External Analysis: evaluating external factors

Step one of the Annual Planning process is to establish what's going on around you. I know that sounds stupid, but think how many people haven't done that. As we speak,

  • movie theaters are ignoring the fact that people aren't willing to spend $20 to see a movie on the big screen when they can wait 2 months, spend $20, and see the same movie at home.
  • newspapers are ignoring the fact that their readers are finding the same content online for free, and advertisers are following the readers
  • music publishers are ignoring the fact that no-name artists are making it big by using social media and file sharing, and are refusing to let anyone tell a friend about their products
  • ...
I know some people, and I'm sure you do too, who are similarly blind to changes in their own lives. People who are unwilling to blog, and can't figure out why everybody has more publicity than they do. People whose jobs will be automated within a decade, who won't go back to school to learn something new. People who have exactly the skills that are needed for high-paying, exciting jobs, but won't put together a resume to apply for them.

Look around you. It helps, it really does.

The Process

External Analysis - .docExternal Analysis - .pdf

I've attached sheets for downloading on which you can write down your thoughts and notes as you go. I'm not particularly attached to you using my sheet, but it may be easier to understand the process if you follow along at home on your own copy. I've included a PDF and a DOC, so you can print it off or edit it on your computer.

PEST Analysis
PEST stands for Political, Economic, Social, Technological -- the four areas that (mostly) encompass everything you should be thinking about. (If you think of a factor that is important, but doesn't fit in one of these 4 categories, just write it off to the side or in whichever category is the closest fit).

A lot of this stuff will just come out of your head. Everybody knows that our society is frighteningly litigious, that Americans are obese, and that Twitter is the Next Big Thing (tm)

But go ahead and use Google here. Type "Lawsuits: small business" or "economic changes: hospitality industry" into the search bar and see what comes up. Even if it turns out that there aren't any lawsuits pending that may affect your business, aren't you relieved to know that for sure?

Political/Legal: what's going on in the government that might affect you? Are there new laws being passed that my affect your ability to work? Legislation regulating your industry is an example; legislation that will change your employer's incentives is another. There was a law proposed in Colorado last year that would have made it extremely disadvantageous for a company to have more than 20 employees; working in a company with 35 employees, the passage of that law would likely have put about half of our jobs at risk (fortunately it was voted down). Are there any benchmark cases before the state or federal supreme court that might affect your business, making decisions about whether bloggers are press, whether repairmen can be sued for shoddy work, whether bakeries may use trans fats?

Economic: What's going on in the economy? And how closely tied is your business to the economic state? Is it positively or negatively tied (Walmart's revenue went up when the US economy took a nosedive)? What time frame of the economy do you need to be looking at? What is the economy likely to be doing in the next 2-3 years, and does that have any effect on what you should be doing?

Social/Cultural: What changes are going on in our society, and which ones affect you? Does it matter to your money-making capability that the baby boomers are retiring? That the Net Generation is starting to leave college and grad school? That obesity is through the roof? That more than half the households in the US include a woman who works outside the house? That Americans are marrying later and divorcing more?

Technological: Technology is booming at an accelerating rate -- how does it matter to you? Can you reach audiences that you couldn't before? Can you target a niche that you couldn't previously have found? Is it harder to get the attention of your customers? Is it easier to get professional-looking sales materials?

Jot down everything you can think of, and select the 2-3 in each area that are the most important to put in your table.

Industry Analysis
Depending on your situation, industry analysis may not matter to you. But if you have a field or industry in mind, it's a good idea to run it through this quick check.

The analysis is based on Porter's Five Forces (yes, I know there are 6; it's not my fault he missed one), which was published in 1979, and remains the definitive method for assessing the attractiveness of an industry.

Each force can be high, medium, or low. In general, the more lows you have, the more attractive the industry. If there are a lot of highs, you should make sure you have a very clear and good reason to enter (or stay in) that field; it's very competitive and cut-throat.

For example, the blogging industry looks like this:

    Threat of new entrants: high (anyone can start a blog inside an hour)
    Bargaining power of buyers: high (I have no control over what you do; you can leave at any time)
    Threat of substitutes: high (you can get other blogs, read a book, tinker with monetization on your own time, go to school....)
    Bargaining power of suppliers: low (Wordpress has very little leverage on me)
    Rivalry among competing firms: low (most bloggers are more interested in helping me than in wiping me out)
    Relative power of unions, government, special interest groups, etc: medium

Overall then, blogging is a semi-attractive industry. I have to be prepared at all times to defend my niche against new entrants, and I have no leverage to make you read or buy anything I put out. On the other hand, I can't be threatened by many things, and I don't have to be on the lookout for big-box competitors. And in the case of blogging, the power of special interest groups can actually be a good thing. When Porter designed the analysis, he was thinking about people working against you. But in my case, I can use the power of special interest groups for me, simply by aligning my blog with their (my) special interests. And I'm willing to put up with the highs in the top 3 forces, because not having any power over my buyers keeps me from abusing my power. I therefore find blogging an acceptable industry (phew!) though you might decide differently.

Look over everything you've written, and decide which factors are going to be the most important to you in the upcoming year. I've given you room for 7, but try to stick to 3-5 if possible.

Then go through the list, and think about the implications of each one. If the high litigation rate of our society is important, should you buy insurance? Have your customers sign a disclaimer? Keep a lawyer on retainer? Go back to school and study law yourself?

Then (and this is entirely my opinion; my profs would have a heart attack if they saw this) go through the list again, and try to find an opportunity in each item. I firmly believe that most threats can be turned into opportunities if you treat them right; you just have to be prepared to change as necessary. In many many industries, you can turn a threat into an opportunity simply by being the first to respond to it: movie theaters are installing coffee shops and sushi bars to make the theater more pleasant and exciting than your home; Pepsi responded to anti-high-fructose-corn-syrup sentiments by releasing Pepsi Throwback; a friend of mine is coding an improved keyboard for the ipad, since Apple hasn't seen fit to provide one.

Many of those opportunities you won't have the time, resources, or desire to actually make use of. But it's good to know all your options before you make a decision.

Next Week
What about Me? Evaluating Internal Factors