Entrepreneurship

BM019-3-3

Analyzing the External

Environment
Anita.Apiit.
 LEARNING OUTCOMES

• To learn to apply the SWOT analysis as

assessment tool for entrepreneurs.
• To review the PEST factors and its application to
entrepreneurs
• To study the competitor analysis.
• To examine the industry environement using
PORTERS five forces

Module Code and Module Title Title of Slides

 The Entrepreneur and the
External Environment
• The business world is unpredictable and
volatile.
• By making an assessment of the
opportunities and threats, an entrepreneur
will reduce the risks and chances of failing
in his/her new venture.

Module Code and Module Title Title of Slides

 S.W.O.T. Analysis

Factors Internal
to Organization

Strengths Weakness

Opportunities Threats
Factors External
to Organization

Module Code and Module Title Title of Slides

 SWOT: Description

• A SWOT analysis generates information that

is helpful in matching an organization or
group’s goals, programs, and capacities to
the social environment in which it operates.
• Factors internal to the firm usually can be
classified as strengths (S) or weaknesses
(W), and those external to the firm can be
classified as opportunities (O) or threats (T).
• It is an instrument within strategic planning.
• When combined with dialogue it is a
participatory process
Module Code and Module Title Title of Slides
 SWOT: Internal Factors

• Strengths
Positive tangible and intangible attributes,
internal to an organization. They are within
the organization’s control.
• Weakness
Factors that are within an organization’s
control that detract from its ability to attain the
core goal. Which areas might the organization
improve?

Module Code and Module Title Title of Slides

 SWOT: External Factors
• Opportunities
– External attractive factors that represent the reason for
an organization to exist and develop. What opportunities
exist in the environment, which will propel the
organization?
– Identify them by their “time frames”
• Threats
– External factors, beyond an organization’s control, which
could place the organization mission or operation at risk.
The organization may benefit by having contingency
plans to address them if they should occur.
– Classify them by their “seriousness” and “probability of
occurrence”.
Back to Design
Module Code and Module Title Title of Slides
 Strengths

• What do you do particularly well?

• What do you do that is unique in the
“marketplace?”
• What do your customers/clients/patrons
ask for you to do over and over again?
• What do you have the right
tools/resources to accomplish?

Module Code and Module Title Title of Slides

 Weaknesses

• What do you not feel as comfortable

doing?
• What needed resources, staff, or skills do
you lack?

Module Code and Module Title Title of Slides

 Opportunities

• Are there new situations coming down the road

that you can take advantage of (new programs
being offered, new faculty joining the
department, new tools available to you)?
• Are there gaps in the “market” that you can fill?
• Are there partnerships that might be fruitful?

Module Code and Module Title Title of Slides

 Threats

• Who is your competition and what do they

offer that you can’t do as well or at all?
• Are there “environmental” changes or
situations that could cause problems for
you and your programs?
• What other roadblocks are being thrown in
your path?

Module Code and Module Title Title of Slides

 Create a Plan of Action

• What steps can you take to:

– Capitalize on your strengths
– Overcome or minimize your weaknesses
– Take advantage of some new opportunities
– Respond to the threats
• Set goals and objectives, like with any
other plan

Module Code and Module Title Title of Slides

 • The general who wins a battle makes many
calculations in his temple ere the battle is fought. The
general who loses a battle makes but few calculations
beforehand. Thus do many calculations lead to
victory, and few calculations to defeat: how much
more no calculation at all! It is by attention to this
point that I can foresee who is likely to w in or lose.

-Sun Tzu, the Art of War

Module Code and Module Title Title of Slides

 Components of the External
Environment

Demographic Economic

Industry
Environment
Political/
Global Legal

Technological Sociocultural

Module Code and Module Title Title of Slides

 The General Environment
• Demographic: Population size, age, geographic
clustering, ethnicity, income
• Economic: Inflation, unemployment, GDP, CRB,
direction of the economy
• Political/Legal: Anti-trust, tax, labor, & industry
regulation/deregulation
• Sociocultural: Workforce, preferences, morals, values
& social attitudes
• Technological: Speed of product innovation,
application of knowledge

Module Code and Module Title Title of Slides

 The Legal & Political Environment
-any government action or regulation.

Examples of regulations:

 Taxation
 Privatisation
 Deregulation
 Patent and trademark laws
 Consumer Legislation
 Labour Market Legislation

Module Code and Module Title Title of Slides


Employers must pay all workers equal
pay for equal work
Employers must not discriminate
against anyone for a job because of
their sex
A consumer can sue a business if it
sells them a product that is of poor
quality, is not as described and does
not fit the purpose for which it is being
sold.
Module Code and Module Title
Title of Slides
Employers must provide healthy and
safe working conditions and
employees must act in a safe and
responsible way.
Employers must not discriminate
against anyone for a job because of
their race
An agreement between the employer
and employee. It includes conditions
such as rates of pay, hours of work,
holidays, pension contributions and
the amount of notice that must be
given if the worker wants to leave or
the employer wants to make the
worker redundant. Employees taken
on for a month or more must be given
a written statement of the conditions
within two months of the date the job
starts.
Module Code and Module Title Title of Slides
Module Code and Module Title Title of Slides
 “Oil prices at the current levels will not dampen the demand for cars in Malaysia
but if they continue to rise, demand for bigger engine cars would be affected.”

• http://biz.thestar.com.my/news/story.asp?file=/2008/1/14/business/
19975167&sec=business

Module Code and Module Title Title of Slides

 SOCIOCULTURAL EFFECTS
-THE HEALTH CONCERN

Module Code and Module Title Title of Slides

Module Code and Module Title Title of Slides
 THE ORGANIC OPTION

Module Code and Module Title Title of Slides

 THE EFFECTS OF HIGHER
EDUCATION
Greater access
to education

Get good jobs

and earn
higher income

Higher
purchasing
power

Consumption shifts
towards branded,
high quality or
luxuries
Module Code and Module Title Title of Slides
 An Industry
A group of firms producing
products that are close
substitutes for each other or that
supply or support each other
 Porter’s Five Forces Model of Competition

-An approach or framework to categorize, examine

and evaluate information about an organizations
specific industry environment

-It looks at the profit potential of companies in

specific industries through factors that could
represent opportunities' or threats.

Module Code and Module Title Title of Slides

 The Industry
Environment
• Threat of New Entrants
• Power of Suppliers
• Power of Buyers
• Availability of Product Substitutes
• Intensity of Rivalry Among
Competitors

Module Code and Module Title Title of Slides

 Porter’s Five Forces Model of Competition
Threat of
Threat
Newof New
Entrants
Entrants

How easy it is for a new firm to

enter the market.

Module Code and Module Title Title of Slides

 Porter’s Five Forces Model of Competition
Threat of
Threat
Newof New
Entrants
Entrants

How easy it is for another firm to

produce what you produce

Threat of
Substitute
Products

Module Code and Module Title Title of Slides

 Porter’s Five Forces Model of Competition
Threat of
Threat
Newof New
Entrants
Entrants

How easy it is for suppliers to

Bargaining increase prices Bargaining
Power of Power of
Suppliers How easy it is for buyers to Buyers
drive prices down.

Threat of
Substitute
Products

Module Code and Module Title Title of Slides

 Porter’s Five Forces Model of Competition
Threat of
Threat
Newof New
Entrants
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms in Power of
Suppliers Industry Buyers

How intense is the rivalry

Threat of
Substitute
Products

Module Code and Module Title Title of Slides

 Threat of New Entrants

* Economies of Scale

* Product Differentiation
Barriers to
Entry
* Capital Requirements

* Switching Costs

* Access to Distribution Channels

* Cost Disadvantages Independent of

Scale

* Government Policy

Module Code and Module Title Title of Slides

 Porter’s Five Forces Model of Competition
Threat of
Threat
Newof New
Entrants
Entrants

Bargaining
Power of
Suppliers

Module Code and Module Title Title of Slides

 Bargaining Power of
Suppliers

Suppliers exert
power in the
industry by:
* Threatening to raise
prices or to reduce
quality
Powerful suppliers
can squeeze
industry
profitability if firms
are unable to
recover cost
increases

Module Code and Module Title Title of Slides

 Bargaining Power of
Suppliers Suppliers are likely to be powerful if:
* Supplier industry is dominated by a few
firms
Suppliers exert
power in the * Suppliers’ products have few substitutes
industry by:
* Threatening to raise Buyer is not an important customer to
prices or to reduce *
supplier
quality
Powerful suppliers * Suppliers’ product is an important input to
can squeeze buyers’ product
industry
profitability if firms * Suppliers’ products are differentiated
are unable to
* Suppliers’ products have high switching
recover cost costs
increases
* Supplier poses credible threat of forward
integration
Module Code and Module Title Title of Slides
 Bargaining Power of Buyers
Buyer groups are likely to be powerful if:

* Buyers are concentrated or purchases are

large relative to seller’s sales
Buyers compete with
* Purchase accounts for a significant fraction the supplying industry
of supplier’s sales by:

* Products are undifferentiated

* Bargaining down prices
* Buyers face few switching costs
* Forcing higher quality
* Buyers’ industry earns low profits
* Playing firms off
* Buyer presents a credible threat of each
of
backward integration other

* Product unimportant to quality

* Buyer has full information

Module Code and Module Title Title of Slides

 Threat of Substitute
Products
Keys to evaluate substitute products:

Products with * Products with improving

similar function price/performance tradeoffs relative to
limit the prices present industry products
firms can
charge

For Example:

Electronic security systems in place of

security guards

Fax machines in place of overnight mail

delivery

Module Code and Module Title Title of Slides

 Porter’s Five Forces Model of Competition
Threat of
Threat
Newof New
Entrants
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms in Power of
Suppliers Industry Buyers

Threat of
Substitute
Products

Module Code and Module Title Title of Slides

 Rivalry among existing firms in an Industry

A competitive move by one firm will affect another in the industry and
could cause retaliation or counter efforts. Intense rivalry can be
caused by several factors:

-Number of competitors
-Diverse competitors
-Rate of industry growth
-High fixed cost
-Differentiation or switching costs
Barriers to exit are high

Module Code and Module Title Title of Slides

 Competitor
Analysis
The follow up to Industry Analysis is effective
analysis of a firm’s Competitors

Industry
Environment

Competitive
Environment

Module Code and Module Title Title of Slides

 Competitor
Analysis
Future
What Drives the competitor?
Objectives
How do our goals
compare to our
competitors’ goals?

What is the attitude

toward risk?
Where will emphasis be
placed in the future?

Module Code and Module Title Title of Slides

 Competitor
Analysis
Future What is the competitor doing?
Objectives
How do our goals What can the competitor do?
compare to our
Where Current
will emphasis
competitors’ goals? be
Strategy
placed in the future?
What is How
the attitude
are we currently
toward risk?
competing?
Does this strategy
support changes in
the competitive
structure?

Module Code and Module Title Title of Slides

 Competitor
Analysis
Future What does the competitor believe about
itself and the industry?
Objectives
How do our goals
compare to our
Where Current
will emphasis
competitors’ goals? be
placed in the future?
HowStrategy
are we currently
What is competing?
the attitude
toward risk? Assumptions
Does thisDostrategy
we assume the
supportfuture
changes
willin
be volatile?
the competition
What assumptions do
structure?
our competitors hold
about the industry and
themselves?
Are we assuming
stable competitive
conditions?

Module Code and Module Title Title of Slides

 Competitor
Analysis
Future What are the competitor’s
capabilities?
Objectives
How do our goals
compare to our
Where Current
will emphasis
competitors’ goals? be
placed in the future?
HowStrategy
are we currently
What is competing?
the attitude
toward risk? Assumptions
Does this
Do strategy
we assume the
supportfuture
changes in volatile?
will be
the competition
What assumptions do
structure? Capabilities
our competitors hold
about the industry and
What are my
themselves?
Are we operating
competitors’ strengths
under a status quo?
and weaknesses?
How do our capabilities
compare to our
Module Code and Module Title competitors?
Title of Slides
 Competitor
Analysis
Future Response
Objectives
How do our goals What will our
compare to our competitors do in the
Where Current
will emphasis
competitors’ goals? be future?
placed in the future?
HowStrategy
are we currently
What is competing?
the attitude How will this change
toward risk? Assumptions our relationship with
Does this
Do strategy
we assume the our competition?
supportfuture
changes in volatile?
will be
the competition Where do we have a
What assumptions do competitive
structure? Capabilitie
our competitors hold advantage?
about the industry
s and
What are my
themselves?
Are we operating
competitors’ strengths
under a status quo?
and weaknesses?
How do our capabilities
compare to our
Module Code and Module Title competitors?
Title of Slides
 REVIEW QUESTIONS

Module Code and Module Title Title of Slides

 Short Tut Question

Martin Johnson is deciding whether to

switch career and become a vege
farmer-he’s always loved the
countryside, and wants to switch to a
career where he’s his own boss. Use
the 5 forces analysis on this situation
and derive a conclusion.

Module Code and Module Title Title of Slides

 TUTORIAL ACTIVITY

• Select an industry business with your partner

and identify the industry it would be in.
• Do an industry scan using Porter’s 5 forces
analysis using the knowledge that you have.
You may also conduct a mini research on the
industry.
• Present your analysis on Tuesday.
(Examples of industries: Ice-cream, cola drinks, chewing gum, hand
phone, cereal ,fast food outlet, vegetarian restaurant, chocolate,
men’s body wash and shampoo, fitness center, hotel , video game
etc)

Module Code and Module Title Title of Slides