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Enterprise Creation & Development
Lecture 3:
Scanning the
Business Environment
Mr Khoo Chen En
(6460 8016; [email protected])
ECD Oct 14/Lecture 3/kce 1
Lecture Objectives
• Understanding environmental influences
• regulatory environments
• industry environment
• Industry trends
• Competitive advantage
• Market research
• Financial feasibility studies
2ECD Oct 14/Lecture 3/kce
Recommended Reading
• Donald F. Kuratko ENTREPRENEURSHIP –THEORY, PROCESS AND PRACTICE, 9th Edition, CENGAGE, Chp 6 & 10
3ECD Oct 14/Lecture 3/kce
Why is understanding the environment important?
4ECD Oct 14/Lecture 3/kce
Environment Scanning
• Gathering and use of information about events, trends and relationships of an organisation’s external environment,
• to assist management in planning the organisation’s future course of action.
5ECD Oct 14/Lecture 3/kce
5
PESTEL: Effect on Industry & Companies
ECD Oct 14/Lecture 3/kce
Understanding Asia-Pacific Regulatory Environments
• Why do some entrepreneurs succeed while others fail in international competition?
• Why does Singapore have the most business–friendly environment for entrepreneurs?
• What makes Australia a global leader in wine exports?
• How did New Zealand make it to global ranks in the creative industries?
• Why is it location , location & location?
6ECD Oct 14/Lecture 3/kce
Regulations an Asia-Pacific entrepreneur needs to know
• Business formation
• Dealing with licences and permits
• Labour regulations
• Property laws
• Getting credit
• Investor protection
• Paying taxes
• International trading regulations
• Enforcing contracts
• Political instability and corruption
7ECD Oct 14/Lecture 3/kce
Singapore still the easiest place to do business
• Ranked above Hong Kong and New Zealand.
• Ranked high in terms of ease of doing business, employing workers etc.
• For more details, go to
• http://www.doingbusiness.org/rankings
8ECD Oct 14/Lecture 3/kce
Understanding the Industry Environment
• What is the structure of your industry and how is it likely to evolve over time?
• What is the company’s relative position in the industry?
• Evaluating the industry environment is the second critical step (after the regulatory environment)
9ECD Oct 14/Lecture 3/kce
10ECD Oct 14/Lecture 3/kce
5
Industry Verticals & Horizontals
ECD Oct 14/Lecture 3/kce
Understanding the Industry Environment
Source: Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, 1985; 1998: 6. Copyright © 1985, 1998 by Michael E. Porter.
Porter’s Five Industry Forces Model
11ECD Oct 14/Lecture 3/kce
Understanding Industry Trends
Carrying Capacity
Degree of saturation
UncertaintyDegree of ambiguity in
the industry
ComplexityDiversity of
inputs/outputs facing the firm
Industry Life Cycle
Birth, Growth-differentiation,
shakeout, maturity
Industry Knowledge
Familiar vs New environment
Framework for Understanding Industries
12ECD Oct 14/Lecture 3/kce
Common Characteristics of New & Emerging Industries
• What product configuration is the best?
• Which production technology will be the most efficient? etc
Technological Uncertainty
• Different approaches to product positioning, advertising, pricing, product configurations & production technologies will be formulated.
Strategic Uncertainty
• Getting the buyer to make the initial purchase of the new product or service.
• Substitution
First-time buyers
• Pressure to develop customers or produce products to meet demand is great.
• Hence, little considerations given to long run results.
Short time horizons
13ECD Oct 14/Lecture 3/kce
Competitive Advantage
• A competitive advantage exists when a firm offers a product or service that customers perceive to be superior to those of its competitors.
• Start ups must have its own competitive advantage that differentiate it from others in order to survive in the already established market.
What are iPad’s competitive advantages?
14ECD Oct 14/Lecture 3/kce
15ECD Oct 14/Lecture 3/kce
Competitive Advantage
Areas where you could have a competitive advantage:
Strong research and development capabilities
Access to intellectual property – trade names, trade secrets, patents, copyrights, etc.
Exclusive re-selling or distribution rights
Ownership of capital equipment (specialist machinery, exploration equipment, delivery fleets, surplus capacity)
Superior product and/or customer support
Low cost (and perhaps high volume) production
16ECD Oct 14/Lecture 3/kce
Competitive AdvantageOther areas where you could have a competitive advantage:
Other economies of scale
Superior databases, management information, and data processing ability.
Marketing skills related to specific customer types (e.g defense), market segments (teenagers), channels (retail, telesales), etc
Access to working capital
Other excellence in management, operations, administration, etc
Related Concept of Barriers to Entry17ECD Oct 14/Lecture 3/kce
Barriers to Entry
Proprietary Technology
Access to distribution channels
Access to raw materials & other inputs
Cost advantages
through experience
Ability to better manage
risk
Elements restricting
an emerging industry
18ECD Oct 14/Lecture 3/kce
Difficulties faced by New Ventures
Inability to obtain raw materials & components
Period of rapid escalation of raw materials
prices
Absence of infrastructure
Perceived likelihood of obsolescence
Erratic product quality
Image & credibility with the financial community
19ECD Oct 14/Lecture 3/kce
Marketing Research
• Marketing research involves the gathering of information about a particular market, followed by analysis of that information.
• For the entrepreneur, a market is a group of consumers (potential customers) who have purchasing power and unsatisfied needs.
20ECD Oct 14/Lecture 3/kce
Half empty of half-filled?
Two shoe salesmen find themselves in a rustic
backward part of Africa. The first salesman wires back to his head office:
“There is no prospect of sales.
Africans do not wear shoes!”
The other salesman wires:
“No one wears shoes here.
We can dominate the market.
Send all possible stock!”Attributed to Akio Morita, Sony co–founder
21ECD Oct 14/Lecture 3/kce
Marketing is civilised warfare
• Marketing is as critical to new businesses as it is for established ones.
• A new venture will survive only if a market exists for its product or service.
• Marketing research is important as the information gathered will allow the entrepreneur to develop a niche that will differentiate the business from the competition.
22ECD Oct 14/Lecture 3/kce
Marketing Research Procedures
1) Define the Research Purpose & Objectives
2) Gather secondary data
3) Gather primary data
4) Interpret and report information
23ECD Oct 14/Lecture 3/kce
Marketing Research Procedures
1) Define the Research Purpose & Objectives
•Define precisely the informational requirements of the decision to be made.
•E.g. Where can potential customers go to purchase the good /service?
•Why do they choose to go there?
•What is the size of the market?
•How does the business compare with competitors?
24ECD Oct 14/Lecture 3/kce
Marketing Research Procedures
2) Gather secondary data
•Information that has been gathered by others. E.g. periodicals, trade association literature, government publications, Internet
•Can be internal or external
•Problems:
•Outdated and hence less useful
•Units of measure in the secondary data may not fit the current problem
•Some sources of data are less valid than others.
25ECD Oct 14/Lecture 3/kce
Marketing Research Procedures
3) Gather primary data
Observational methods:
Economical; avoid potential bias from respondent; but limited to descriptive
studies
Questioningmethods:
Surveys, experimentation
26ECD Oct 14/Lecture 3/kce
Marketing Research Procedures
Surveys
Used when respondents are widely dispersed
Low response
rates
Telephone
Higher response
rates
Personal interviews
Moreexpensive
than mail & tel surveys
Individuals may not
grant personal
interviews
27ECD Oct 14/Lecture 3/kce
Marketing Research Procedures
4) Interpret & Report Information
•Data must be organized into meaningful information.
•Methods of summarising & simplifying information include charts, tables etc.
•Statistics like mean, mode and median are also helpful.
28ECD Oct 14/Lecture 3/kce
Marketing Research Questions
Sales Distribution
Markets Advertising
Products
29ECD Oct 14/Lecture 3/kce
Marketing Research Questions - Sales
• Do you know all your competitors’ sales performance by type of product and territory?
• Do you know which accounts are profitable & how to recognise a potentially profitable one?
• Are your sales staff deployed effectively?
30ECD Oct 14/Lecture 3/kce
Marketing Research Questions - Distribution
• Are your distributors saying the right things about your products & services?
• If you want to introduce a new product or new line of products, do you know your distributors’ attitudes towards it?
31ECD Oct 14/Lecture 3/kce
Marketing Research Questions - Markets
• Do you know the differences in buying habit & tastes by territory/ product?
• Do you have information on brand loyalty or repeat purchasing?
32ECD Oct 14/Lecture 3/kce
Marketing Research Questions - Advertising
• Is your advertising reaching the right people?
• Is your advertising more effective in comparison to that of your competitors?
33ECD Oct 14/Lecture 3/kce
Marketing Research Questions - Products
• Can you test the effect on sales of new or changed packaging?
• Can you test the market acceptability of new products and product changes?
34ECD Oct 14/Lecture 3/kce
Why companies are reluctant to conduct Marketing Research?
Cost Complexity
Strategic Decisions
Irrelevancy
35ECD Oct 14/Lecture 3/kce
Financial Feasibility Studies
• Start-up Cost (Original investment or seed money)
• One time
• Revenue and Expenses Projection
• Sales (Revenue)
• Operating and non-operating sales
• Don’t expect large crowds on first few days/months of operation
• Capital outlays
• Explore lease or hire purchase options
• Operating cost
• Include can see and cannot see items
36ECD Oct 14/Lecture 3/kce
Financial Feasibility Studies
Cash inflow
Cash outflow
NETCASH FLOW
37ECD Oct 14/Lecture 3/kce
Financial Feasibility StudiesMonths Jan Feb Mar
Beginning Bal $100 X Z
Cash Inflow
Cash from Sales $300 $180 $500
Cash Outflow
Electricity $20 $10 $25
Salaries $200 $200 $200
Miscellaneous $100 $60 $120
Net Bal Cash Flow $ 80 Y A
38ECD Oct 14/Lecture 3/kce
Financial Feasibility StudiesMonths Jan Feb Mar
Beginning Bal $100 $80 $(10)
Cash Inflow
Cash from Sales $300 $180 $500
Cash Outflow
Electricity $20 $10 $25
Salaries $200 $200 $200
Miscellaneous $100 $60 $120
Net Bal Cash Flow $80 $(10) $145
39ECD Oct 14/Lecture 3/kce
Financial Feasibility Studies
• Return On Investment
•“To invest” means to put your money intosomething from which you expect to gainfinancial profit in return.
•For every cent that I spent, what is myreturn?
•Owners’ Equity – Money invested into thebusiness.
Net Profit before Tax
Owners’ Equity
40ECD Oct 14/Lecture 3/kce
Decision Rules
No GoBack to Square 1
Idea Generation
Testing the Idea
Test IndustryPorter’s 5 Forces
Financial Feasibility
GoProceed Next Step
41ECD Oct 14/Lecture 3/kce
Recall Lecture Objectives
• Understanding environmental influences
• regulatory environments
• industry environment
• Industry trends
• Competitive advantage
• Market research
• Financial feasibility studies
42ECD Oct 14/Lecture 3/kce