Early Warning Signals (External) of Business Decline

Early warning signals companies should look for in the external environment include all legal, political, competitive, technological, economic, and social changes that affect them. Regular review of social media, trade periodicals, business publications, and newspapers will help to keep you current. A technological advance, for example, often affects buyer attitudes and expectations, thereby causing social changes that need to be addressed in product/service design and delivery/sales. If your organization is uninformed with regard to the changes–either that they occur or the extent to which they occur–company performance may lag behind competitors. 

Early Warning Signals – External

Management often tends to dismiss the external signals of decline as elements beyond their control. They believe that a downward trend will end when external elements (e.g. economic conditions) improve. Problematic external elements can include the following:

  • increased competition
  • rapidly changing technology
  • unpredictable economic fluctuations
  • cultural/social changes
  • legal/political swings

Within these external elements are market changes, customer preference changes, foreign competition, capital and commodity market movements, legal precedents, and unresponsive political solutions. While these elements cannot be controlled, they can be influenced. Also, since all businesses in an industry are similarly affected by external elements, management’s ability to survive these changes will determine future  viability. Some businesses weather external changes and emerge with increased market share and profitability; others fail.

Two major problems with these elements are their uncontrollable nature as well as their interaction with each other. Upon close scrutiny, it becomes apparent that factors affecting one of them can have a secondary effect upon another. For example, a cultural/social shift can result in a legal/political change. This change can affect the economic environment, which will interact with technological development. the rate of technological development consequently affects the status of competition. This process of action and reaction comes full circle when we realize that the status of competition then affects the economy and cultural/social change.

Businesses fail to realize that they can plan for external changes and safeguard their hard work. Their management teams have the ability to influence the external elements if they can predict their occurrence. Such foresight allows the executive team to influence the elements through the use of promotion, persuasion, buyer education, accelerated product development, process improvements or elimination, unit growth plans, new markets, and adjusted sales practices. 

Adaptation to the change is the result. For example, construction companies that build prefabricated residences have known for years about the external changes affecting the prefab sector of the home building industry. They have been affected by  cultural/social and legal/political changes for the last several decades. In response, they developed new products, such as modular multifamily housing, to offset their declining mobile home product sales. They invested in additional research to determine the number of potential single-family and multifamily buyers who preferred the cost savings that their construction process generates. They invested in new manufacturing capabilities, which would use material specifications offering a competitive advantage. These companies understood the early warning signals of the external elements and acted to offset them through:

  1. promotion and persuasion to keep their customers,
  2. additional market research about market size and buyer profiles,
  3. buyer education based on research findings,
  4. product improvements, and
  5. product elimination.

These tools allowed this segment  of the building industry to adapt to changes in the market. What are you doing in your business to a.) study the external environment, b.) adapt to the changes, and c.) position yourself in the eyes of prospects and existing customers to become more competitive? You can influence your own outcome!