Let us talk about three important things when trying to understand a business:
- General Business Environment
- Industry Specific Environment
- Competitor Environment
In the general business environment, we are mainly concerned with the external environment. The external environment consists of the following:
Demographic: This is mainly concerning the population size, age structure, geographic distribution, ethnic mix, and income distribution.
Economic: This is mainly concerning the macro-economic environment. What is the impact of inflation, interest rates, trade and budget deficits or surpluses, personal savings rate, business savings rate, gross domestic product etc?
Socio-cultural: This mainly concerns available work force, work force’s expectations on the quality of work life, environmental considerations, work and career balance, attitudes towards products and services, role of women etc.
Global: The global environment mainly concerns impact of macro economic events at the international level. Events such as low labor costs in China, rise of Chinese RMB, Outsourcing to India, default of the debt by Argentina etc. can have a local impact on one’s business. Hence one should pay a close attention to the global events as the world has continued to shrink.
Technological: A society’s use of technology predisposes it to certain paradigms. With the rise if internet, BlackBerrys, iPhones and iPods, society expectations have changed drastically with respect to access to information, product portability, battery life longevity etc. When introducing product in those segments, one must pay close attention to the technological advancement of the society.
Political/Legal: A political or legal landscape in the market place can be most daunting and complex. Hence it is important to understand it. Antitrust laws, taxation laws, labor laws etc. can be quite difficult to follow especially in the developing countries.
Industry environment analysis requires us to pay close attention to Michael Porter’s five forces competition model. Those five forces are listed below:
Threat of Substitute Products: Can the product we sell be substituted with other products? Are those products cheaper? Are they better quality? How will they impact our sales? Those are the questions one would need to answer in attempting to gain an insight into the industry specific environment.
Rivalry among Competing Firms: Questions such as - How intense is the rivalry among the competition? How will the competition respond to one’s tactics? , will need to be answered.
Threat of New Entrants: If the market is growing fast and the barrier to entry is low then that is not a good thing for business. AOL has lost most of its advantage although it was the first mover in the industry.
Bargaining Power of Suppliers: Suppliers can make a mess of small companies while they are trying to grow. Hence it is important to have options. Never depend on a single supplier no matter how attractive it is.
Bargaining Power of Buyers: What will it take to keep the customers loyal to your company? Can they hop and skip to a competition or do you have a better mouse trap?
I believe that the competitor analysis should be done by using the five forces model. It gives a good insight into how the competition stacks up against you in all the five categories.
