Hinhalagoda lekamalage pulsi kavindya sandeepani ariyarathna

1.3. External Factors affecting SME 
1.3.1. Overview on External factors (PESTLE Analysis) 
To be successful, all firms must put up ever-increasing efforts in all areas that affect the 
company's performance.SME's are becoming increasingly susceptible due to increased 
commercial competition, particularly from large and medium-sized competitors.As SMEs 
operate along traditional lines, a number of factors increase their influence and have a 
significant impact on their success. Regardless of where SME's are located or how strong the 
market conditions are, influencing factors are always present for small businessmen to 
anticipate while conducting business. Identification of external factors determining SMEs’ 

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future, is critical in order to take all necessary actions to decrease or eliminate barriers and open 
up new prospects for these businesses. 
PESTLE Analysis was originally designed as a corporate environmental scanning tool 
to assist owners in seeing the broad picture.The PESTLE analysis was developed by Francis 
Aguilar, an American researcher who specialized in strategic planning.Aguilar wrote a book 
titled "Scanning the Business Environment" in the late 1960s, in which the now-famous 
PESTLE tool was originally identified.Nowadays it is widely used as a tool to identify the 
external factors that affects any kind of business regardless if its a small or a multi-billion 
corporation.PESTLE analysis on the small and medium enterprises in Sri Lanka can be 
elaborated as below. 
• Political Factors  
Political factors encompass all aspects of business that can have an impact, including 
government policy that influences, changes, or targets issues in business and society. 
Tax policy, environmental laws, trade limitations and reform, tariffs, political stability, 
future elections, grants, initiatives, and bureaucracy are all things that businesses must 
consider. 
• Economic Factors
This considers the state of the economy and how it may affect businesses. Government 
organizations and each country's central bank can provide information on how the 
economy is performing. Economic growth and decrease, interest, exchange, inflation, 
and pay rates, minimum wage, working hours, unemployment, credit availability, and 
cost of living are all factors to consider. Because the status of the economy has such a 
large impact on businesses, it can be an important element in making business decisions. 
• Sociological Factors 
These are the aspects that have an impact on society and social standards. Cultural 
elements and trends can have an impact on people's lifestyles. These shift societal 
expectations, affecting society's behaviour and, as a result, how customers engage with 
businesses. Cultural norms and expectations, health consciousness, population growth 
rates, age distribution, career views, health and safety are all factors that can alter 
societal norms and have an impact on businesses. 

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• Technological Factors
Technology is rapidly reshaping society, forcing businesses to innovate in response. In 
addition to innovation, technological improvements have an impact on other aspects of 
the PESTLE. Automation, software development, and technology incentives are some 
technological issues to consider in the context of business. 
• Legal Factors 
Legislative changes may necessitate adjustments to procedures to satisfy new legal 
obligations. Changes in legislation affecting employment, access to materials, quotas, 
resources, imports/exports, and taxation are all possibilities. Because legislation 
changes can result in policymakers adopting new policies, there may be some overlap 
between legal and political variables. Legal criteria, on the other hand, always determine 
what a business can and cannot do by law and must be always followed. 
• Environmental Factors 
Because of societal trends toward greener living and rising pressure to lower the rate of 
global warming, environmental considerations are becoming a more prominent sector 
in business. There is a growing awareness of the importance of living more sustainably, 
and businesses can help. Environmental factors include global warming and the growing 
need to move to sustainable resources, ethical sourcing, including supply chain 
intelligence, pandemics, and other calamities. 
These factors cannot be influenced by an organization on its own, and these factors 
cannot be influenced by an organization's profitability.It is feasible to maximize possibilities 
and minimize hazards to the organization by knowing these external forces.Conducting a 
strategic analysis entails monitoring the external environment for broad, long-term patterns and 
understanding them.In a variety of corporate planning circumstances, a PESTLE analysis is an 
acceptable framework and activity to use. 
To obtain the material for a PESTLE analysis, a researcher need to ponder and 
investigate.However, it is critical to strike a balance between acquiring information and 
conducting the real analysis.Manual analysis of the external environment is required once the 
data has been collected in order to determine the next steps.It will be unable to apply the 
findings to the business otherwise.A PESTLE analysis is used in business to help with decision-
making.It aids in the understanding of the market as well as the procedures to take in order to 

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expand and achieve the desired results.A PESTLE focuses on external elements that affect a 
firm, and it aids in maximizing external strengths in order to get an advantage over the 
competition.This is critical for strategizing, especially for older organizations that have grown 
trapped in the innovation process.It also aids in the mitigation of any potential hazards or threats 
to a company. 
SMEs are challenged by globalisation of trade and the growth of the 
Internet and information technology. (Prasad, Strengthening policies through international 
cooperation, 
2004) 
Further, 
inadequate 
access 
to 
capital 
and finance, inadequate industrial infrastructure, lack of market-based information, 
obsolete technology, lack of modern management skills and lack of labour training 
restrict the growth of the sector. (Antonio & Gregorio, 2005) Further, it has been 
discussed that more than 85% of SMEs face significant survival challenges and that more 
than 75% fail within five years from their start-up (Asian SME Summit, 2009). 
Figure 1.2 PESTLE analysis in Brief (Impact Innovation, 2020)