McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Four External Analysis

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Outcomes 4.1 Describe how to examine the industry that the new business plans to enter. 4.2 Discuss how to create a profile of the target customers for a new business. 4.3 Explain how to categorize the competitors of the new business using external analysis. 4-2

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Outcomes 4.4 Explain how to construct competitive maps 4.5 Ensure that the entrepreneur has considered a full set of concerns in his or her external analysis 4.6 Differentiate between those elements of the business which provide a competitive advantage and those that do not. 4-3

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. External Analysis There are a number of critical steps to examining the nature of the external environment: 1.Define the industry 2.Define your customers 3.Research your industry 4.Identify competitors 5.Research competitors 4-4

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. External Analysis 6.Draw a competitive map 7.Examine and develop insights about additional economic aspects of the industry 8.Determine your competitive advantage 4-5

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Defining Your Industry Be as specific as possible Obtain basic information from the Internet, library, or journals or magazines that cover that industry Locate your industry’s NAICS code Define the industry broadly, but not too broadly 4-6

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Industry Defined as “ those direct competitors selling similar products or services within a specified geographic radius that is consistent with a customer’s willingness to travel to purchase those products and services.” 4-7

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Defining Your Customers Define the exact nature of the potential customers: –Who are they? –Where are they located? –Where do they currently obtain the product or service? 4-8

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Philo Asian Grille Its core product will be Asian Dumplings Industry All restaurants in the Uptown market Customers Upwardly mobile, affluent year olds Competition Moderately upscale restaurants attracting business professionals and Uptown entertainment seekers 4-9

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Developing the Information for the External Analysis of Competitors Research the industry yourself Who are your competitors? As obvious as it sounds, a great place to start is to look in your local telephone book. 4-10

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Defining Competitors Identify every potential competitor within a “reasonable” distance from your planned location Examine each of your competitors within the established radius Fragmented Market -a market in which no one competitor has a substantial share of the market and the means of competition varies widely 4-11

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Developing a Competitive Map The Authors recommend the entrepreneur develop his own a competitive map because: 1.It is less expensive 2.Knowledge of what is right and wrong with each competitor allows the entrepreneur to better position the new business 4-12

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Developing a Competitive Map 3.Insights will be developed regarding positioning, pricing, and facility layout 4.A competitive map can be updated easily 5.Any financing needed by the firm will be greatly enhanced with a detailed knowledge of the industry 4-13

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Be a Customer to the Competitors Potential items to consider: 1.Parking availability 2.Access from the road 3.Nearby attractions for customers 4.Size of facility 5.Décor 6.Pricing 7.Product breadth 8.Product depth 4-14

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Be a Customer to the Competitors 9.Staffing (number and quality) 10.Capacity 11.Brochures/advertising material 12.Customer traffic at different times 13.Average Sale 14.Friendliness/helpfulness 15.Unique features 16.Suppliers (what company is delivering to their business? 4-15

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Competitive Map-Golf Course 4-16 Table 4.1 (p. 72)

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Additional External Analysis Substitutes Elasticity of Demand Ease of Entry or Exit Benchmarking Industry Trends 4-17

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Competitive Advantage A Competitive Advantage is made up of those things that your business does uniquely well, or better than anyone else in your industry Consider both orthodox and unorthodox parts of the business. 4-18

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Company Evaluation of Resources and Capabilities 4-19 Table 4.2 (p. 77)

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Resource-Based View Resource-based analysis: defined as a theoretical approach and methodology that examines the functioning of a business in terms of whether a product or service simultaneously meets the criteria of being rare, durable, non-substitutable, and valuable. 4-20

McGraw-Hill© 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Summary Examined the reasons and methods the potential entrepreneur to develop personal knowledge of the competitive conditions in the market The entrepreneur decides for herself what constitutes her “industry” Examined tools available to personally develop one’s own analysis 4-21