P3M2 The External Environment

I like to think of scanning your external environment as how to PESTER your way to success.

Why Assess The External Environment

  • No business operates in a vacuum
  • Changes create opportunities and threats
  • Customers – You (& team) – Competitors
  • Changes may affect one or all three unequally
  • Understand inter-dependencies
  • Predict change and be prepared
  • Ready to grab opportunities
  • Mitigate problems

Warning – I see some resistance from small businesses who don’t see the need to take a strategic view of their business. As I make clear in the Profit Tipping Point report, I see that as a huge mistake since strategy is at the route of three of the five drivers to business success or failure.

As a small business, you won’t need to give so much time to it although it depends on your share of your natural market.

A teenage fashion store with 1% of the business in a large city is much less affected by what is happening in the general market than a similar store in a small town with 60% market share who can be devastated by some external event or a new, powerful competitor moving in.

No business operates in a vacuum and change creates opportunities and threats.

You need to understand how those changes will affect your customers (what they want to buy, how they buy, their ability to pay), your competitors (and their ability to supply quality goods and services at competitive prices) and your business and your support team of employees and suppliers.

PESTER

  • P = Political
  • E = Economic
  • S = Social & Cultural
  • T = Technological
  • E = Ecological
  • R = Regulations

Also known as PEST, PESTLE, STEP, STEEP

Briefly:

Political – how does what is happening in the world of politics affect your business, the nature and level of demand from customers and the ability of your competitors to supply competitively.

Economic – how does the general economic situation in your region, country or the world impact on you, your customers and competitors.

Social – how do the changes in the society – the people and their needs – impact on you, your customers and competitors.

Technology – how do technology changes, from the recent past through into the future impact on your market.

Ecology – how does the green agenda and sustainability issues impact on you?

Regulations – how do regulation changes and the differences in regulations affect your business.

There is a lot to take in with the PESTER framework and I’ll be referring to it again so it’s on a separate page.

Read: PESTER

Uncertain Future

  • Aim to build a picture of the future – customers – you – competitors
  • Alternative worlds
  • “I think there is a world market for about five computers”, Thomas J. Watson 1943 (President of IBM)
  • “There is no reason for any individual to have a computer in their home” Kenneth Olson 1977 (President of DEC)

Any prediction of the future is uncertain and likely to be wrong. That doesn’t give you an excuse not to bother since you can get great value from the 80% which is right or from spotting that things are not changing as you expected and therefore something unusual is happening which you need to think about.

I love these two quotes from the bosses of IBM and DEC because they show how you can get fixed views in your mind and continue to believe them when the evidence shows they are wrong. Bill Gates worked the other way with his vision of ” a computer on every desk and in every home”.

If you find yourself coming up with different alternative views of the future world based on one of two key assumptions then you need a technique called…

Scenario Planning

  • Not recommended for most businesses
  • Build alternative views of the future world and test strategies in each world.
  • “Fork in the road” e.g. UK & EU
  • Collective learning for the team
  • Some foresight better than none
  • Increases awareness – Boiled Frog syndrome
  • Disruptive change may be unpredictable

First I don’t recommend this for 95% of small businesses since it involves building up details descriptions of alternative worlds and then independently coming up with a series of strategies to see what makes sense to do regardless and what you should leave until it is clear what is happening.

Examples might include forks in the road like the UK joining the EU in the Euro and a full political union or pulling out all together.

Going through the scenarios creates collective learning. Your senior management team gets to share visions of the future and each can be more alert to potential changes. Quite simply, some foresight is better than none.

There’s a story which is disgusting but makes the point about awareness.

If you put a frog in hot water, it will jump out immediately as it knows that things aren’t right.

If you put a frog in cold water and slowly heat it up, you finish with a boiled frog because each small incremental change in water temperature went unnoticed, even though the water finished up much hotter than the temperature the first frog jumped out.

Research into business decline shows these incremental changes which gradually make the market less attractive and gradually make a business weaker than competitors are a major cause of business failure.

Sorry that’s not quite true.

What causes the businesses to fail is not the changes in themselves but the managers inability to notice the change or to react to it in an appropriate way.

Strategy Under Uncertainty

  • Hugh Courtney, Jane Kirkland, Patrick Viguerie
  • Four levels – clear trend, discrete scenarios, range of potentials, total ambiguity
  • Roles – shapers, adapters, right to play
  • Actions
  • Big bets – risky depending on uncertainty
  • Options
  • No regrets

The best article I’ve ever read about strategy under uncertainty came from strategy consultants McKinsey. Normally their material is written for big business but i think thing is very appropriate to small businesses who operate in niche markets.

First there are four levels of uncertainty:

  • Clear trend – it is clear the market is changing and which way it is changing – think of music CD sales going from High Street stores to the Internet, first with physical supply and then digital download. The only uncertainty is how fast the trend happens.
  • Discrete scenarios – it’s going to be A or B but you’re not sure which. You create a strategy which fits both with a bias towards the one you think is most likely.
  • Range of potentials – this time the big decisions which affect your business and market are not the simple yes/No type but a question of degrees – the recession could be 3% which puts the economy 6% behind normal trend assuming 3% growth or it could be a long, double-dip recession which creates a double digit gap with normal trend. Or the Euro/dollar exchange rate has swung alarmingly for any business importing or exporting between the two currencies.
  • Total ambiguity – this time all bets are off – anything could happen.

Each business has a choice of roles in how it adapts to the uncertainty.

  • Shapers – the existing market leader will want to control the way the market changes as much as possible and will consider competitive moves which set the agenda. It’s the same with an aggressive newcomer who sees the market as old, lazy and fit and ripe for picking. Think of Apple and how it moved from the iPod to iTunes and changed the way music is bought.
  • Adapters – these competitors lack the resources of the market leader to make things happen or the courage of the newcomer because of vested interests in the market. The aim is to predict changes and adapt slightly ahead of the crowd of mainstream competitors.
  • Right to play – these companies have an interest in the market and may have a presence in it already but they don’t see it as a core market where they have to be. They want to keep their options open and play if changes are favourable to them or if changes go in the wrong direction, they may duck out.

The final part of the jigsaw are the actions and there are three.

  • Big bets – these are risky moves designed to shape the market and win. Think Amazon.com as the classic ecommerce store. For as long as I can remember, Amazon has set the standard because of huge investments in getting the websites right, in getting publicity so the name became well known and in building the service infrastructure to deliver great customer service.
  • Options – put your foot in the water without risking too much. It’s like stepping stones across a stream – if you’ve already gone to the middle, then it doesn’t take much to get you to the other side.
  • No regrets – these are actions that make sense whatever happens.

Hopefully your business won’t face too much strategic uncertainty but it doesn’t do any harm to think those big scary, what if questions.

“What if the big car factory which supports much of the local economy is closed down or severely cut back?”

What To Do

  1. Complete your PESTER assessment by using the form provided on PESTER together with the practical tips on how to use it.
  2. Identify any huge issues – decide if you need to think about your business under two different scenarios.
  3. Identify possible opportunities and threats and how you can respond. Categorise in terms of no regrets, options or big bets.

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