Tag Archives: external systems

External Systems that Impact Internal Systems

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From the Ask Tom mailbag –

Question:
When I look at our strategic plan, it is mostly a mathematical increase in revenues over last year and some projects to cure some of our operational problems. If that is all it is, why is there such a focus on strategic planning?

Response:
Unfortunately, for most companies, your observation is correct. Most strategic plans are not strategic, they are tactical. Tactical planning is important, but it is rarely strategic.

Your question is why plan. If we were successful in identifying our competitive advantage and effective efforts to operationalize that advantage, why pow wow to come up with a new plan?

We have to periodically pow wow because of this one factor, change. Change requires us to reexamine our assumptions, understand our marketplace, revise our thinking, adapt our internal systems and track our progress in the face of that change.

Most planning is an attempt to resolve operational issues with our internal systems, that is still a noble goal. Strategic planning is an examination of those external systems that have an impact on the way we organize and operationalize our internal systems. Here are five important external systems you might consider –

  • Market (external system). This external system includes your best customer, different customer segments, your best competitor, second tier competitors, vendors and suppliers.
  • Regulatory (external system). This could be financial regulation, like taxes, environmental regulation, tariff regulation, permit regulation.
  • Finance (external system). As companies grow beyond the resources of stockholder investment, reliance on external sources of capital becomes more important. This includes simple revolving lines of credit, institutional term debt, private equity. All come with strings that have an impact on the way you internal organize. Banks call these covenants. Access to capital markets is seeing an extraordinary shift with increased interest rates depending on market risk.
  • Labor (external system). We used to look at unionization and unemployment statistics to get a handle on our access to labor. Now we have to include governmental intervention, student loan forgiveness, cultural impact on employment conditions (unlimited vacation, virtual roles) and accountability in those conditions. It’s all part of your business model.
  • Technology (external system). Technology has changed the way that we work. Meaning, technology has changed the way we make decisions and solve problems. Every business model is shifting to incorporate technology and make it effective with a constant eye to the next technology which will bring the next change to the way we organize.

It is these external systems that will have the most impact on your change in strategy. This is where I always start. What’s changed?

Your Problems Are Not All Internal

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“I thought we had everything firing on all cylinders,” Manny explained. “We had the perfect customer offering, at the perfect price point, with the best quality. Suddenly, market demand just tanked. Over the past three months, our backlog disappeared and our order forecast is a disaster.”

“It’s not enough to get everything working on the inside (internal systems),” I said. “We also have to look outside. There are external systems, like your market, that will hit both revenue and bottom line. And even if you get your market right, there are other external systems you have to pay attention to –

  • Market (external system) – consists of your customers, your competitors, your suppliers. Sometimes there are incremental changes, sometimes major disruptions.
  • Regulation (external system) – most companies pay taxes, but there are other financial regulations, tariffs and fees. Environmental regulations in terms of prohibited materials, impact fees and unknown liabilities.
  • Finance (external system) – we go to the bank in search of a loan and think the bank should loan us as much as we have the ability to repay. The bank has other ideas called covenants, internal ratios (internal systems) that have to be maintained. It’s an external system with an impact on how you internally organize. Finance can take the form of lines of credit, term debt, stockholder investment, private equity. All external systems.
  • Labor (external system) – usually impacted by unionization and unemployment statistics, more recently impacted by governmental intervention.
  • Technology (external system) – technology has changed the way we work, the things on our desk, the way we communicate, attend meetings. Most importantly, technology as an external system has changed the way we make decisions and solve problems.

So, when we look at our perfect internal systems, we also have to look at the imperfect external systems in which we operate.

Impact of External Systems

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By the time an organization reaches S-III maturity, its core system is maturing and provides for eventual profitability. At S-IV, the organization sees the emergence of multiple systems and sub-systems (marketing, sales, account management, operations, quality control, research and development, HR, accounting).

At S-V, with maturing multiple systems and sub-systems, the organization has to look outward, to external systems. No matter how well the company is organized internally, it is external systems that impact success (or failure).

Market (External System)
Markets organically shift related to demographics, trends, economic growth or contraction. These organic shifts are sometimes subtle and relatively slow. The relative slow speed allows companies to respond (market response).

Regulation (External System)
Most companies are financially regulated (taxes), some are subject to stringent environmental regulation. During COVID-19, regulation dramatically clamped market demand, by defining essential vs non-essential companies.

Labor (External System)
The US went from record low unemployment to depression level unemployment in a matter of 60 days. Labor is an external system that impacts the way we internally organize.

Finance (External System)
Finance includes institutional debt, credit lines, owner investment, private equity investment. The company believes it should be able to borrow as much money as it has the ability to repay. Banks, on the other hand have these concepts called covenants which require certain internal ratios. Finance, as an external system has an impact on the way we internally organize. COVID-19 shifted credit in some cases to forgivable debt guaranteed by government.

Most of these external systems stand alone, but COVID-19 has brought together a not-so-subtle interplay. The organizations who survive are those who are mature in their internal systems, but also understand the interplay and impact of external systems. Those companies funded in the first tranche of stimulus were those who kicked in applications immediately. Most smaller companies, with immature systems, without awareness of external systems were brushed to the second tranche or left in the cold.

It is the role of the CEO at S-V to ensure both, maturity of internal systems and skilled experience in external systems.