In a perfect world, you could just work out the business you wanted to create, identify the amount of productivity required to make a good profit, and set things in motion. In this world, however, there’s quite a bit more than that involved, and most of the problems that remain at this point in the project are going to be coming from outside the company itself. An external analysis (also known as an environmental analysis) considers all of the factors beyond your immediate control; some of these may be positive, many of them will be negative, and some are just the nature of your business. But as with all of the other sections that make up the business plan, the key here is explaining all of the different people and things that have the potential to impact your new company – and how you plan to deal with them…
If you completed a Five Forces analysis during the research phase this would be an excellent time to pull out those issues and the answers you came up with. First of all, how will you manage the competition from other firms that do what you do? If you’re introducing a completely new product or service there may not be any direct competition when you begin operations, but you can generally assume that there will be some as soon as you have your first profitable quarter. How do you expect to gain market share over the companies already in your field, and how will you hold onto that share in the face of direct competition? Even if your potential investors didn’t want to know about that (and they probably will) you still need to work that out before you begin operations…
You should also have some idea of how you intend to manage your interactions with vendors and suppliers. If you are unusually fortunate all of your interactions may be fair and friendly, but it’s much more likely that your vendors will have some amount of influence on you, depending on how much you need each one of them, and how many possible sources you have for each need. It’s also possible (although much less common) that you will be one of a very small number of customers some of your suppliers can count on, and that you will be able to exert leverage on them. Of course, similar comments apply to your relationships with your own customers; your external analysis should map out how you plan to manage these issues – or eliminate them where possible…
Then you should consider how new forces could your business model from outside your immediate environment. The obvious one is new competitors, and here again, even if no investor ever asks you to account for how you intend to deal with them, you need to work out in advance what will happen if somebody opens a new business in your industry (or geographic area) and starts competing with you. Almost as important, however, is the question of what you intend to do if some new technology, process or legislation makes it possible for someone to create a substitute for your product or service – something completely different that can be used for whatever your customers expect to gain by doing business with you. If that happens, how are you going to deal with it?
You should round out your external analysis by covering anything else external to your company, such as local taxes and permit costs, size and composition of the workforce from which you will draw your employees, climate, customer demographics, cultural traditions, and anything else that might impact your operations. Keep in mind that no one has ever been able to account for everything that might fit into this category, and you probably won’t be the first, but if you’ve done your homework you should already know all about the industry you are breaking into, the geographic area in which you will operate, the legal systems, monetary systems, governmental systems, demographics of your workers and your customers, and a thousand other details. You probably don’t have to cover all of the minutiae, but take a moment and think about all of the things you’d want to know if it was your money that would be going to finance this venture – because very shortly now, it will be…
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