A part of the business planning process requires you to consider the outside environment.
Typically referred to as External or Environmental Analysis, it essentially consists of researching and considering the current state of affairs plus any foreseeable threats and opportunities likely to happen in the near future.
However, when it comes to actually doing this, most small business owners don’t know where to start.
This guide is intended to act as a “short” checklist of areas to consider, by applying two famous Business Model for your headings.
External consideration can be broadly split into two areas, the Micro Environment and the Macro Environment.
The Micro Environment are outside factors which directly impact your operations, decision making, and performance. By loosely applying Porter’s Five Forces, you can consider these under the following headings:
Customers – Are you reliant on one big customer? Are customer’s loyal within your industry? Who do they use now? Why do they use them? Try to divide your customers or target customers into categories; whether that be by Industry, Market Sectors, Age, etc. (more on that in a future blog post … )
Suppliers – Are you reliant on one main supplier? What’s the financial health of your key suppliers? Do you have alternatives? Is there a likely rise or dearth in the number of supplier options? Are there costs for switching suppliers? Are costs / quality increasing or decreasing?
Competitors – Are there a lot of competitors? Is there much difference between the services offered? Are your competitors big or powerful? What is their service offering? What are their prices? How have they changed over the last year? What are they promoting on their websites and newsletters?
Threat of New Entrants – businesses who operate in a profitable market, with few competitors, and an easy route of access (i.e. small start-up costs) will be particularly susceptible to this.
Threat of Substitutes – What other services or products can customers buy which would bypass the need for your service?
The Macro Environment are influences which impact the whole economy for which you operate.
Here we can use a business model called PESTEL Analysis. This is an acronym for Political, Economic, Social, Technological, Environmental, and Legal.
- Political – There shouldn’t be too much focus for many of you here but its about considering how governments intervention such as tax policy, trade restrictions, or tariffs may affect you.
- Economic – Are we in a period of growth or recession. And what’s the future outlook. How are interest rates, exchange rates, and inflation rates tied into your business or borrowings? These can be significant in industries that rely on imports & exports (even if you don’t import yourself, your competitors might). Risk of recession is always the big one though. Markets are about confidence. What’s the current climate of optimism among your clients? How does this affect you?
- Social – What are the cultural trends within your industry? Is demand for your type of service increasing? Is the industry growing? Consumer trends and opinions do change. How does the latest sway to Veganism affect you? If it does, what a great opportunity!
- Technological – IT, Internet, Automation. The major disrupters and substitutes typically come from technological advances. Think about the rise in Social Media. Who saw that coming? Blackberry didn’t! What about Vaping. This has transformed the way people smoke here in the UK, but has it affected every country? What technological advances are on the horizon in your industry? Is it a threat or an opportunity?
- Environmental – this actually refers more to the weather and climate of a location and can affect industries such as farming, tourism, insurance.
- Legal – the factors probably of most concern to you are employment law and health & safety. Failure to comply with either Environmental and Legal Law can be a very costly and time consuming event, damaging to your brand reputation, but perhaps most surprisingly, the biggest impact on regulatory failure is on employee moral (apparently!). Nonetheless, this is also probably the easiest pillar to quickly research so there’s no excuse!
The key to External Analysis is simply considering the environment and the potential of upcoming changes. It’s not about formulating a plan. Your strategy is developed at a later stage.
