Should you be monitoring external forces for your business?

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No. 2 in the Getting Started Series.
This article is a transcript (with slides) of the video.

One of the fundamentals of Competitive Thinking is to only spend resources – time, effort, money – on things that are relevant to your business. This may seem like common sense but it’s surprising how much effort is expended on things that are no longer relevant, just because they’ve always been done.

So Rule No. 1 is Focus on what is relevant.

Since Competitive Thinking is all about monitoring, anticipating, and acting on External Forces that can affect your success we need to start by determining just how relevant these external forces are likely to be. In order to do that we need to know just what these forces are.

Types of External ForcesThere are four types of forces that affect every business to some degree. These four are:

  • Economic
  • Sociological
  • Technology
  • Political

To one extent or another we have all felt the impact of Economic forces over the past five years, as we’ve dealt with the repercussions of a US housing market collapse and global credit meltdown.

Sociological forces are trends in consumer habits, changes in demographics, and shifting cultural influences that affect your business. For example, if you are in the Assisted Living facility business you should be very aware that the Baby Boomer generation is reaching its peak in retirement and your market will never again be this big.

Technological forces can be sweeping or dagger-like in their impact. RIM was surgically extinguished by the emergence of the iPhone/smartphone in an obvious example, but the trade show and convention industry has been devastated by a much wider shift in technology.

Political forces can also affect companies both large and small. If you are in any aspect of the healthcare industry they you are probably stymied by the political wrangling going on over a national health care system.

As important as these forces are, they are far too abstract for us to anticipate and act on. What we need is a model that can put these forces in the context of your industry so you can more clearly see their impact and prioritize your focus.

Porter's Five ForcesFor that I like to use Dr. Michael Porter’s Five Forces model. I’m not going to talk about this a lot right now, we’ll discuss it much more in the future. But if you’ve ever taken a college-level management course you have probably seen this. It is the classic industry analysis model. There’s also a strong possibility you’ve forgotten it.

Porter created this model in 1984, but it has fallen out of favor with expensive consulting firms. Its advantage is that it is simple without being simplistic. It contains everything you need to quickly analyze your industry so you can put focus where you need it. That’s also why most consultants don’t like it.

This model can be understood and used by anyone with a high school education and some business experience, which leads us to Rule No. 2 – Complication is the enemy of Competitive Thinking.

(By the way, there’s a difference between complicated and complex, but that’s a topic for another time.)

Our goal with Porter’s model is to quickly assess where you need to put the majority of your focus. Put 80% of your strategic planning time, effort, and resources there, and spread the other 20% out on everything else.

Relevance of External ForcesThat brings us to our last slide – the relevance of External Forces.

As I said at the beginning these forces affect all business to some extent, but they do not affect all businesses equally. There are some general indicators you can use to help you gauge the extent to which you are vulnerable.

There’s no hard and fast rule here, but the following guidelines are a good starting point.

In this graph I’ve put Impact on the Y-axis. On the X-axis you can graph one or more of the following:

  • Market Share
  • Maturity (or age) of the business
  • Revenue

There are probably others, but these are good starting points. At the low end of any of these measures you most likely need to stay focused on execution. For example, a startup needs to worry very little about competitors. In the startup phase you may not even know who your competitors will ultimately be. Assuming you’ve done some planning before launch you’re going to be in test and survival mode and strategic planning can wait.

But the longer you are in business, and the more any of these elements grow, the more important external forces become. By the time you reach the far right of the graph, for example in the Fortune 500, a firm likely has dedicated full-time resources to monitor and anticipate what’s going on in the outside world.

In between is what I call the Sweet Spot for Competitive Thinking – companies that are well-established but not large enough to have dedicated resources. That’s where Competitive Thinking can pay big dividends for management.