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Lesson 5 of 6Ideas and Opportunities for New Ventures
Unit 2 · Lesson 5 of 6

Analysing the Competition: SWOT, PEST and Porter

Entrepreneurs identify direct and indirect competitors and analyse their position with SWOT (internal strengths and weaknesses, external opportunities and threats), PEST (political, economic, social, technological factors) and Porter's five forces.

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Key things to remember

  1. 1Direct competitors sell the same product to the same customers; indirect competitors satisfy the same need in a different way.
  2. 2Market share = your sales ÷ total market sales × 100%.
  3. 3SWOT: Strengths and Weaknesses are internal (you control them); Opportunities and Threats are external (you do not).
  4. 4PEST: Political, Economic, Social, Technological factors in the external environment.
  5. 5Porter's five forces: threat of new entrants, supplier power, buyer power, threat of substitutes, rivalry among existing competitors. Stronger forces mean lower profit potential.

Almost every venture has competition, even when it feels like a new idea. If students have phone trouble, they already do something about it: ask a friend, watch a video, or visit a phone repair shop. Each of those choices competes with the Tech Help Desk for the same customers. Understanding the competition, and the wider environment the venture operates in, lets you find a position where customers will choose you. Three tools do this job: SWOT, PEST and Porter's five forces.

Direct and indirect competitors

ADirect competitors
  • Sell the same or a very similar product to the same customers
  • Tech Help Desk: a phone repair shop near the school; another student offering tech help for money
  • Customers compare you with them directly, often on price and quality
BIndirect competitors
  • Sell a different product that satisfies the same need
  • Tech Help Desk: free online video tutorials; a tech-savvy friend or sibling; the manufacturer's online support
  • Easy to overlook, but they often take more customers than direct competitors

One way to measure your position against direct competitors is market share: your sales as a percentage of total sales in the market.

SWOT analysis

SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The key idea is the split between internal and external. Strengths and weaknesses are internal: things about your own venture that you control. Opportunities and threats are external: things in the environment that you do not control but must respond to.

Example: Riverbend Bike Repair (hypothetical small business)HelpfulHarmfulInternalinside thebusiness; itcan controltheseExternaloutside thebusiness; itcan onlyrespondSStrengthsOwner is a certified mechanic with15 years' experienceStrong word of mouth and top localreviewsShop sits right beside a busy biketrailWWeaknessesOnly one mechanic, so long waits inspringNo online bookingSmall parts stock; special orderstake a weekOOpportunitiesThe city is building new bike lanesnearbyE-bikes are growing in popularityCould run tune-up clinics with alocal high schoolTThreatsBig-box stores offer cheap tune-upsA rainy summer means fewer ridersRising prices for parts and shipping
Fig 1SWOT: strengths and weaknesses are internal; opportunities and threats are external.
Internal: StrengthsInternal: Weaknesses
Team of four with strong phone and laptop skillsOnly available at lunch, so limited hours
Low price ($5) compared with a repair shopNo experience with hardware repairs such as cracked screens
Convenient: inside the schoolLittle money for advertising
Tech Help Desk SWOT, part 1: the internal factors.
External: OpportunitiesExternal: Threats
Many students use laptops for schoolworkFree online tutorials solve many simple problems
Staff are short of time to fix their own devicesThe school might restrict students handling other people's devices
Could expand to seniors at a community centreA phone shop could offer a student discount
Tech Help Desk SWOT, part 2: the external factors.
VideoNotice that strengths and weaknesses come from inside the business while opportunities and threats come from outside it.Watch on YouTube

PEST analysis

PEST scans the big-picture external environment in four categories: Political (laws, government and organizational rules), Economic (incomes, prices, interest rates, the state of the economy), Social (population, lifestyle, values, trends) and Technological (new technology and how people use it). PEST feeds the opportunities and threats boxes of a SWOT.

PEST analysis: a small bakery in an Ontario townPoliticalgovernment, laws, regulationsMinimum-wage increases raise labourcostsMust pass public-health foodinspections and get a municipallicenceEconomicprices, interest rates, incomesHigher interest rates make a bank loancost moreWhen budgets are tight, customers cutback on treatsSociallifestyles, values, trends, populationRising demand for gluten-free andplant-based optionsA shop-local trend draws neighbourhoodcustomersTechnologicalnew tools, machines, online systemsOnline ordering and delivery appsreach more buyersTap-to-pay speeds up checkout at busytimes
Fig 2PEST: four external forces that shape every venture.
FactorExample for the Tech Help DeskEffect
PoliticalSchool rules on selling at school and on privacy of personal devicesThreat if rules forbid it; must get approval and promise not to look at private files
EconomicMany students earn part-time income; repair shops charge much moreOpportunity: a low-price option appeals to students
SocialStudents and staff depend on devices for school and workOpportunity: more people need quick help
TechnologicalDevices and software update often, bringing new problemsOpportunity for steady demand, but the team must keep learning
PEST analysis for the Tech Help Desk.

Porter's five forces

Michael Porter, a Harvard Business School professor, described five forces that decide how competitive, and therefore how profitable, an industry is. The stronger each force, the harder it is for a venture to earn a profit. The weaker the forces, the more attractive the industry.

Threat of newentrantsHow easily new businessescan enter the market andcompeteBargaining power ofsuppliersHow much suppliers canraise prices or limitsupplyRivalry amongexisting competitorsHow fiercely currentrivals compete on price,quality and adsBargaining power ofbuyersHow much customers canpush prices down or demandmoreThreat of substitutesHow easily customers canswitch to a differentproduct that meets thesame needThe stronger these forces are, the harder it is for a venture to earn a profit.
Fig 3Porter's five forces surround the rivalry among existing competitors.
ForceQuestion it asksTech Help Desk rating
Threat of new entrantsHow easy is it for others to start the same business?High: any tech-savvy student could start one with no equipment
Bargaining power of suppliersCan suppliers raise prices or limit supply?Low: the main input is the team's own time and skills
Bargaining power of buyersCan customers push prices down or switch easily?High: students have little money and can easily ask a friend instead
Threat of substitutesCan customers meet the need a different way?High: free online videos and manufacturer support
Rivalry among existing competitorsHow intense is competition among current sellers?Low to medium: one repair shop nearby, which mostly does hardware repairs
Porter's five forces for the Tech Help Desk.
Reading the result
Three forces are high, so the Tech Help Desk cannot charge much and could easily be copied. Its best response is to compete on convenience and trust (in the building, at lunch, with staff approval) and keep the price low, rather than trying to charge repair-shop prices.

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1
In a typical month, students at the school spend about $2,000 on lunchtime drinks from the cafeteria, a nearby coffee shop and a student smoothie stand. The smoothie stand sells $300 per month. Find its market share to one decimal place, and name one direct and one indirect competitor.
Example 2
Sort these factors for a student-run custom sticker business into a SWOT: (1) the owner is a skilled digital artist; (2) a large online store sells cheap stickers; (3) laptop stickers are popular with students; (4) the owner's printer is slow; (5) the price of vinyl sticker paper is rising.
Example 3
Apply Porter's five forces to a student-run hot chocolate booth at outdoor school winter events, and decide whether the industry is attractive.

Where marks get lost

  • Putting external factors in the strengths or weaknesses boxes (for example, "the economy is good" as a strength). Strengths and weaknesses are only about your own venture.
  • Ignoring indirect competitors such as free online videos or doing it yourself, which often take more customers than direct rivals.
  • Claiming "we have no competition". If customers have the need, they are already meeting it some other way.
  • Reading Porter's forces backwards: strong forces make an industry less attractive, not more.
  • Listing PEST factors without saying how each affects the venture. Every factor should be labelled as an opportunity or a threat.

Flashcards 8

Direct competitor
Indirect competitor
Market share
SWOT
+ 4 more

Practice

1
Which pair of SWOT categories is internal to the business?
2
Match each factor to its PEST category.
A new municipal bylaw on street vending
Rising prices for ingredients
Growing interest in plant-based food
A new app for taking mobile payments
3
A student car-wash venture earns $450 in a month when total car-wash spending in the neighbourhood is $3,000. What is its market share, to one decimal place?
%
4
For a student tutoring service, free online math videos are an example of...
5
Which situation shows HIGH bargaining power of buyers?
6
Match each factor for a student bake sale to its place in a SWOT analysis.
The team's baker has won local baking contests
The team has only one oven
School fundraising events attract big crowds
A grocery store across the street sells cheap cookies
7
Name the Porter force that asks how easy it is for others to start the same business.
8
A Porter analysis finds that all five forces are strong. What does this suggest?

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