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 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 0.1 0.06 0.07 0.08 1 2 2 4 3 35 0.2 0.12 0.28 0.24 2.92 Weight Rating 0.1 0.08 0.12 0.07 0.1 0.07 0.07 0.08 2 3 3 4 4 2 2 4 Weighted Score 0.2 0.24 0.36 0.28 0.4 0.14 0.14 0.32

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 Weighted Score 0.42

Opportunities 1. Growing interest in health among customers 2. Growing interest in organic food ingredients by consumers 3. Increase in technological advances for ordering food 4. Sustainable restaurant design is increasingly popular 5. Diversification of food/flavor concepts Threats 1. Rising food prices 2. Ease of entry into the market 3. Increase in inclement weather and natural disasters 4. Economic downturn followed by a recovering economy 5. Evolving consumer tastes and preferences 6. An increasing number of obstacles related to acquiring necessary agreements for new stores such as building permits Total Weighted Score

Weight 14%

Rating 3

7%

4

0.28

7% 4% 9%

3 2 3

0.21 0.08 0.27

15% 10% 9%

2 3 1

0.30 0.30 0.09

12% 5%

1 3

0.12 0.15

8% 100%

3

0.24 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.