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Chapter Four: External Analysis
Key Terms
Benchmarking: Working with and learning from a company outside of your industry
that has a particular skill that is potentially critical to your operation. (LO 4-5)
Competitive Advantage: The edge a business has over competing businesses, made
up of those things that the business does better than anyone else in the industry (LO
4-6)
Competitive Map: An analytical tool used to organize information about direct
competitors on all points of competition. (LO 4-4)
Elasticity of Demand: Consumers response to price changes. (LO 4-5)
Exit Barrier: A barrier, such as investment in capital assets that keeps a firm from
leaving an industry. (LO 4-5)
Fragmented Markets: Markets in which no one competitor has a substantial share of
the market and the means of competition vary widely within the same market space.
(LO 4-3)
Industry: 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. (LO 4-1)
Normal or ordinary competitive factor: Describing those areas of a business that are
simply standard practice in the industry and are necessary for the business to be a
player. (LO 4-6)
Resource-Based Analysis: 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. (LO 4-6)
Substitute: A product that performs a similar function or achieves the same result, but
is not a precise imitation. (LO 4-5)
Unusual or unique competitive factor: Describing those areas of a business that are
unique or unusual when compared to the standard practices of the industry, and that
provide the opportunity for the business to gain value over and above the ordinary
returns in the industry. (LO 4-6)
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
Suggested Text Responses:
Opening Vignette – “Moziah Bridges” – p.61
Student responses will vary.
Exercise 1 – p.66
Student responses will vary.
Exercise 2 – p.67
Student responses will vary.
Exercise 3 – p.68
Student responses will vary.
Exercise 4 – p.72
Student responses will vary.
Ethical Challenge – p.73
Student responses will vary. This may be a good small group exercise.
Exercise 5 –p.75
Student responses will vary.
Review Questions – p.78
1. How would you advise a potential entrepreneur define the industry for a new
business? The new entrepreneur should develop of list of services/products that will
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
2. How should a new business develop a profile for its potential customers? The
3. Why should a potential entrepreneur research the industry personally? The
4. What techniques would you recommend for identifying competitors within an
5. How would you recommend developing a complete analysis of the competitors
6. What elements are in a competitive map? A competitive map lists each competitor
Business Plan Development Questions: p.76
Student answers will vary.
Individual Exercises: p.76
Student answers will vary.
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
Group Exercises: p.76
Studen answers will vary.
Class Activities and Sample Assignments
1. Divide the students into groups. Ask students to choose a new small business. Next,
ask the students to identify the industry, target customers, competitors, and the
competitive advantage for their new small business. The students can present their
business or list the outcome of their work on a flip chart or the blackboard. (LO 4-2,
4-3, 4-4, 4-5, 4-6)
2. In groups, ask students to list the eight critical steps (text page 62) needed to
examine the external environment. Next, ask students to create a hypothetical new
business and apply each step to their new small business. Choose one person from
each group to be the spokesperson to share their analysis of the external
environment as they applied it to their new small business. (LO 4-1,4-2, 4-3, 4-4,
3. 4-5, 4-6)
4. In groups, ask students to discuss why entrepreneurs define their customers.
Discuss the advantages of defining their customers and the disadvantages if they fail
to define their customers. Next, divide the groups into subgroups and assign one
group an upscale restaurant; and assign the other group a convenience store. Ask
students in each subgroup to identify the target customers for each of the new small
business. The specific details to discuss should include the age, location, income
group, level of education, and other categories that they choose to detail. Ask
students to discuss why the specific details about the customers were chosen and
relate why each business targets different types of clients. (LO 4-1, 4-2)
5. In groups, ask students to discuss the external environment. Specifically, ask to
discuss why it is important for new small business owners to assess the external
environment themselves versus hiring a consultant or another professional
associated with their new small business. (LO 4-3)
6. Ask the students to discuss the function of a competitive map. Draw a diagram of a
potential competitive map on the blackboard or flip chart (Review Diagram 4.1 on
page 69 of the text). As a class discussion, establish a hypothetical new small
business and discuss why it is important for entrepreneurs to complete the
competitive map personally. Next, ask students to describe some potential items that
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
an entrepreneur must consider to establish a competitive map. List the items,
analyze the results, and form conclusions. (LO 4-4)
7. Divide the class into groups of two or three students (Note: Five different groups of
students are needed to complete this assignment) (LO 4-1, 4-2, 4-3, 4-4, 4-5, 4-6)
Assign each group one of the following topics:
a. Substitutes
b. Elasticity of demand
c. Ease of entry/exit
d. Benchmarking
e. Industry trends
Ask each group to define them and relate them to an external analysis. Discuss why
they are important in the external analysis. List their results on a flip chart or
blackboard. (LO 4-5)
8. Divide the students into groups and discuss the advantages of a competitive
advantage. Ask students to compare and contrast the usual parts of a business with
the unique parts of a business. Discuss how they vary by industry type, the amount
of time in the industry, and discuss how the resource-based view applies to
competitive advantage. (LO 4-5, 4-6)
Discussion Questions for Online/Hybrid classes
1. Explain why it is important for entrepreneurs to evaluate their competitors. Discuss
the advantages and disadvantages of competitor identification. (LO 4-3)
2. Summarize the similarities and differences between usual and unique parts of
businesses. Provide an example for each term. (LO 4- 6)
3. Define a fragmented market. Why is it important for entrepreneurs to understand
them? (LO 4-3)
4. What is a substitute? Why do new small business owners evaluate substitutes and
the potential impact they have in the market? (LO 4-5)
5. New business owners learn to assess the external environment. List the eight critical
steps that new business owners use to assess the external environment. (LO 4-1)
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
6. What is an exit barrier? Discuss why small business owners include them in their
entrepreneurial business planning. (LO 4-5)
7. Discuss how industry trends shape the long-term perspective of the industry. Why?
(LO 4-5)
8. Explain why new entrepreneurial owners select or target their customers. What are
the disadvantages associated with not choosing the customers? (LO 4-2)
9. Summarize why entrepreneurs utilize the technique known as resource-based
analysis. (LO 4-6)
10..Describe how unique parts of the business can develop into competitive
advantages. (LO 4-6)
Discussion Questions for Online/Hybrid classes- Responses
1. Explain why it is important for entrepreneurs to evaluate their competitors.
Discuss the advantages and disadvantages of competitor identification.
2. Summarize the similarities and differences between usual and unique parts
of businesses. Provide an example for each term. (LO 4-6) Usual or normal
3. Define a fragmented market. Why is it important for entrepreneurs to
understand them? (LO 4-3) A fragmented market is one in which no competitor
4. What is a substitute? Why do new entrepreneurial business owners
evaluate substitutes and the potential impact they have in the market? (LO
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. New business owners learn to assess the external environment. List the
eight critical steps that new business owners use to assess the external
environment. (LO 4-1) The eight critical steps are:
a. Define the industry in which you are competing.
b. Define your customers.
6. What is an exit barrier? Discuss why small business owners include them
in their entrepreneurial business planning. (LO 4-5) An exit barrier is a
7. Discuss how industry trends shape the long-term perspective of the
industry. Why? (LO 4-5) Industry trends affect the business. For example,
8. Explain why new entrepreneurial business owners select or target their
customers. What are the disadvantages associated with not choosing the
customers? (LO 4-2) It would be too expensive for new business owners
9. Summarize why entrepreneurs utilize the technique known as
resource-based analysis. (LO 4-6) This technique is based on potentially
10. Describe how unique products can develop into competitive
advantages. (LO 4-6) Unique products separate the new entrepreneurial
IM 4-7
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
