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Chapter Four: External Analysis
Lecture Links
Lecture Link 4.1: The North American Industry Classification System (NAICS)
(LO 4-1)
www.census.gov/epcd/www/naics.html
The North American Industry Classification System (NAICS) are industry codes issued
by the government to gather data, publish data, and track data.
The two ways to find national industry types is to use the categories developed by the
North American Industry Classification System (NAICS) and issued by the government
to gather data, publish data and track data.
Direct competitor analysis. Use the research available online and through a college
library.
Use NAICS to research the national trends in your general industry.
Use NAICS to research national trends in your specific industry
National trends do not reveal opportunities in local competitive environments
Use NAICS codes to research competitors in your geographic area.
Lecture Link 4.2: External Analysis of Competitors
(LO 4-3)
One objective of defining your competitors is to study the market and gain valuable
insight about your competitors. New entrepreneurial business owners cannot afford to
hire consultants and other professionals to conduct this research. As a result, new small
business owners complete this research themselves.
First, go to zipcode.com and conduct a search. Next, visit mapquest.com and get
directions for each competitor that you defined in your analysis.
Develop a list of your competitors.
Create a questionnaire that contains all of the questions you want to discover about the
competitors. For example you might ask about the products or services offered at each
competitor, the volume of clients that frequent the competitor’s industry, how much each
competitor charges their clients, where the population growth is in your industry, and
what the client profiles are in your industry? These questions are only considerations.
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written consent of McGraw-Hill Education.
Chapter Four: External Analysis
You will want to expand and conform the questions you ask to your specific type of
industry. Complete the questionnaire after you visit each competitor.
What did you discover about your competitors? Who do you believe your major
competitor is?
Do field research.
Lecture Link 4.3: How about industry trends here? Discuss the competitive environment
related to the external environment and the adverse affects of the financial crisis.
(LO 4-4)
The Human Develop Indexi is a way to measure the standard of living in various
countries. The index is developed by The United Nations Development Program. The
data is based on economic factors and social progress, such as education levels.
What factors do you think contribute to high development versus low development?
Why do you think the standard of living is better in some countries versus others?
Lecture Link 4.4: Elasticity of Demand.
(LO 4-4)
There is no doubt that one of the most important stakeholders in businesses is the
community in which they operate. For example, when Panamanian Airline ordered
737’s from Boeing, a deal worth $1 billionii, the Chicago based company executives
weren’t the only happy ones. Portions of the plane are built in Gresham, Oregon which
could help keep jobs in this area, East of Portland, Oregon.
On the other hand, a community can suffer when a company isn’t doing well. When
Harley Davidson, Inc announced lower than expected revenues, it also announced it
would be cutting jobs and closing plants in the York, Pennsylvania area, where some of
the motorcycles are built. While on the surface this would only seem to affect those laid
off workers, it can affect everyone in the community. When workers are laid off, they
don’t have money to spend in stores, restaurants and on entertainment, affecting the
entire community.
“Closing these plants will be the worst thing,” says Liviu Hotea, the manager of the
Round the Clock Diner just down the road from the Harley plant. The diner feeds many
plant workers as they head to or off of their shifts; even tourists stop in before or after
touring the plant. Other businesses believe they will be affected to, as 70% of their
business comes from the plantiii.
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Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Four: External Analysis
Suppliers will also be affected by the plant closings, as Harley Davidson will not need as
many raw materials to produce their products when the plant closes. The idea of
stakeholders being an important part of business decision rings true, whether the news
is positive or negative.
Look at businesses in your area. Select one and list what effect the closing of that
business might have on the area.
Bonus Internet Exercises
Bonus Internet Exercise 4.1: Competitive Advantage
(LO 4.-4)
This chapter discussed the importance of competitive advantage as the fourth and final
element of the external analysis. Perform a Google search of competitive advantages in
the external environment within the financial sector. Review the policies of two different
companies and then answer the following questions.
1. What two companies did you research?
2. What is the main focus of their diversity policy?
3. Any company can create a policy, but how might it go about actually making sure
the policy is implemented?
4. Think of the place where you work or the last place you worked. Did that
company have a diversity policy? Do you think it was effective? Why or why
not?
Bonus Internet Exercise 4.2: Bureau of Economic Analysis, U.S. Department of
Commerce (LO 4-5)
Non-profit organizations are also a type of business. Visit the Bill and Melinda Gates
Foundation website at http://www.gatesfoundation.org and answer the following
questions.
1. What are the key values and mission of the foundation?
2. When was the foundation created?
3. Who are the key officers of the organization?
4. What kinds of grants does the foundation give? Name three and the amounts
awarded.
5. What is an endowment? What is the total endowment of the organization?
IM 4-3
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written consent of McGraw-Hill Education.
Chapter Four: External Analysis
Bonus Internet Exercise 4.2: Bureau of Economic Analysis, U.S. Department of
Commerce (LO 4-5) - Notes
1. What are the key values and mission of the foundation? The Bill & Melinda
2. When was the foundation created? It was created in 1997.
3. Who are the key officers of the organization? Bill, Melissa and William Gates,
4. What kinds of grants does the foundation give? Name three and the
amount awarded. Grant making areas are global development program, global
5. What is an endowment? What is the total endowment of the organization?
Bonus Internet Exercise 4.3: Society: An Entrepreneurial Approach to Analysis
(LO 4-4)
The authors in the text discussed that entrepreneurs must analyze their external
environment to gain a competitive advantage in a particular industry. New small
business owners evaluate the external environment when they conduct research in their
competitive analysis.
One interesting component of the external environment is society. Entrepreneurs could
evaluate the society as a whole and make decisions about various products and
services. The Small Business Administration has a research division that promotes
economic research for small business growth. Search their site at
www.sba.gov.research
1. What did you find most interesting about this resource? How is it different from
the other resources that you might use to evaluate business opportunities as a
result in societal trends?
2. How might this data be useful if you were starting a business?
3. Click on the links tab and review the available resources. Choose one topic and
discuss how it might assist you with your new small business.
4. Discuss how society impacts the trends associated with the external analysis.
Explain your logic.
Critical Thinking Exercises
Critical Thinking Exercise 4.1: Draw Your Competitive Map
(LO 4-1, 4-2, 4-3, 4-4, 4-5)
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written consent of McGraw-Hill Education.
Chapter Four: External Analysis
As we know from the text, in a competitive map there are three different classifications
of businesses size. They are: microenterprises, SME’s and large businesses. How
many of each type do you think exist in the United States?
COMPETITIVE MAP
Competitor
#1
Competitor
#2
Competitor
#3
Competitor
#4
Competitor
#5
Data to Evaluate
Number of Households
Household Income
Average Age in Area
Number of Competitors
Number of Clients
Week Day
Number of Clients
Weekend
Number of Clients per
Hour
Peak Flow of Customer
Average
Charge/Transaction
1. Develop a competitive map specific to the industry type for your business
venture.
2. Complete each column based on the specific criteria for your competitors and the
respective data.
3. Add other criteria that you can evaluate based on your specific industry type.
Critical Thinking Exercise 4.2: The External Environment
(LO 4-1, 4-3, 4-4)
The authors in the text emphasized that entrepreneurs gain a competitive advantage
when they assess their external environment independently. Recall the eight critical
steps discussed in the analysis of the external environment. The last step in the
assessment was to determine your competitive advantage.
You are a motivated entrepreneur and your new business goal is to open an
independent insurance agency. You started your business plan and the next item on
IM 4-5
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written consent of McGraw-Hill Education.
Chapter Four: External Analysis
your agenda is to analyze the external environment. The final step in your external
analysis is to assess how you will gain a competitive advantage in your industry.
Discussion Questions:
1. Perform a google search with the key words “insurance agency” in the location
where you plan to open your new insurance agency.
2. How many insurance agencies did you find?
3. What is the distance between where you want to open your agency versus the
location of the other insurance competitors?
4. Summarize how you will gain a competitive advantage over the competition.
Critical Thinking Exercise 4.2: The External Environment - Notes
Note: Answers will vary based on student research outcomes
1. Students will list the number of competitors in their specific industry
2. Students will list the number of competitors in their specific industry
3. Students will discuss the location of the competitors related to their business
4. Answers will vary. Students are expected to discuss how they will gain a
competitive advantage over other firms in their industry
Follow up discussion for students
1. Will you open your insurance agency?
2. Based on student responses, discuss possible competitive advantages for them
to consider. For example, will they sell a specific insurance product?
Critical Thinking Exercise 4.3: Usual or unique?
(LO 4-6)
Ask students to consider a particular business and differentiate between ordinary
unique business resources and capabilities.
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written consent of McGraw-Hill Education.
Chapter Four: External Analysis
Critical Thinking Exercise 4.4: Reading for Information
(LO 4-4)
One of the important things helpful for understanding the business environment is for
people to read. If they read, they can begin to understand how each of the five areas
can affect their business. As each of the article titles listed have been actual articles in
the news. For each article, brainstorm which kinds of businesses the article might affect
(could be more than one). Then discuss how this knowledge might help a
businessperson.
1. The World Economy: It Has Stopped Shrinking
2. Ann Taylor Tops Profit Estimates
3. U.S. Immigration Battle Heats Up
4. Southwest Airlines to Provide Onboard Wi-Fi
5. The Hard-Sell on Anti-Aging Products
6. Home Sales Rally Stocks
7. Spas Take Off in Asia
8. Renovating Home Depot
9. World’s Most Admired Companies
10.The End of Phones As We Know Them
Bonus Cases
Bonus Case 4.1: Pop’s Pizza Palace: Assessing the Environment
(LO 4-1, 4-2, 4-3, 4-4, 4-5, 4-6)
Imagine that you were just informed that you inherited a business from a distant relative
in another state. Visualize yourself as the beneficiary of this small business. You never
had the opportunity to visit the relative or the state where the business operates; and
the shop that you inherited is small and outdated. It is located is in a small recessed
area next to a Pizza King, the favorite local hang out in the county.
IM 4-7
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written consent of McGraw-Hill Education.
Chapter Four: External Analysis
Since yours is an established business called Pop’s Pizza Palace and you are in the
process of completing your Entrepreneurial course, you want to apply some of the skills
that you learned in the class. You have already examined the eight critical steps of the
external environment and your competitive map includes the following information:
1. There is inadequate parking at your shop so you have no clients.
2. Pizza King owns their own parking lot so they have an abundance of parking
3. Your family pizza shop is located in a rural area two miles away from the main
highway
4. Pizza King is located on the main highway
5. The other shops in your building are either closed or going out of business
6. Pizza King has their own building with a play ground, video games, and internet
access
7. There are only two tables in your small shop
8. Pizza King can seat one hundred clients
9. Your shop’s decor is run down and out of date
10.Pizza King is newly renovated
11. Your shop’s prices are so low there is not enough profit to cover the cost of your
supplies and salaries
12.Pizza King’s prices are outrageous; however, the clients love the atmosphere
13.Your product is better Pizza King’s
14.Your relative and cousin are the only employees
15.Pizza King has fifteen employees
16.You were at the shop for two days and you realized there were only two
customers. Those customers were your relatives
17.You own the pizza shop and the buildings in the shopping center and there are
no mortgages or liens on the building or the propert
18.Your assessment from researching public records research revealed that Pizza
King owes over $500,000 in loans and the owners do not handle their finances in
an efficient manner. As a result, they are delinquent on their mortgage and their
small business loans. You also heard through the grape vine that an employee
over at the Pizza King complained that her check bounced
Discussion Questions:
1. Summarize the state of your new business.
2. Would you consider selling your pizza shop, the land, and the surrounding
business? Why or why not?
3. Discuss whether or not you would offer to purchase the popular Pizza King shop.
Why or why not?
IM 4-8
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written consent of McGraw-Hill Education.
Chapter Four: External Analysis
Bonus Case 4.1: Pop’s Pizza Palace: Assessing the Environment
(LO 4-1, 4-2, 4-3, 4-4, 4-5, 4-6) - Notes
This case works well as a group exercise. Have the students read the eighteen points
about the two pizza businesses. An aid to analyzing the information is to have the
students list the advantages and disadvantages of each business. Then, using that
information, compare the different options – keep Pop’s Pizza Palace open, sell it, close
it, buy Pizza King, merge with Pizza King or just go home and forget the whole thing.
Also consider the effect that having to move to another state would have on your own
personal life.
One of the major challenges facing businesses today is how to create a work
environment that meets the needs of all generations that work within a given business.
We know that Baby Boomers and Generation Xers work differently. For example, Baby
Boomers started their careers with a strong work ethic because of the strong work ethic
they were shown by their parentsiv. However, many Baby Boomers entered the
workforce as dual-career couples, managing busy home and work lives. Generation
Xers saw the toll that “trying to have it all” took on the family and, as a result, they try to
manage a better work/life balance. In a survey by the Families and Work Institutev, 52%
of Generation Xers that put family first, while only 41% of Boomers said that family
comes first.
Discussion Questions
1. Why do you think generation plays such a large role in our work/life balance? Do
you see this at your own workplace?
2. What can companies do to create better work/life balance for employees? Make
a list of 5 things.
3. Do you think the individual is also responsible for his or her own work/life
balance? Explain your answer.
In this chapter, we discussed ways in which the government could help businesses be
successful. Among many, for example, the government implements standards, such as
the UPC code for retail products (this is the bar code required on products for sale in
retail stores) and UCC Code. The UCC code stands for the Uniform Commercial Code
and sets codes that govern companies doing business.
The UCC Code was developed by private organizations, but a version of the code has
been adopted by all states. Some states have made structural changes to the code,
although the code in all 50 states stays relatively the same.
IM 4-9
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written consent of McGraw-Hill Education.
Chapter Four: External Analysis
The UCC code sets standards for banking transactions between companies and
between banks. It also addresses how transactions should take place between B2B
buyers and sellersvi. In a sense, this code is a way to write contracts so that all
businesses are using the same rules and language in their contracts.
The government, in setting up these type of guidelines, makes it easier to do business
because all businesses are playing by the same set of rules. Imagine if there were not
one set of rules for transactions; there would be a greater chance for corruption in
business, affecting the entire economy.
1. What are the other things that government can do to make businesses
successful?
2. How involved do you think the government should be in setting regulations for
businesses? Why?
3. What laws have been implemented recently to reduce corruption?
1. What are the other things that government can do to make businesses
2. How involved do you think the government should be in setting regulations
for businesses? Why? The government should be proactive in safeguarding
3. What laws have been implemented recently to reduce corruption? Many
Endnotes
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written consent of McGraw-Hill Education.
i United Nations Development Program, (2009). HDI Report, Retrieved August 20, 2009:
http://hdr.undp.org/en/reports/
ii Portland Business Journal. (July 16, 2009). Panamanian Airline Orders 21 737’s. Retrieved July 16,
2009 from Portland Business Journal:
http://www.bizjournals.com/portland/stories/2009/07/13/daily38.html
iii Burfer, T.W. (May 18, 2009). Closing of York County Harley Davidson plant would Impact Entire
Community. Retrieved July 16, 2009 from Patriot News:
http://www.pennlive.com/midstate/index.ssf/2009/05/shutting_down_york_harleydavid.html
iv Huff, C. (2005). Families and Work Institute. Retrieved July 15, 2009, from Workforce Management:
http://www.nysscpa.org/cpajournal/2007/207/images/ex1p56.pdf
vHuff, C. (2005) Families and Work Institute. Retrieved July 15,2009
http://www.nysscpa.org/cpajournal/2007/207/images/ex1p56.pdf
vi The American Law Institute. (2005-2009). University of Cornell Law School: UCC Codes. Retrieved August
21, 2009: http://www.law.cornell.edu/ucc/2/2-102.html
