978-1259912191 Chapter 4 Lecture Notes

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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

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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.

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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]

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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

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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

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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

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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

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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

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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

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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

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