This is Module 2 in the Pillar 3 Your Strategic Market Positioning.
The External Environment – How To Review It To Find Opportunities & Threats And How To Position Your Business To Take Advantage
I like to think of scanning your external environment as how to PESTER your way to success.
Why Assess The External Environment
The Outline Points
- 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. That can be a big 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 as much time to it as a big business although it does 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 which 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.
What PESTER stands for:
- P = Political
- E = Economic
- S = Social & Cultural
- T = Technological
- E = Ecological
- R = Regulations
This method of scanning the external environment is also known as PEST, PESTLE, STEP, STEEP etc which are all variations on the same theme.
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 across markets and sources of supply affect your business.
There is a lot to take in with the PESTER framework and I’ll be referring to it again so more details are on a separate page.
The Future Is Uncertain
- 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.
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.
“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, back that the Digital Equipment Company was a big business in computers for medium sized businesses)
Bill Gates of Microsoft thought differently with his vision of ” a computer on every desk and in every home”.
How can two senior executives who should know what they were talking about, be so wrong? What they’d done was have a fixed view of what the word “computer” meant and the benefits that would come from such devices.
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…
This is an advanced technique which isn’t relevant to most small businesses most of the time.
It is a way to deal with fundamental uncertainty in the business environment that matters to you. This may be international, national or local.
It’s particularly useful for “fork in the road” style situations where a discrete change could go one way or another. For small retailers who rely on their local market, this could be whether a large supermarket superstore opens or closes in the area.
These superstores do two things:
- Take away business from existing stores because of their lower prices driven by massive buying power and the convenience of one stop shopping.
- Attract more people to this particular town from the outlying areas.
If a superstore opens, the smaller shops need to refine their reason for existing away from providing the basics to offering specialities along with superior customer service.
If the superstore closes, the smaller stores need to return to filling the basic demands of the area.
Some of these decisions can be made quickly but other decisions need to be optimised on an either or basis.
Read: Scenario Planning if relevant.
Strategy Under Uncertainty
The best article I’ve ever read about strategy under uncertainty came from three strategy consultants who worked for McKinsey – Hugh Courtney, Jane Kirkland and Patrick Viguerie.
This looks at the different types of uncertainty, the roles the business can adopt to face the uncertainty and the three main types of strategic actions.
These actions are particularly important:
- A business can make a big bet that the uncertainty will respond in a particular way. Many of the major success stories come from entrepreneurs making a big bet and calling it right. Of course, there will be failed entrepreneurs who made a different big bet.
- A business can invest enough to retain an option to play in the game in each of the likely futures and wait for the uncertainty to clear.
- There are also no regret moves that make sense whatever happens.
What To Do
- Complete your PESTER assessment by using the form provided on PESTER together with the practical tips on how to use it.
- Identify any huge issues – decide if you need to think about your business under two different scenarios.
- Identify possible opportunities and threats and how you can respond. Categorise in terms of no regrets, options or big bets.