Enterprise Creation & Development

Lecture 3:

Scanning the

Business Environment

Mr Khoo Chen En

(6460 8016; kce3@np.edu.sg)

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Lecture Objectives

• Understanding environmental influences

• regulatory environments

• industry environment

• Industry trends

• Competitive advantage

• Market research

• Financial feasibility studies

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Recommended Reading

• Donald F. Kuratko ENTREPRENEURSHIP –THEORY, PROCESS AND PRACTICE, 9th Edition, CENGAGE, Chp 6 & 10

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Why is understanding the environment important?

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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.

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5

PESTEL: Effect on Industry & Companies

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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?

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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

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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

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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)

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5

Industry Verticals & Horizontals

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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

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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

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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

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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?

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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

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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

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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

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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.

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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

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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.

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Marketing Research Procedures

1) Define the Research Purpose & Objectives

2) Gather secondary data

3) Gather primary data

4) Interpret and report information

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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?

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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.

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Marketing Research Procedures

3) Gather primary data

Observational methods:

Economical; avoid potential bias from respondent; but limited to descriptive

studies

Questioningmethods:

Surveys, experimentation

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Marketing Research Procedures

Surveys

Mail

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

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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.

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Marketing Research Questions

Sales Distribution

Markets Advertising

Products

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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?

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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?

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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?

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Marketing Research Questions - Advertising

• Is your advertising reaching the right people?

• Is your advertising more effective in comparison to that of your competitors?

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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?

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Why companies are reluctant to conduct Marketing Research?

Cost Complexity

Strategic Decisions

Irrelevancy

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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

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Financial Feasibility Studies

Cash inflow

Cash outflow

NETCASH FLOW

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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

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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

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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

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Decision Rules

No GoBack to Square 1

Idea Generation

Testing the Idea

Test IndustryPorter’s 5 Forces

Financial Feasibility

GoProceed Next Step

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Recall Lecture Objectives

• Understanding environmental influences

• regulatory environments

• industry environment

• Industry trends

• Competitive advantage

• Market research

• Financial feasibility studies

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