External Assessment

There are seven components of a good external assessment:

• Industry/market trends

• Technology trends

• Competitor assessment

• Social and regulatory environment

• Macroeconomy and demographics

• International threats and opportunities

• Overall threats and opportunities

INDUSTRY/MARKET TRENDS

Take a quick snapshot of your industry…

• Most importantly, what are your customers telling you about their evolving needs? What are they telling you about how well your company is meeting their needs? How are customer demands changing? Direct input from your customers is an essential part of setting strategy. Get input directly from your customers regularly. They can tell you what’s going on in your market because they are the market. They can also tell you about your competitors. It’s wise to survey your customers at least once per year as an integral part of setting strategy.

• At what stage of evolution is your industry? What does this imply in terms of how the industry might change in the next five years? See nearby diagram, “Stages of Industry Evolution,” as a backdrop to this analysis. (Various versions of this chart are common in strategic management and marketing literature. A more detailed version can be found in Competitive Strategy by Michael Porter.)

All industries, even “low tech” industries, have a technology component to their evolution, either in products or in process. Every industry is somehow affected by changes in technology. For example, the banking industry, which has not historically been known as “high tech,” was nonetheless dramatically changed by computer technology. In back-room processing, effective use of computers became a key strategic advantage for those who mastered their use quickly. In services to customers, adoption of ATMs became an essential part of banking services.

Examine the technology trends in your own industry and ask how you can best use them to your advantage. The question is not whether technology trends will affect your industry, but how.

Never underestimate your competition. One of the biggest mistakes in mapping out a strategy is doing so in ignorance of the competition or, worse, with disdain for the competition.

• Who are your current competitors?

• Who are potential competitors?

• What are their strengths and weaknesses?

• What do you anticipate as being their future moves in the market? What are their visions and strategies?

• How do your strengths, weaknesses, and product line stack up against the competition? Where are they vulnerable? Where are you vulnerable?

• Do you have a clear, differentiated position with respect to your competitors? What is it?”

Examine the general macroeconomic climate and assess what impact the overall economy might have on your company.

Pay particular attention to demographic trends. Entire industries can be dramatically affected by demographic changes. For example, the United States’s “baby boom” (a gigantic bulge in the birth rate from 1945 to 1960) will continue to have a profound impact on a wide range of industries until at least the year 2020. This is only one of many demographic forces…

In preparing for a strategy session, ask a selected group of employees, managers, and objective outsiders to list the top three external opportunities and top three external threats facing the company. This is a quick and efficient way to tap the insights of a range of people as input to your external assessment.

Throughout the internal and external assessment process, it’s absolutely paramount that you do everything possible to see reality—to see things as they really are and not the way you wish they were.

STRATEGY LOGIC FLOW DOS AND DON’TS:

• Do explore all four critical dimensions of strategy choice: industry, customers, relative position, and competition.

• Do look beyond your current understanding of the industry, pushing to generate new ways of segmenting the market.

• Don’t accept that entire industries are or must be unattractive; explore the drivers of

different dynamics in different segments, and ask how the game could be changed.

• Do consider both channel and end consumer value equations; if only one of these constituents is happy, your strategy is a fragile one. A winning strategy is a win-win-win; it creates value for consumers, customers, and the company.

• Don’t expect either the channel or the end consumers to tell you what constitutes value;

that is your job to figure out.

• Don’t be blasé about your relative capabilities or costs; compare them with those of your

best competition, and really push to understand how you can win against them.

• Do explore a range of possible competitive reactions to your choices, and ask under what conditions competitors could block you from winning.

In general, you’ll pick a Critical Number that will address either an opportunity or a challenge on the People/Balance Sheet side of the business (e.g., reduce employee turnover, improve customer service scores, or dramatically reduce a credit line with the bank) or the Process/Profit & Loss side (e.g., improve gross margins, reduce production cycle time, or increase sales close ratios).

A key accounting activity is to slice and dice a company’s financial data as granularly as possible. This lets the leadership team view the gross margin, profit, and cash flow by categories, such as individual customer, location, product line, salesperson, etc. Accountants do this by creating a series of waterfall graphs.

It’s natural to think these abstractions will save us time and improve our decision-making, but in many cases they don’t. Reading a summary might be faster than reading a full document, but it misses a lot of details— details that weren’t relevant to the person summarizing the information, but that might be relevant to you. You end up saving time at the cost of missing important information. Skimming inadvertently creates blind spots.

Information is food for the mind. What you put in today shapes your solutions tomorrow. And just as you are responsible for the food that goes into your mouth, you are responsible for the information that goes into your mind. You can't be healthy if you feed yourself junk food every day, and you can't make good decisions if you’re consuming low-quality information. Higher quality inputs lead to higher quality outputs.