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Chapter Four: External Analysis
Table of Contents
Brief Chapter Outline...............................................................................................2
Chapter Outline and Lecture notes..........................................................................3
Key Terms.............................................................................................................. 12
Suggested Text
Responses…………………………………………………………………………...13
Class Activities and Sample Assignments.............................................................16
Discussion Questions for Online/Hybrid classes....................................................18
Lecture Links......................................................................................................... 21
Lecture Link 4.1: The North American Industry Classification System (NAICS). .21
Lecture Link 4.2: External Analysis of Competitors............................................22
Lecture Link 4.3: How about industry trends here? Discuss the competitive
environment related to the external environment and the adverse a,ects of the
financial crisis..................................................................................................... 23
Lecture Link 4.4: Elasticity of Demand...............................................................24
Bonus Internet Exercises.......................................................................................25
Bonus Internet Exercise 4.1: Competitive Advantage........................................25
Bonus Internet Exercise 4.2: Bureau of Economic Analysis, U.S. Department of
Commerce.......................................................................................................... 26
Bonus Internet Exercise 4.3: Society: An Entrepreneurial Approach to Analysis 28
Critical Thinking Exercises..................................................................................... 29
Critical Thinking Exercise 4.1: Draw Your Competitive Map...............................29
Critical Thinking Exercise 4.2: The External Environment..................................30
Critical Thinking Exercise 4.3: Usual or unique?.................................................32
Critical Thinking Exercise 4.4: Reading for Information......................................33
Bonus Cases.......................................................................................................... 34
Bonus Case 4.1: Pop’s Pizza Palace: Assessing the Environment.......................34
Bonus Case 4.2: Work Life Balance amongst Generations.................................37
Bonus Case 4.3: UPC Codes...............................................................................38
Endnotes............................................................................................................... 40
IM 4-1
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Four: External Analysis
Brief Chapter Outline
I. Learning Objectives (text page 60)
Describe how to examine the industry that the new business plans to enter.
Discuss how to create a profile of the target customers for a new business.
Explain how to categorize competitors of the new business using external
analysis.
Explain how to construct competitive maps.
Ensure that the entrepreneur has considered a full set of concerns in his or
her external analysis.
Differentiate between those elements of the business which provide a
competitive advantage and those that do not.
II. Defining your industry (text pages 62 through 64)
Learning Objective 4-1: Describe how to examine the industry that the new
business plans to enter.
III. Defining your Customers (text pages 64 through 66)
Learning Objective 4-2: Discuss how to create a profile of the target customers
for a new business
IV. Developing the information for the external analysis of competitors (text pages 66
through 70)
Learning Objective 4-3: Explain how to categorize competitors of the new
business using external analysis
V. Developing a competitive map (text pages 70 through 72)
Learning Objective 4-4: Explain how to construct competitive maps
VI. Additional issues for external analysis (text pages 72 through 74)
Learning Objective 4-5: Ensure that the entrepreneur has considered a full set of
concerns in his or her external analysis.
VII. Competitive Advantage (text pages 74 through 77)
Learning Objective 4-6: Differentiate between those elements of the business
that provide a competitive advantage and those that do not
VIII. Summary (text page 77)
Chapter Outline and Lecture notes
1. Learning Objectives (text page 58)
Describe how to examine the industry that the new business plans to enter.
Discuss how to create a profile of the target customers for a new business.
Explain how to categorize competitors of the new business using external
analysis.
Explain how to construct competitive maps.
IM 4-2
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Four: External Analysis
Ensure that the entrepreneur has considered a full set of concerns in his or her
external analysis.
Differentiate between those elements of the business that provide a competitive
advantage and those that do not.
2. Defining your industry
Learning Objective 4-1:Describe how to examine the industry that the new
business plans to enter
A. Defining industry
i. Those direct competitors selling similar products/services within a
specified geographic radius that is consistent with a customer’s
willingness to travel to purchase those products/services
B. Two ways entrepreneurs
can analyze the external
environment
ii. Competitive analysis
iii. Industry analysis
C. Data sources used in analysis
i. Internet
ii. Library
iii. Magazines
iv. Trade journals
D. Two ways national industry types are categorized
i. North American Industry Classification System (NAICS) are
industry codes issued by government
1. Gather data
2. Publish data
3. Track data
4. Use the NAICS to research national trends in a specific
industry
5. Use a public company’s documents to find its NAICS code to
pursue further
ii. Direct competitor analysis
1. National trends do not reveal opportunities in local
competitive environments
E. Potential entrepreneurs define their local competitors.
i. Evaluate practical levels of competition.
ii. Evaluate available transportation to and from the potential
business.
iii. Evaluate geographic customer draw from other businesses.
1. Draw a radius around potential business location to evaluate
the target market [good topic for critical thinking section]
IM 4-3
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Four: External Analysis
2. Ask students to consider how far and how often clients
would be willing to travel to frequent their new business
F. Industry
i. 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 or services.
G. Categorical classification criteria
i. Ambiance
ii. Class
iii. Location
iv. Price
v. Ask students to analyze their local market for their specific
businesses
3. Defining your customers (text pages 64 through 66
Learning Objective 4-2:Discuss how to create a profile of the target customers
for a new business
A. Define customers according to the external environment
i. New small business owners are diligent and accurate in
analysis
1. Make effective use of marketing dollars
2. Satisfy core customers
3. Satisfy repeat customers
ii. Why not target everyone?
iii. This all inclusive Egalitarian approach is a poor approach for
business success
1. Customer demands need to be equally valued
iv. Reject an expansive and expensive scope to focus on core
customers and develop plans
1. Observe geographic needs and demands of core customers
2. Observe demographic needs and demands of core
customers
a. Develop expansive and expensive plans to target this
customer base
b. Analyze criteria to focus on core customer base
i. The new small business maintains a strategic
distance between itself and its competitors
ii. Observe to identify a potential advantage over
competition
iii. Expansive scope
1. Determine how to narrow your target
market
IM 4-4
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Four: External Analysis
2. Focus on expense reduction for the
business
3. Customers demand satisfaction
a. i.e. target products to teens or to
children
iv. Expensive scope
1. Determine the customer demand
2. Plan to target the specific customer
base
3. Focus on expense reduction for the
business
a. i.e. offer clients cheap wines or
rare vintage brands
c. Eliminate from the analysis those individuals and
groups who are not targeted customers
4. Developing the Information for the External Analysis of Competitors (text pages 66
through 70)
Learning objective 4-3: Explain how to categorize competitors of
the new business using external analysis
A. Research the industry yourself
i. Identify the exact competitors within the industry
1. Competitors are those firms that directly compete for
the same set of unique customers as your potential
business
2. Entrepreneurs that evaluate their industry themselves
can clearly identify those direct competitors
a. Direct observation
i. Observation from car
b. Public resources
i. Other available resources
ii. Simple identification through the
telephone book
ii. Potential entrepreneurs are innovative and they utilize their
available resources
iii. Potential entrepreneurs gain pertinent knowledge about their
industry when they study their local target market
1. Competitive advantage
2. Consultants are expensive
3. Effective planning metrics
iv. First-hand knowledge about industry
IM 4-5
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Four: External Analysis
1. Ask students to pair up and explain a business idea to
another student. Direct the students to role-play as a
friend who would be investing in the business. Have
that person ask questions about what the customer
desires to get out of the product/service. The students
can use the list as a starting point for their own
competitor analysis (text page 65)
B. Define your competitors
i. Identify potential competitors in a specific geographic
location
ii. Primary target customers are within reasonable commuting
distance
iii. Examine potential competitors
iv. Fragmented markets (text page 68)
1. Markets in which no one competitor has a substantial share
of the market and the means of competition varies widely
within the same market
2. Markets where small businesses compete
3. No dominant competitor
4. Small businesses operate at a cost disadvantage when they
compete with large firms
5. Small businesses must compete on an advantage other
than cost basis
6. Must research the number of competitors in the target
market
7. Must research the size of competitive firms
8. Understand how competitors compete in a target market
9. Discover why specific competitors would have a competitive
advantage
5. Developing a Competitive Map (text pages 70 through 72)
Learning Objective 4-4: Explain how to construct competitive maps
A. Defining competitive maps
i. A competitive map is an analytical tool used to organize
information about direct competitors on all points of competition
1. Less expensive
2. Knowledge of what is right and wrong with each
competitor
3. Allows the entrepreneur to better position the new
business
4. Develop insights related to facility layout, positioning
and pricing
IM 4-6
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Four: External Analysis
5. Once developed, a competitive map is easy to update
and provides a constant way to track the industry
6. Easier to obtain financing
ii. Visit all potential competitors as a customer because it makes it
easier to compare businesses and conduct the comparative
analysis
1. Gain customer perspective
2. Develop a list of criteria that includes: (ex. a retail
business)
a. Parking availability
b. Access from road
c. Nearby attractions
d. Size of facility
e. Décor
f. Pricing
g. Product breadth
h. Product depth
i. Number of employees
j. Quality of employees
k. Capacity
l. Brochures and advertising
material
m. Document customer traffic at various time
intervals
n. Average sale
o. Friendliness/helpfulness
p. Unique features
q. Suppliers
iii. Record data after each visit
1. Form conclusions
6. Additional Issues for External Analysis (text pages 72 through 74)
Learning Objective 4-5: Ensure that the entrepreneur has considered a full set of
concerns in his or her external analysis.
A. Defining substitutes
i. A product that performs a similar function or achieves the
same result, but is not a precise imitation. (text page 70)
1. Substitutes are products similar to your intended
product
ii. Entrepreneurs develop an awareness of substitutes and their
potential impacts in the market
iii. Avoid excessive substitutes
iv. Evaluate the impact of substitutes
IM 4-7
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written consent of McGraw-Hill Education.
Chapter Four: External Analysis
v. Recognize the circumstances when consumers purchase
substitutes
B. Elasticity of Demand
i. The price flexibility requiring that a consumer has to switch to
a substitute or not purchase a product when its price
increases
ii. Inelastic demand occurs when consumers are willing to pay
any price for a product
iii. Entrepreneurs must be aware that substitutes exist and they
have power in the market
iv. Always include on a competitive map those companies that
have close competitive substitutes
v. Determine the trade-off value of substitutes found
C. Ease of entry or exit from an industry
i. Exit barriers prevent owners from leaving the business
1. Business owners attempt to sell their products at a discount
to recoup as much of their investment s possible
2. Other predatory pricing strategies are used to generate
cash flow and recoup investment
ii. An Entrepreneur should evaluate the competition and the
entrepreneurs ability to exit the industry
iii. Entrepreneurs can consider secondary markets to sell products
1. Price discounts are not necessary for secondary-market
strategies
2. No exit barrier
3. Limited competition
4. Reduces the threat of new entrants in the marketplace
D. Benchmarking
i. Working with and learning from a company outside of your
industry that has a particular skill that is potentially critical to
your operation.
1. Entrepreneurs consider benchmarking to learn skills or
operations.
2. They often can apply those skills and competencies to their
own business operations
3. Benchmarking can be used to achieve a competitive
advantage in the marketplace
E. Industry Trends
i. Shape the long-term perspective of a specific industry
ii. Entrepreneurs can analyze the competition when they observe
and identify industry trends in the marketplace
IM 4-8
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written consent of McGraw-Hill Education.
Chapter Four: External Analysis
iii. Entrepreneurs can strategically position their businesses to
take advantage of various industry trends
1. Competitive advantage
2. First-mover advantage in niche markets
3. Price advantage
iv. Entrepreneurs can identify industry trends to acknowledge
opportunities for continued profitability and success
v. Entrepreneurs that fail to identify industry trends miss
opportunities for short-term or long-term growth advantages
7. Competitive Advantage (text pages 74 through 77)
Learning Objective 4-6: Differentiate between those elements of the business
which provide a competitive advantage and those that do not
A. Competitive Advantage
i. The edge that a business has over competing businesses is
made up of those things that the business does better than
anyone else in the industry
1. Successful entrepreneurs assure their businesses
gain a competitive advantage over competing firms
ii. Gain in market share is achieved through product
differentiation, niche markets, and/or pricing and other
product strategies
iii. Entrepreneurs can charge more than competitors for their
products or services when they have a competitive
advantage over other firms
1. A firm with a competitive advantage over another firm
reaps larger profits
iv. Source of competitive advantage can be:
1. The activity of the firm such as the service or product
2. A high-quality location
3. The firm’s focus on its own competitive advantage.
4. Cause of failure is lack of focus on this competitive
advantage.
5. Must know the reasons why your customers come to
you.
6. Normal part of the business:
a. Usual, done well but the same as others in
industry
7. Unusual or unique parts of the business
a. Describing those areas of a business that are
unique or unusual when compared to the
standard practices of the industry, and that
IM 4-9
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written consent of McGraw-Hill Education.
Chapter Four: External Analysis
provide the opportunity for the business to gain
value over and above the ordinary return in the
industry.
b. Entrepreneurs focus on the unusual aspects of
the business because this differentiates them
from competitors
c. An advantage could start out as unusual but
later become an industry norm.
v. Resource-based analysis
1. A theoretical approach and practical methodology that
examines the functioning of a business in terms of
whether a product/service simultaneously meets the
criteria of being rare, durable, non-substitutable, and
valuable
vi. Entrepreneurs conduct resource-based analysis to evaluate
resources and capabilities of a business
1. Used to develop a competitive advantage
2. This analysis has been developed over the past 50
years
3. An effective tool to define a business’s competitive
advantage
4. Differentiates products and/or services from those of
competitors
IM 4-10
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written consent of McGraw-Hill Education.
