BUS305: Small Business Management

Key Points

• The 5C analysis is considered to be the most useful and common method in analyzing the market environment due to the extensive information it provides to a business.
• A SWOT analysis is another method under the situation analysis that examines the Strengths and Weaknesses of a company (internal environment) as well as the Opportunities and Threats within the market (external environment).
• The Porter model involves scanning the environment for threats from competitors and identifying problems early on to minimize threats imposed by competitors.

Terms

• 5C Analysis - The 5c analysis has allowed businesses to gain more information on the internal, macro-environmental, and micro-environmental factors within the environment. The 5C analysis is considered to be the most useful and common method in analyzing the market environment due to the extensive information it provides to a business.
• Micro environment - Factors or elements in an organization's immediate area of operations that affect its performance and decision making freedom. These factors include competitors, customers, distribution channels, suppliers, and the general public.

Example

When Starbucks first decided to expand, decisions were made on intuition. Once the company began to run into problems, it went back and conducted a detailed SWOT analysis. Its subsequent success arose from decisions based on this analysis.

Introduction

A marketing plan guides businesses on how to communicate the benefits of their products to potential customers.

The situation analysis, the 2nd step in a marketing plan, is critical in establishing a long-term relationship with customers. Managers use it to analyze the internal and external environment of an organization and the firm's own capabilities, customers, and business environment.

As described by the American Marketing Association, a situation analysis is "the systematic collection and study of past and present data to identify trends, forces, and conditions potentially to influence the performance of the business and to choose the appropriate strategies".

The situation analysis consists of several methods of analysis: The 5Cs, SWOT, and Porter's five forces analyses.

5C Analysis

A situation analysis is often referred to as a "3C analysis", but when extended to a 5C analysis it allows businesses to gain more information about the internal, macro, and micro-environmental factors within the environment.

The 5C analysis is considered the most useful, comprehensive, and common way to analyze the market environment.

The 5Cs are:

Company

Analysis of the company allows for evaluation of the company's objectives, strategies, and capabilities which indicate the strength of the business model if there are areas needing improvement, and how an organization will fit with the external environment.

In addition to company goals and objectives, it includes an analysis of the firm's position, performance, and product line.

Competitors

The competitor analysis takes into consideration the competitor's position within the industry and the potential threat it may pose to other businesses. The main purpose of the competitor analysis is for businesses to analyze both the current and potential nature and capabilities of a competitor to be prepared to compete against them.

The competitor analysis looks at the following criteria: identity competitors, assessment of competitors, and future initiatives of competitors. The task of examining the competitor's financial and marketing performance is one of the responsibilities of a market analyst. It includes the strengths and weaknesses, the anticipated response to the company's marketing strategy, an analysis of growth and investment plans as well.

Customers

Customer analysis can be vast and complicated. Some companies conduct a PEST analysis which scans the external macro-environment in which the company operates. The important areas to analyze includes:

• Demographics
• Advertising most suitable for the demographic
• Market size and potential growth
• Customer wants and needs
• Motivation to buy the product
• Distribution channels (online, retail, and wholesale)
• Quantity and frequency of purchase
• Income level of customer

Collaborators

Collaborators are useful for businesses as they allow for an increase in the creation of ideas, as well as an increase in the likelihood of gaining more business opportunities.

Types of collaborators are:

• Agencies
• Suppliers
• Distributors
• Partnerships

Businesses must be able to identify whether the collaborator has the capabilities needed to help run the business as well as an analysis of the level of commitment needed for a collaborator-business relationship.

Climate

To fully understand the business climate, there are usually many different factors that can affect a business, and if researched well it will create a company that can respond well to change. An analysis of the climate is also known as PEST analysis.

The types of climate that firms have to analyze are the:

• Political and regulatory environment
• Economic environment
• Social and cultural environment
• Technological environment
• Legislative environment

SWOT Analysis

A SWOT analysis is another method under the situation analysis that examines the Strengths and Weaknesses of a company (internal environment) as well as the Opportunities and Threats within the market (external environment).

A SWOT analysis looks at both current and future situations, where they analyze their current strengths and weaknesses while looking for future opportunities and threats. The goal is to build on strengths as much as possible while reducing weaknesses. A future threat can be a potential weakness while a future opportunity can be a potential strength.

This analysis helps a company come up with a plan that keeps it prepared for a number of potential scenarios.

Porter's Five Forces Analysis

Porter's five forces analysis is a framework for industry analysis and business strategy development. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Strategy consultants occasionally use the five forces model to scan for and identify competitors, in order to qualitatively evaluate a firm's strategic position. Ultimately, the primary purpose of the model is to help businesses compare and analyze their profitability and position at the line-of-business, rather than an industry group or industry sector level. It considers the following factors:

Threat of new entrants

Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will trend towards zero (perfect competition).

Bargaining power of buyers

The bargaining power of customers is also described as the market of outputs: the ability of customers to put the company under pressure, which also affects the customer's sensitivity to price changes (e.g. firm can implement loyalty program to reduce customers' buying power).

Bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the company can be a source of power over the firm when there are few substitutes. Suppliers may refuse to work with the firm, or charge excessively high prices for unique resources.

Threat of substitute product of services

The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives. An example is substituting a traditional phone with a VoIP phone.

Rivals among existing competitors

For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry

Source: Boundless
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