Chapter 4 Entrepreurship

Elasticity of demand

consumers' responsiveness or sensitivity to changes in price

8 critical steps in an external analysis

1. D-Define your industry 2. D-Define your customers 3. R-Research the industry yourself 4. I-Identify competitors in the industry 5. R-Research those competitors 6. D-Draw a set of competitive maps 7. E-Examine and develop insights about additional economic aspects of the industry (substitutes, elasticity of demand, ease of entry and exit, benchmarking, and industry trends) 8. D-Develop an understanding of your competitive advantage

Example of elasticity of demand

As the prices of luxury items increase, the demand usually declines as these good are not essential and their purchase can be delayed. Alternatively items such as gas for your car are INELASTIC because demand will not change based on the price. Everyone needs gas!!

Exit barrier

A barrier that keeps a firm from leaving an industry, such as investment in a particular piece of equipment or land.

What is an NAICS code?

A code that identifies the classification of industry a business is in.

Substitute

A product that can be used in place of another product, but is NOT a precise imitation.

Resource based analysis

A theoretical approach and methodology (tool) that looks at the the functioning of a business in terms of whether a product or service simultaneously meets the criteria of being rare, durable, non-substitutable, and valuable. Are all FOUR things true? Resource based analysis has been developed over the past 50 years and has become one of the most effective tools in defining a business's competitive advantages and in differentiating these from their competitors. The focus of the analysis is solely on the potentially unusual products or services you will offer in your busisess, which can be a source of competitive advantage.

What is a competitive map?

An analytical tool used to organize information about direct competitors on all points of competition. You should go "be a customer of your competitors."

How broadly should an entrepreneur define their industry?

Broadly enough so that they include all potential competitors, but not so broadly that it's overwhelming.

Industry

Companies within a specified geographic radius that will be in direct competition for the same customers and sales of that new business.

Normal/ordinary competitive factor

Describing those areas of a business that are simply standard practice in the industry and are necessary for the business to be a player.

Unusual/unique competitive factor

Describing those areas of a business that are unique or unusual when compared to the standard practices of the industry, and that provide the opportunity for the business to gain value over and above the ordinary returns in the industry. Gives someone a leg up or an advantage.

Why was the NAICS created?

Generated by the US government in an effort to gather, track and publish data on specific industries.

What do competitive maps show?

If you have a list of criteria you want your business to meet, you can look at other competition and see how those things measure up (do an evaluation to compare the items for each business).

Why is it important for entrepreneurs to define the industry that they're in?

It helps to include all potential competitors

Competitive advantage

Made up of those things that your business does uniquely well OR better than anyone else in your industry.

Fragmented markets

Markets in which no one competitor has a substantial share of the market and the means of competition vary widely within the same market space.

What are fragmented markets?

Markets that have no clear dominant competitor and instead are made up of a large number of similarly-sized firms.

How do you define your customer base?

Narrow the individuals you will serve. Where are they located? Where do they get your product at this time? This will help you clearly focus on your core customer.

NAICS

North American Industry Classification System

Define your industry

This pushes you to design your business in a way that helps set you apart from the competition. Once you've decided on an industry, there are associations that you can tap to get the support and promotion from that industry. (e.g., local breweries)

What is a competitive advantage?

This will be the reason people choose your store over somewhere else. Figure out what those will be: Customer service (how well you treat your guests) Speed of service Accuracy of orders Pricing Best items that you provide Atmosphere Etc.

Benchmarking

Working with and learning from a company outside of your industry that has a particular skill that is potentially critical to your operation.