This section helps you to research and assess the business environment using the most common business analysis tools. In fact, environmental analysis should be continuous and feed all aspects of planning and forecasting. Every company exists in multiple environments. Your business is both affected by, and shapes, those environments.
- The societal environment can be examined using the PEST analysis of the following factors: political, economic, sociocultural, and technological;
- The task environment can be examined using Porter's Five Forces analysis;
- The internal factors affecting the organization; and, then
- A SWOT analysis brings together the most essential external and internal environment factors that are relevant to your business.
The summary of these tools is briefly described below and links to additional resources can be found on this page. While you may not report all the elements of this analysis in your business plan, you will need to summarize the high points of your business strengths / opportunities and weaknesses / threats. Lenders, potential partners, and investors will want to be aware of the downside (worst case scenario) of your new venture.
a. Political Factors
The political arena has an influence upon the regulation of business, and the spending power of consumers and other businesses. Consider the following issues in light of your business proposal:
- How stable is the political environment (home and host)?
- Will government policy influence laws that regulate or tax your business?
- What is the government's position on marketing ethics or consumer protection?
- What is the government's policy on the industry sector?
- Is the region involved in creating trade agreements: EU, NAFTA, BC/Alberta TILMA, others?
b. Economic Factors
Businesses and their marketing departments need to consider the state of the trading economy in the short and long-terms. You will need to look at:
- Interest rates
- The level of inflation
- Employment level per capita
- Housing starts / real estate prices
- Financial institution restraints / constraints on various industry sectors
c. Sociocultural Factors
For your target market and the region in which you will distribute your product, consider the following questions:
- What are attitudes toward foreign products and services?
- Does language impact the diffusion of products into the marketplace?
- How much time do consumers have for leisure?
- What are the roles of men and women within society?
- How are children treated in the society, i.e. impoverished, educated, part of the labour force, etc.
- How long does the population live? Are the older generations wealthy?
- Is the region multi-cultural?
d. Technological Factors
Technology is vital for global competitive advantage, and is a major driver of globalization — falling price and increased efficiency of communication and technology. Consider the following research points:
- Technology drives creation of new industries and challenges the mature industry — how are you poised to take advantage of this fact?
- Technology is one tool for withstanding competitive threats.
- How does the uptake / change in technology affect your relationships and communications with suppliers, customers, networks, communities, media, governments, and stakeholders?
Porter's Five (or Six) Forces Analysis
Porter's Five Forces is a framework for industry analysis and business strategy development (Michael Porter, Harvard Business School, 1979). It works effectively for big or small businesses, and by design is generally used to analyse the micro-environment of your business. Each of the forces can be given a value of a low, medium, strong, or very strong rating and together provide a strategic 'picture' of your business.
1. The bargaining power of customers
- buyer volume
- buyer information availability
- price of total purchase
- buyer price sensitivity
- buyer switching costs relative to firm switching costs
2. The bargaining power of suppliers
- brand recognition
- supplier concentration to firm concentration ratio
- degree of differentiation of inputs
- cost of inputs relative to selling price of the product
- geographical coverage
3. The threat of new entrants
- brand equity
- switching costs
- access to distribution
- learning curve advantages
- government policies / regulations
- capital requirements
- geographical factors
- incumbents' resistance
4. The threat of substitute products
- buyer propensity to substitute
- relative price performance of substitutes
- buyer switching costs
- perceived level of product differentiation
5. Intensity of competitive rivalry
- number of competitors
- rate of industry growth
- exit barriers
- diversity of competitors
- informational complexity and asymmetry
- brand equity
- fixed cost allocation per value added
- level of advertising expense
6. The relative power of other stakeholders is a sixth force that can be particularly relevant to obtaining resources on Crown Land, for instance, and may be relevant to your business case.
Internal Environment Analysis
People, with their knowledge, know-how, and managerial skills, are seen to be the new competitive advantage. Is your business structured in a manner that harnesses employee power, or drives it away?
1. How does your organization structure compare to your competitors - especially the ones that are known for their best practices in human resources management?
2. What is your organizational culture? Does it set you apart in the industry and lead to a competitive advantage?
3. What are your organizational resources in the following areas (do a size-up or examine the strengths / weaknesses):
- Research and development
- Operations and logistics
- Human resource management (recruitment / retention)
- Information systems
- Strengths: attributes of the organization that positively impact its ability to achieve business objectives.
- Weaknesses: attributes of the organization that negatively impact its ability to achieve business objectives.
- Opportunities: external conditions that potentially assist the business in achieving the objective.
- Threats: external conditions that potentially threaten the success, in the present or future, of a business.
It is important to note that opportunities and threats are often beyond the control of a business, and therefore should prompt the business to adapt, evolve, and innovate to either take advantage of the opportunity, or to mitigate the damage of the threat. Here is a chart that you can use to formulate your analysis:
(to business achieving
(to business achieving its objective)
(attributes of organization)
(attributes of the environment)
Examples of SWOTs
Strengths or Weaknesses
- resources / technology prowess
- customer service / loyalty
- staff productivity
- corporate culture
- management expertise
- delivery time
- price point
- relationships with customers / suppliers
- brand strength
- multi-lingual capabilities
- patents, licenses, permits
- distribution networks
Opportunities or Threats
- changes in government policy
- tax increases / decreases
- currency fluctuations
- interest rates
- industry mergers or joint ventures
- change in customer demographics
- strategic alliances
- expectations of shareholders / public
- technology advances
- geographic markets
- changing customer tastes