Analysis Tools for Business Owners
The various tools are separated into those for use in the External Environment (outside your business), Internal Environment (inside your business), and a hybrid, which can be used to analyze both internal and external environments.
Let us start with analyzing the External Environment using a tool called PESTEL. This framework is simply an acronym for 6 different drivers that impact every business in the external environment (i.e. outside of you business). Each driver starts with a letter within PESTEL. They are as follows:
P – Political Drivers
E – Economic Drivers
S – Socio-Cultural Drivers
T – Technological Drivers
E – Environmental Drivers
L – Legal Drivers
The idea behind a PESTEL analysis is for you to use your own general knowledge to assess the impact of each of the six drivers on you and your business. If you don’t read the newspapers or watch the daily news, you may need to get some outside help to guide you through this exercise. Otherwise, you should be able to master the tool simply by asking yourself a bunch of questions in each category.
For example, in examining Political Drivers, you need to ask yourself questions about elections, consumer protection, industry-specific regulations, competitive regulations, inter-country relationships/attitudes, war, terrorism, political trends, governmental leadership, taxes, and government structures. The questions should be based on the impact of these things on your business and your industry. A similar approach should be taken in relation to the other 5 drivers within this framework. Detailed explanations of each Driver can be found on the Internet.
Now let us take a look at industry and competitor analysis tools, some of which fit into both camps. Key Success Factors are attributes or benchmarks that every business in a given industry must achieve in order to survive in that particular industry. Essentially, a KSF is the minimum standard required to allow a business to participate in an industry. It may be something like having a license to trade in the industry, such as a real estate license. It might be a certain skills set or financial structure in a different industry. The SME business owner needs to look at the successful participants in his industry and identify what they have in common. Then he needs to look at his own business and see if he meets the minimum standards or KSF’s for his industry or niche.
Harvard Professor, Michael Porter, developed a framework for analyzing 5 forces within an industry and identifying where the market power lies. Known as Porter’s Five Forces Model, it places your industry at the center of a canvas and surrounds itself with 4 other components: New Entrants, Substitutes, Buyers and Sellers. Porter was concerned about the intensity of rivalry within an industry and the impact of the 4 surrounding elements on participants and on the industry as a whole. The following key questions need to be asked about your industry:
- Is there high or low competitiveness in your industry?
- Are the barriers to new entrants high or low?
- Are the threats of substitution products high or low?
- Is the bargaining power of buyers high or low?
- Is the bargaining power of sellers high or low?
A more refined set of questions to ask yourself about your industry is shown in the Porter’s 5 Forces image below. The challenge for you is to determine where the market power lies in your industry and how it may impact your business.