External Factor Evaluation Paper
Example 1: Dell Computer
Key External Factors
Opportunities
Increasing demand for Speed, Memory and Graphic Capability
Increasing demand for Portability
Emergence and early popularity of "Tablet" Products
Improving outlook for PC sales
Increasing focus on cost reduction
Increased Use of Wireless Technology
Increase in Strategic Acquisition
Increasing Demand for Green Products
Weight Rating
Weighted
Score
0.1
0.08
0.12
0.07
0.1
0.07
0.07
0.08
2
3
3
4
4
2
2
4
0.2
0.24
0.36
0.28
0.4
0.14
0.14
0.32
0.1
0.06
2
2
0.2
0.12
0.07
0.08
1
4
3
35
0.28
0.24
2.92
Threats
Increase in Competition
Increasing interest in longer battery life
Expansion of Business Models to incorporate new lines of
business (Related Diversification) as the core business matures
Decline in Netbook Sales
Total
Analysis of the External Environment
Every company deals with internal and external factors that affect their business. These
external factors involve trends related to things such as oil price changes, political instability,
government regulation and many more. External environment impacts every company; it’s all
about how every company adjusts to external trends and prepares for them before they occur.
The best companies always try to anticipate these external factors and respond strategically to
them.
There are two types of trends: the ones that can offer the company strategic opportunities
and the ones that provide threats. By identifying opportunities and threats, companies can protect
themselves from future harm and take advantage of opportunities as they emerge. There is a set
of trends common within an industry. Each of these forces has a different weight depending on
the company, and is dealt with differently as well. Companies always differ on how they
prioritize trends.
Right now, there are two new major trends going on in the computer manufacturing
industry. The emergence of tablets and the increasing demand for green products. Just like we
discussed in the industry analysis, tablets are taking over the industry. Some analysts even
predict that it might erase the era of the portable computer. The high possibilities of such a trend
create both an opportunity and a threat for companies in the business. It is an opportunity
because it creates a whole new market for the industry. The PC market has represented 80% of
the industry for a long time and now the tablets give the competition more opportunities to try
new strategies and be more creative. We can already see the effect of this trend on Apple who
has been the pioneer of the tablets. Apple, who hasn’t been in the top five companies in the
industry since 1999, is expected to come back as a leader in 2011. While most other companies
are still experiencing the results of their first tablet offerings, Apple just launched is second
generation tablet with the iPad2. The most successful company in the tablets market will gain
market share in the industry. (Hoovers.com, Industry overview)
It is a threat because it is competing with the main product of the industry which is the
PC. Dell and HP, the top two companies for many years now, have built their success with PC
shipments. Nobody could beat them in this market. The once famous “Netbooks” are already in
decline and companies are losing money. Tablets are uncommon ground for most of the leaders
and they have to adjust quickly in order to catch up. More importantly, tablets bring other strong
competitors in the industry. Now they have to compete with well managed companies such as
Amazon, Google, Motorola and others that are trying to take advantage of this opportunity. Not
getting involved in this market is a huge risk and can put a company out of business in the long
term.
All major competitors, HP included, have at least one tablet in the market. The “Dell
Inspiron Duo Swivel Netbook” is quite different from what the market offers. It gives the
opportunity to still enjoy the tablet without taking away the netbook that we are all familiar with.
It will take more from Dell to be dominant in this new trend, but this new product is a good way
to start. (Dell.com, 2011)
The second big thing going on in the industry is the momentum for being green. There is
a big promotion in the world to save the planet and fight global warming. That’s why every
company in all industries is trying to find sustainable methods to do business. From using new
sources of energy to promote recycling, companies are looking for new idea every day. The ideal
of this trend is that not only it helps the environment thus protects future generation, but it also
can be more profitable on the long term for the company. As it is proven, it takes less energy
therefore less cost to manufacture a product with materials that have been recycled than with
crude materials. Also, natural energy such as solar power, wind or water is unlimited and much
less costly than the energy we use now. There are plenty of advantages related to taking
advantage of this trend. Because it is still at an early stage, the opportunity is enormous. (PC
Trends, Computer Industry Almanac & eTForecasts)
Trends like criticism of battery life, increasing demand for speed, memory and graphic
capability, increasing portability and cost reduction initiative are common to the industry. Every
year, companies know that they have to improve their products and also reduce cost. (PC Trends,
Computer Industry Almanac & eTForecasts)
Finally, we are going to take a closer look at the most unusual of the trends in this
industry: Change of business model. It is unusual because unlike the other trends, this one is not
directly related to the industry’s operations. More and more companies in the mature computer
hardware industry are diversifying into other related businesses that offer opportunities for
growth and profitability. For example, Apple made its fortune with the iPhone and the iPod.
These two products differ from the traditional PC. HP is also involved in all kind of electronics.
Its list of products includes TVs, sound systems, smartphones, cameras and more. This can be a
valid argument to defend the point of view that this industry can no longer survive solely
focusing on PC sales (PC Trends, Computer Industry Almanac & eTForecasts). In this case, Dell
is also exploring changes in its business model. Not only they entered the smartphones and
tablets market, but they also provide various services:
Financial services
Business Process and Business Consulting services
Insurance and Healthcare services
Support services
Managed Infrastructure services
IT Consulting
And more
(Dell.com, Services, 2011)
Example 2: Chipotle
Weight
Rating
Weighted
Score
1. Growing interest in health among customers
14%
3
0.42
2. Growing interest in organic food
ingredients by consumers
7%
4
0.28
3. Increase in technological advances for ordering
food
7%
3
0.21
4. Sustainable restaurant design is increasingly popular
4%
2
0.08
5. Diversification of food/flavor concepts
9%
3
0.27
1. Rising food prices
15%
2
0.30
2. Ease of entry into the market
10%
3
0.30
3. Increase in inclement weather and natural disasters
9%
1
0.09
4. Economic downturn followed by a recovering
economy
12%
1
0.12
5. Evolving consumer tastes and preferences
5%
3
0.15
6. An increasing number of obstacles related to
acquiring necessary agreements for new stores such as
building permits
8%
3
0.24
Opportunities
Threats
Total Weighted Score
100%
2.46
Analysis of the External Environment
Within the fast casual segment, there are certain external trends and forces that the
industry must address. Some of these trends and forces can lend themselves to being
opportunistic in nature; however there are some that can threaten the well-being of the restaurant.
The success of a company ultimately depends upon how well it can use its strengths to take
advantage of external trends. By utilizing an External Factor Evaluation Matrix (EFE) a
company’s chief strategist can analyze and determine crucial external opportunities and threats
important to the future of their organization.
Another growing trend that the fast casual industry can capitalize on is the growing health
trends among consumers. More and more people are becoming aware of the foods that they
consume and are making strides to eat healthier. In fact, according to a recent survey by the
National Restaurant Association, 19% of all customers are actively seeking out healthy
alternatives when dining out (franchisedirect.com, 2011). This is a direct result of obesity rates
constantly rising in the United States. Furthermore, several restaurants competing in the fast
casual sector have made conscious efforts to offer rather healthy meals to their customers.
Certainly, realizing that customers are seeking out healthy options when dining out will prompt
the industry to enjoy much success in the coming years.
A third trend is the expanding interest in, and availability of, organic food ingredients.
Several restaurant chains have dedicated their mission and vision statements to seek out the
finest ingredients. It is no secret that many fast food chains use cheap ingredients that even
compromise the nutritional value of the food it serves. However, several fast casual chains refuse
to compromise the integrity of the ingredients used in its menu options. The use of produce that
comes from sustainable practices is becoming more and more important to customers after so
much light has been shed on how animals are treated before being used for food. This has even
prompted many chains to purchase produce from locally-owned organic food producers. In fact,
according to the National Restaurant Association, 70% of adults say they are more likely to visit
a restaurant that offers locally produced food items (franchisedirect.com, 2011).
The recent advances in technology have also enabled various restaurants to offer
customers a more customizable way to order food. There are currently applications that allow
customers to order food via their smartphone. Capitalizing on an idea from pizza parlors, fast
casual restaurants also allow customers to order food online and specify a particular time for pick
up. As these restaurants offer its customers more ways to place an order, the business can
maintain a larger propensity for growth as ordering food becomes more convenient.
The fast casual segment has also begun to enter into the construction of sustainable
restaurant designs. Currently, there are numerous initiatives for developing LEED and other
sustainable buildings. These buildings are very environmentally friendly, and offer advantages to
the communities that they are erected within. At the head of this curve is Chipotle, which has
received the first certifications for LEED-designed restaurants (fastcasual.com, 2008). Using
sustainable buildings to house its restaurants is not only advantageous because it would appeal to
customers, but there are also other governmental incentives in the form of tax credits and
deductions (irs.gov, 2011). Thus, not only are sustainable buildings great for attracting and
maintaining new customers, but it also makes great business sense too.
Diversification of food concepts is a tremendous way to attract a wider audience with a
differentiated taste. As the fast casual segment continues to grow and prosper, the companies
competing can afford to implement spinoffs much in the same way as the giants of the fast food
industry have done through the years. Many of the key players within the industry attract a
customer with a specific taste profile. As these restaurants continue to expand and grow, they too
can spinoff another brand of restaurant with a differentiated menu.
Accompanying the numerous opportunities to the segment, there are also several existing
threats that must be navigated in order to remain successful. The first of these potential threats
pertains to rising food prices. The fast casual segment must especially take note of this because it
already uses the highest quality ingredients which lead to higher costs. However, if food prices
continue to rise, the industry would be forced to either cut costs or raise the prices on its menu.
This is a very touchy subject as the restaurants within the segment cannot afford to raise prices
too high without facing adverse effects to its normal business operations.
The ease of entry into the market is also another threat that the organization must combat.
Although fast casual restaurants offer a distinct experience for consumers, its products are not
necessarily revolutionary by any means. This leaves them somewhat vulnerable to competitors to
enter the market and attack the brand; especially given the low start up costs for restaurants.
However, with adequate marketing and utmost customer satisfaction, these restaurants can
maintain their customer base and thwart any potential competitors.
Increasingly inclement weather and the apparent increasing threat of natural disasters
always remains a possible hardship. This would cause food shortages and a steep rise on the
price of ingredients. This makes it absolutely necessary for organizations to diversify their
distributors to different parts of the U.S. in order to prevent catastrophic shortages. This way, if a
flood destroys the supply of one supplier in an area, the restaurant can use another supplier
elsewhere in order to maintain adequate distribution to its restaurants.
The threat of recessions also can be a harmful blight to the segment’s success. Economic
downturns often affect most businesses in negative ways and the fast casual segment is not
protected from such an event. Although it did enjoy moderate growth and prosperity through the
most recent recession, the segments growth was stunted a bit, as was the case for a majority of
industries. However, restaurants were steadfast in maintaining prices and a quality experience
and customers continued to support the food segment.
The threat of consumers’ taste preferences changing is always of concern. Although most
people are creatures of habit, differentiation of taste preferences can change, leaving the
restaurant vulnerable. Knowing this, it is crucial that restaurants constantly improve upon food
quality and the dining experience. Doing so will keep the entire experience “fresh” and entice the
customer to come back.
One of the obstacles in restaurants expanding into different areas that most do not realize,
is the fact that there are often difficulties in acquiring the necessary agreements to open new
stores (Chipotle 10-k, 2011). These consist of building permits if the company is looking to build
a brand new fixture for the new restaurant, to lease agreements for current buildings. Different
cities have different zoning and ordinance codes, making the decision to rent a preexisting space
a plausible alternative. However, the restaurant management typically has a target number of
what it wants to pay on a monthly basis. Often, there can be a discrepancy between what
management feels is fair and what the lessor feels is fair. This can hinder the expansion rate of a
restaurant until both parties come to grips on fair terms of a lease agreement.
It is important that fast casual organizations constantly analyze opportunities and threats
that are presented outside of the organization. If companies do not exploit its advantages within
the market, it cannot grow at a pace that it should be. On the other hand, if it does not properly
navigate and combat the external threats presented, it will surely not be in business for the long
term capacity which is often hoped. Thus, an EFE is extremely important in developing and
maintaining a successful business.