency. One of the major reasons, though, is that changes in their external environment were not recognized and given sufficient attention in corporate decision making, including in strategy development and tactical application.
The Boston Consulting Group undertook a study in 2016 which showed that organizations get more introverted as they get bigger. They become focused more on internal metrics like cost, inventory and quality, and not enough on external developments that threaten their existence.
This tendency is more important today. Digital transformation has increased competition with rapid development of new products and services. It has transformed processes, often dramatically impacting performance, while customer relationships are often now fundamentally different than in the past (especially after the pandemic). While introversion was a problem before, it is a much bigger one today. The tool that will help you address it is known as PESTLE.
What is PESTLE analysis?
PESTLE analysis (originally known as PEST, before the L and E were added) categorizes your analysis and understanding of the external factors that are important to your organization: Political, Economic, Social, Technological, Legal and Environmental.
Political: The tech sector and organizations’ use of technology are facing increasing scrutiny by local, regional and national political bodies, which may constrain the use of information technology. The U.S. government’s concerns about Huawei, for example, have influenced many organizations’ choice of technology suppliers. Political concerns about competition in the tech sector and the impact of automation on jobs are further areas of government focus today. Technological decisions require consideration of possible political decisions today.
Economic: Higher levels of employment make it more difficult for organizations to recruit the new skills they need. Low interest rates may make investment easier. Trade barriers may restrict markets and limit international supply chain activity.
Social: Public attitudes toward technology have been changing quickly in recent years. Privacy concerns have grown and influence the adoption of technology-based products. COVID-19 has led to more people using information technology and opened up more technology-based opportunities for many organizations. Increases in working at home change the way organizations use technology.
Technological: Innovation in the technologies available to organizations continues to take place rapidly. Advances in artificial intelligence (AI), automation and the internet of things (IoT) are appearing regularly. Every advance opens up new possibilities for organizational application.
Legal: New legislation will influence organizational use of technology. Legislation on privacy, employment practices, cybercrime, data governance, and in many other areas is emerging today and likely to continue to rapidly develop.
Environmental: Concerns about climate change and other aspects of the environment are now impacting many areas. Technology impacts the environment negatively and positively. For example, it helps organizations manage their energy use and at the same time raises concerns about the impact of the disposal of redundant equipment.
Example of a PESTLE analysis for digital transformation
The following chart provides an example of the application of PESTLE for digital transformation in a forestry industry company. Note that I have utilized a three-year time horizon and included a “Possible Action” column to focus attention on the outcomes of the discussion:
|
Element |
Now |
In Three Years |
Possible Action |
|
Political |
Turbulence in export markets |
Increasing international competition for access to forest resources |
Contract expertise in lumber product trade |
|
Economic |
Decline in construction due to higher interest rates |
Increased new housing demand due to government policy |
Invest in automation to accommodate increased demand |
|
Social |
Increased concerns of local community impact |
Concerns expected to further increase |
Improve stakeholder management strategy |
|
Technological |
Internet of things applied to forestry processes |
Opportunities with artificial intelligence to utilize IoT data |
Recruit AI capable specialists and skills train workforce |
|
Legal |
Land access legal challenges |
Data regulations in use of artificial intelligence |
Access expert advice on expected regulation and modify processes |
|
Environmental |
Increase in forest fires |
Increased restrictions on forest activity in dry periods |
Introduction of longer range planning of operations to accommodate more downtime |
PESTLE is valuable because it provides a framework for understanding the external environment, but that’s not all or enough. Its greater purpose is as a group tool that is used to help pool knowledge and develop collective understanding. In applying it, you should think very carefully about how you do this, to maximize the impact it has on reducing your organization’s introversion. Here are some tips:
- Use PESTLE for management team discussions at other levels beyond the most senior team to reduce introversion everywhere.
- Ensure discussion participants prepare for the PESTLE session and bring knowledge that is appropriate to their role.
- Record and share outcomes in briefings for others.
- Think about how you can bring the outside into the organization—many successful organizations do this by inviting guest speakers, encouraging external visits, etc.
- Encourage education—broadening knowledge and understanding opens minds supports the needed innovation.
- Make PESTLE a regular activity—as the pace of change increases it will be more important that PESTLE discussions occur.
Your digital transformation homework
Your objective with this lesson is to better understand how to develop the external focus of your organization. First, think about the focus your organization has today. What are the factors that encourage an internal concentration and what encourages an external one (such as your performance metrics and the areas of discussion in management meetings)?
Next, do your own PESTLE analysis. It is better if you can find a few other people to do this with you (maybe your own management team) but if you can’t do that, then do it by yourself. Finally, consider the actions you could take to improve your organization’s external orientation.
I’m always keen to hear about how you did. Add your questions or comments below!
Ready for more digital transformation knowledge? Check out another lesson: SWOT and Strategy Development.
Peter Carr is the author and instructor of the University of Waterloo Watspeed Digital Transformation Certificate Program, available globally online, and focused on overcoming the challenges of successful technological change. The program is jointly offered with the Ontario Society of Professional Engineers.
