Identifying Signals of Change in External Business Environments

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  • 0:03 External Indicators of Change
  • 0:56 External Indicators
  • 1:34 Types of External Indicators
  • 2:58 Encoding & Decoding…
  • 5:00 Acting on the Indicators
  • 5:28 Lesson Summary
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Lesson Transcript
Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

Change is inevitable, but staying power is not, and external indicators can telegraph the future. This lesson describes how an organization can monitor external indicators in order to decode and act on them.

External Indicators of Change

What do the brands on this list have in common?

  • Texas Instruments
  • Atari
  • Blackberry

Each made a product or used a business model that companies still use today. In fact, many similar businesses are still highly profitable, but the ones listed here are not. Texas Instruments was the first company to develop an integrated circuit, and they were the first major player in the computer market. Similarly, Atari pioneered the video game industry, but they ultimately were overtaken by Nintendo, Sony, and many others. Blackberry had a lock on the smartphone market in its earliest days, but they lost to Motorola and others.

All of these product categories are successful in the marketplace, but somehow these companies failed to hold their initial market share. What external indicators did these companies miss so badly that they lost their position as the dominant player in their respective industry?

External Indicators

External indicators are specific components of the business environment that reside outside of the organization. Often, they are factors that are completely outside the control of the organization and include things like regulatory changes, shifts in customer buying habits, or cultural changes. When businesses overlook external indicators, it is usually for one of two reasons. First, some business leaders simply don't know what indicators they should be looking at. Second, they have either missed or misinterpreted what they were watching. For each of the three brands named above, there were many obvious signs that the business environment was changing.

Types of External Indicators

A company might wish to monitor a larger number of external indicators, but a few should be monitored by virtually any organization.

  • Regulatory indicators are one external factor that can impact almost any business. Regulatory indicators are changes to laws or rules that require an organization to alter a product or service in order to be compliant.
  • Recently, the corner drugstore chain CVS announced that it would no longer be carrying tobacco products in its U.S. stores. Many applauded CVS for taking this position, but the move was based on more than just a moral compass. Leadership at CVS understood that cultural indicators, or changes based on societal acceptance, were creating a business environment in which cigarettes and other tobacco products were less and less acceptable in American society. Put simply, CVS understood that America's negative view of smoking would ultimately impact its business. Because of this, they chose to focus on health rather than tobacco products.
  • Data indicators involve collecting data about customer habits and creating complex algorithms to predict buying behavior. This helps companies know a great deal more about their customers. This is another external marker that may change how an organization sees the future, and it has undergone radical change because of the internet. A company like Eastman-Kodak could have used big data to predict that customers would transition away from film and into the digital camera market.

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Encoding & Decoding External Signs

It would be nice if external indicators put up a red flag and provided a straightforward explanation of how an industry will change, but that's not the reality. In actuality, impending changes in the business environment are encoded. An encoded indicator is an external event that has no immediate impact on the organization but provides valuable information about other trends that will affect the business.

Regulatory indicators may be one of the easiest external factors to consider. Laws, and to lesser extent rules, must go through due process before implementation. Impending regulatory changes are usually encoded in the form of legislation. Proposed laws and proposed rules can be closely observed with minimal resource allocation since most of the information is publicly available. Decoding these indicators simply means reading them and estimating the impact of the change.

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