Analysing the company environment: what to think about before you start your business?
Starting a business requires careful preparation. However, in order not to make an important step blindly, it is worth mapping out the environment you want to enter with your idea in advance.
Strategic analysis methods are used to assess the market situation, which you can use not only when setting up your company, but also for key management decisions. Through analysis, you will discover the strengths and weaknesses of your business, evaluate your competition and price your products more easily.
We'll introduce you to the three most popular methods:
Porter's Five Forces Analysis
Porter's method focuses on evaluating the competition in the market. It examines the risks your company faces from:
- Existing competitors;
- potential competitors;
- substitutes (which are alternatives to your products or services);
Each section of the analysis then looks at the different forces at work in the industry.
Existing and potential competitors
A key point in the analysis is to correctly identify competitors. Therefore, be clear about who you will realistically be competing with in the market. For example, if you produce luxury cars, you will not be significantly threatened by the producers of the cheapest cars.
Then compare your offer with your chosen competitors. How do your products/services differ? How do they stack up in terms of price? Do your competitors offer any additional services to their products? If the market is flooded with competitors with similar offerings, customers will easily flee elsewhere at the slightest problem. But if there are few competitors, your situation is easier.
A comparison will help you clearly identify the advantages of your products or services over those of your competitors. You can then use these advantages, sometimes called unique selling points (USPs), in your marketing.
In addition to existing competitors, you should also be interested in those who are not yet in the market. If you are in a lucrative industry that is easy to enter, new players may soon emerge. Therefore, when planning, take into account that competitors are growing or changing their offerings, so update your comparison from time to time.
Substitutes, i.e. products and services that customers may choose to substitute, also pose a potential risk to the company. A substitute can be very different from your product - it just needs to satisfy the same need. For example, if you produce tea, it is useful to monitor the price of coffee, which many people drink in the morning instead of tea.
Influence of suppliers and customers
Finally, assess the bargaining position of important partners in your market - suppliers and buyers. How big are they? Are you dependent on any of them? Their position will have a significant impact on your market position.
The output of a Porter analysis for a new clothing brand might look something like this:
- Existing competitors. There are currently several major competitors in the women's clothing market with established brands and distribution networks, supplemented by a dozen local retailers. The level of existing competition on the market is therefore relatively high.
- Potential competitors. The women's dress segment is not subject to significant government regulation. However, market entry requires investment in production, marketing and distribution. The risk of new competitors entering the market is medium.
- Substitutes. The women's dress brand is competing not only with other specialist manufacturers but also with large fashion houses, which generally offer a better price. The threat of substitutes is therefore high.
- Bargaining position of suppliers. There are only a few reliable suppliers on the fabric market who also have contracts with competitors. Their bargaining position is therefore relatively strong.
- Bargaining position of customers. Women's dresses are bought by the majority of the female population; moreover, lovers of designer dresses are loyal to their favourite brands and like to pay extra for them. The bargaining power of customers is therefore low.
Note: It is recommended to complement the analysis with a comparison of the new firm's offer with that of the existing competitors.
PESTLE analysis examines the surrounding environment (macro environment) of an organization. It will give you a clearer picture of the challenges that lie ahead in your chosen industry. The method will also help you to uncover potential opportunities for business development.
The data for the analysis can be obtained from legal regulations, official reports (e.g. from the state administration, the Czech Statistical Office, etc.) or from research organisations. A lot of information is also publicly available online.
The name of the method is an acronym from the English term for the influences on the enterprise:
- Political factors (P) - political situation in the country (e.g. stability, corruption), taxes, international conflicts.
- Economic factors (E) - global economic situation, inflation rate, international market situation, national bank policy.
- Socio-cultural factors (S) - demographic influences, customs and social trends, employment.
- Technological factors (T) - innovations in the field, new technological trends (e.g. digitalisation, AI development), research grants.
- Legislative factors (L) - laws and standards, OSH and other industry regulations, upcoming reforms.
- Environmental factors (E) - weather and climate, geographical influences, environmental regulations and subsidies, pressure on business sustainability.
Sometimes a basic variant of this method, PEST analysis, is also used, which omits legislative and environmental factors.
The factors identified are then categorised according to whether they have a positive or negative impact on your business and their importance is assessed (e.g. how much potential impact they have on your business).
Tip: You analyse each influence in relation to the situation you are dealing with. Thus, you will be interested in different factors when setting up a company than when launching a new product model.
For many strategic decisions, some of the factors mentioned are not relevant (for example, when setting up an advertising agency, you don't necessarily need to examine the environmental factors of the surroundings). So you can skip these parts of the analysis.
For example, a simplified output of the analysis might look like this:
|Type of factor||Factor||Estimated time horizon||Impact||Importance|
|Political||Upcoming parliamentary elections||6 months||Probably negative||Low|
|European subsidies in the sector||6-12 months||Positive||Medium|
|Economic||High inflation across EU countries||1-3 years||Negative||High|
|Decline in fuel prices||0-6 months||Positive||medium|
|Socio-cultural||Rising popularity of products from our industry||1-2 years||Positive||High|
|Households are spending less due to inflation||1-3 years||negative||high|
|Technological||AI development in the industry||1-5 years||Positive||Medium|
|Advances in research into new production methods||3 years and more||positive||medium|
|Legislative||New EU directive||12 months||Negative||High|
|Tighter government regulation forthcoming||6-12 months||negative||High|
|Ecological||Pressure on sustainability of production||1-5 years||Negative||Medium|
|Long-term drought||3 years or more||negative||Medium|
The SWOT matrix is a popular analytical tool that helps you identify the strengths and weaknesses of your future business as well as important external factors that may affect it - i.e. Opportunities/Threats.
What to imagine under each concept?
- Strengths (S) - factors that give you an edge over your competitors.
- Weaknesses (W) - areas where you need to improve.
- Opportunities (O) - external influences that your business can use to its advantage.
- Threats (T) - external influences that can easily deprive you of customers and profits, so you want to be prepared for them.
Use internal documentation (reports, financial statements, etc.), market research or statistical data as a basis for creating your SWOT. You will also need information from the previously mentioned analyses (for example, the outputs from a PESTLE analysis will help you identify opportunities and threats).
Evaluation of factors
Identifying the factors is, of course, only the first step in a SWOT analysis - it is soon followed by their evaluation. This will tell you which influences to focus on as a priority. The evaluation usually takes place in a team.
You evaluate strengths and weaknesses according to how important they are in addressing the strategic issue at hand. In practice, this is done, for example, by having each team member divide 100 points among the strengths/weaknesses identified. Those with the most points are then the most important.
Opportunities and threats are ranked according to their impact and likelihood of occurrence. The most important opportunities/threats are then those that will impact the business most strongly and are very likely to occur.
List the most important factors in a table that you will use later to develop your strategy. For example, a simple SWOT with specific examples looks like this:
|Strengths (S)||Weaknesses (W)|
|Low cost||Higher price|
|Excellent availability of services||Slow distribution|
|Innovative product||Product failure rate|
|Good brand reputation||Brand unfamiliarity|
|Great customer service||Limited production capacity|
|Opportunities (O)||Threats (T)|
|Favourable economic situation||Rising material prices due to inflation|
|Fashion trends||Changes in customer preferences|
|Development of AI tools in the industry||Competitors' moves|
|European subsidies for our industry||Challenges in global markets|
|Market gap||New legislation/regulation in the industry|
Do you want to start your own business?
The analysis is just the beginning of the process. Learn how to create a successful business plan. If you have already thought everything through, we will be happy to help you set up your company formally. Leave us a message and we'll work out the details.