Chapter One
Scanning & Sensing the Business Environment

…a series of corroborative facts is not necessarily evidence.
Seeing white swans does not confirm the nonexistence of black swans.

Nassim Nicholas Taleb, essayist, scholar, statistician; former options trader and risk analyst.
‘The Black Swan: The Impact of the Highly Improbable’.

Business Context

The fundamental purpose of strategic management is to establish and sustain a tight strategic ‘fit’ among the following three elements:

      1. The business environment.
      2. The company’s strategy.
      3. The company’s capabilities.

An inability to achieve ‘fit’ between any two of these factors will almost certainly result in poor performance and/or failure.

The correct starting place when endeavouring to form this required strategic fit is the business environment. This is because the internal capabilities and the business strategy are within the control of the company whereas the external environment is not, although there may be the potential to influence its dynamics – but only if it is fully understood. Changes in the business environment lead to changes in market Key Success Factors (KSFs) i.e. “the things that market conditions dictate that any company must be able to do to succeed in competitive markets” (see Appendix Two, The BBM Glossary of Business Strategy Concepts & Terms).

Since the environment is not directly controllable, the company must continually research, analyse, understand and predict business environment dynamics to preserve the fit of its strategy and capabilities to the external market conditions.

The competitive landscape and strategy creation emerge from the way that a company interprets its business environment. Assessment of this environment’s complexity and the determination of appropriate responses to the continuity and change dynamics it generates requires that the company sustains itself as an open learning system, acquiring, interpreting and processing information at all organisational levels and across all functions. This intangible but essential capability for creative environmental assessment conveys a key organisational strength, a strategic asset that demands that business leaders facilitate a continuous process of learning and action.

To summarise, primacy in strategy creation and organisational design must be given to the understanding of Business Environments and it should be emphasised that strategy doesn’t exist, or isn’t created, in a vacuum. We should also be aware that the commonly prescribed strategy question ‘Where are we now?’, captured, for example, in a traditional SWOT analysis, should not be considered in isolation of the related question ‘How did we come to be where we are now?’ An organisation’s history, including its structural and cultural baggage, very often conflicts with the response to a third question, ‘Where do we want/need to be in the future?’ The answer to the fourth question, ‘How do we get there?’ is the logical outcome of the analyses undertaken in the previous three (see Appendix One, Building a Comprehensive Strategic Audit).

The Parable of the Boiled Frog

This fable is often told to demonstrate the terminal impact of failing to see the cumulative effects of the gradual processes involved in business environment change.

A frog is conditioned by nature to be responsive to sudden environmental changes (single events). Place one in a pan of boiling water and its instinct will impel it to clamber out. Place the amphibian in a pan of water at room temperature, turn up the heat and witness a transformation from contentment to death. The frog becomes impervious to its surroundings and the latter’s shift from being favourable (warmth) to hostile (intense heat).

The parable is often used to describe the demise of both companies and industries, a textbook example being the inability of the entire Swiss Watch industry to perceive the threat of new entrants (Japanese companies) or innovative substitutes (quartz), the latter now widely known as disruptive technologies and business processes. Contemporary examples include Blackberry, Nokia, Toys ‘R’ Us, Yahoo and even the mighty Intel, who completely misunderstood the impact of smartphones on their core technologies (realised threat) and failed to see the future potential of 5G communications (missed opportunity).

Indicative Content

    • Identifying key macro business environment factors, including:
      #  Political.
      #  Economic.
      #  Social.
      #  Technological.
      #  Ecological.
      #  Legal.
      #  Cultural.
      #  Environmental.
    • Identifying key micro business environment factors, including:
      #  Customers.
      #  Direct competitors.
      #  New industry entrants, using similar technologies but offering better and/or cheaper products.
      #  Disruptive technologies.
      #  Disruptive business processes.
      #  Suppliers and their relative negotiating power.
      #  Buyers and their relative negotiating power.
      #  Regulators: local and global.
    • Determining which factors to include, which to exclude and which to add for a specific business unit.
    • Determining whether each factor is an opportunity and/or a threat.
    • Determining the nature of change on three dimensions:
      1. Immediacy (how soon).
      2. Intensity (how big).
      3. Impact (on the specific business unit).
    • Identifying strategic priorities.
    • Creating externally-driven strategic business action plans.

 Learning Outcomes

 After studying this chapter, readers will:

    • Understand the principles of the ‘outside-in’ business strategy perspective.
    • Have the competencies to develop a comprehensive business environment audit.
    • Have the capability to determine strategic priorities.
    • Have the confidence to propose externally-driven strategic plans.
    • Apply the principles of business environment scanning & sensing using proven practical frameworks, methodologies, processes and tools.


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All content © Colin Edward Egan, 2023